Background
There is currently debate about the accounting treatment of cryptocurrencies in both academia (Raiborn & Sivitanides 2015; Tan & Low 2017; Yermack 2015) and industry (PWC 2017).
There have been calls for the International Accounting Standards Board (IASB) (AASB 2016) and the Financial Accounting Standards Board (FASB) (Thompson Reuters 2017) to provide guidance. This assignment focuses on the "biggest and best known digital currency" (AASB 2016, p. 6) - Bitcoin.
There are many ways in which companies may use Bitcoin and therefore need to account for Bitcoin transactions. These uses include the following.
1. Companies may invest in Bitcoin (short-term, long-term, speculative, as a hedge).
2. Companies may receive and make payments in Bitcoin (e.g. Microsoft, Whole Foods, PWC AsiaPacific started accepting bitcoin as payment for advisory services in 2017 (Business Insider Australia 2017) )
3. Companies may mine Bitcoin (such as Slush Pool (Cryptocompare 2018))
4. Companies may be investment companies, investing client money in Bitcoin.
This assignment is concerned with item 1 above - where a company holds Bitcoin as an investment. There is debate as to how Bitcoin transactions should be accounted for, as shown in Table 1.
Table 1: Debated accounting treatments of Bitcoin
|
Nature of Bitcoin
|
Relevant Australian accounting standard
|
|
Cash or Cash Equivalents
|
AASB 107 Statement of Cash Flows
|
|
Financial Instruments
|
AASB 139 Financial Instruments: Recognition and Measurement or AASB 9 Financial Instruments
|
|
Inventory
|
AASB 102 Inventories
|
|
Intangible assets
|
AASB 138 Intangible Assets
|
Required:
Part 1
You are a recent graduate working for a Big 4 accounting firm and your manager has asked you to prepare a report (max 1,500 words) which is to be presented to the Chief Financial Officers (CFO) of the firm's major clients. The report should:
a. Discuss whether Bitcoin meets the definition and recognition criteria of an asset in the Conceptual Framework.
b. Discuss and critique the arguments for and against accounting for Bitcoin as i) inventory and ii) an intangible asset.
c. Provide and explain the journal entries on initial and subsequent recognition of the Bitcoin if the i) inventory standard and ii) intangible asset standard applies. Consider subsequent increases and decreases in the market price of Bitcoin.
d. Explain the implications for earnings management depending on whether Bitcoin is accounted for as i) inventory and ii) an intangible asset.
You should use appropriate headings to organise your material, provide references to accounting standards (including specific paragraphs) and cite relevant academic and practitioner articles.
References should be in-text (i.e. within the body of the report) as well as in the Reference list at the end of the report.
Part 2
You have a friend who has asked you to explain what Bitcoin and blockchain means. Your friend is a teacher with no accounting knowledge. Your written email response (max 250 words) should be much less formal and should be in a style and format that is easily understood by a non-accountant.