Cryptocurrency

Question 1

What is cryptocurrency

Answer 1

-digital or virtual currencies that allow people to make payments directly to each other through an online system
-no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. Are not issued by a central authority so are out of government control.
-decentralised control
-blockchain = public transaction database and everyone has their own copy of the ledger
-adv= two parties can transaction with each other directly without the need for an intermediary, saving time and cost
-transactions are coded to allow info to be kept secret within the transaction database
-market value is highly volatile

Question 2

Two types of entities involved with cryptocurrencies

Answer 2

1. Holders of cryptocurrencies = an entity that has purchased cryptocurrencies to store value or to make an investment return (IAS 2 inv)
2. Miners of cryptocurrencies = an entity that has decided to invest in all hardware, electricity and other resources with the purpose of creating new cryptocurrency units (IAS 38 intangible assets)

Question 3

Accounting options (IMPORTANT)

Answer 3

1. Treat as cash
   -accepted that cryptocurrencies are not cash as they are not considered legal tender by virtually all governments, and they are not backed by a central bank
2. Treat as cash equivalents
   -IAS 7 states cash equivalents are short term, highly liquid investments that are readily convertible to knows amounts of cash and which are subject to an insignificant risk of changes in value
   -cryptocurrencies cannot be classified as cash equivalents as they are not readily convertible and are subject to considerable price volatility
3. Treat as financial instrument
   -IAS 32 financial instruments = a contractual right to revise be cash or another financial asset from another entity
   -there is no contractual right to receive cash in a cryptocurrency transaction
4. IAS 38 Intangible Assets
   -cryptocurrency is an asset because assets are a resource controlled by an entity as a result of past event from which future economic benefits are expected to flow to the entity (fully met)
   -cryptocurrency is an identifiable (separable) non-monetary asset without physical substance
   -identifiable means separate, you can sell it, transfer it etc

Question 4

If we apply IAS 38 to cryptocurrency, how does the standard tell us to value the currency

Answer 4

1. Cost model
   -hold cryptocurrency at cost less accumulated amortisation less impairment
   -problem = if fair value of cryptocurrency increases above your cost, you would never recognise this increase under cost model
   -due to volatility in value of cryptocurrency huge differences between cost and FV are unlikely to provide useful info
2. Revaluation model
   -if an active market exists, you can revalue cryptocurrencies to their fair value and account for any increases directly in other comprehensive income
   -must be capable of reliable measurement

Question 5

Other issues

Answer 5

1. Disclosures
   -clear disclosures need to be in financial statement to ensure the user gains clarity on how the cryptocurrencies are being presented and understands the nature of these assets and their financial effects
2. Impairment
   -cryptocurrency is being treated as an intangible asset with indefinite life, the asset must be reviewed annually for impairment
3. IAS 2 inventories
   -holding for sale in ordinary cause of business, may need to apply for IAS 2 inventories
4. FASB issues crypto asset standard (USA standard setter)
   -financial accounting standards board has issues an accounting standard update (ASU) that will see US GAAP require cryptocurrencies to be measured at fair value with gains or losses recorded in profit or loss
   -US standard settee says the new requirements are intended to improve the accounting for and disclosure of certain crypto assets, it will create a divergence from the current requirements of IFRS accounting standards and UK GAAP
   -provide investors with more relevant info that better reflects the underlying economic of certain crypto asset and an entity’s financial position, while reducing cost and complexity associated with applying current accounting
   -uk = IFRS accounting standards crypto is measured at cost or fair value (active market exists)
   -us = comprehensive view of IAS 38 intangible assets