Businesses and individuals across the UAE see crypto-assets to be lucrative investment options. These assets are being created and held by more people. The burning question is: How can accounting services in Dubai or UAE account for cryptocurrency creation and holding?
This subject matter was not yet covered. Although Bitcoin was the first crypto-asset, new forms of crypto-assets grew ever since the creation of bitcoin. Tokens have been created for specific tasks using new coins like Ethereum and Litecoin. You can think of asset-backed tokens and utility tokens as examples.
Farahat & Co will be sharing chartered accountants in Dubai & UAE to account cryptocurrency. Tokens are dependent heavily on specific terms and tasks, which is quite different from cryptos.
Understanding Cryptocurrencies
It is a digital currency that acts as a medium for exchange. It allows individuals and businesses to transact financial transactions in Dubai and UAE. Cryptocurrencies are also available for investment.
These are the characteristics of cryptocurrency:
Cryptos are decentralized. They are not issued by central banks. They are recognized in the distributed ledger. This means that all transactions in the currency are stored in one ledger called the blockchain. Each participant has a copy of the ledger.
Cryptography’s purpose is to protect against fraud and increase security. This is used to verify transactions’ authenticity. Every transaction is signed or hashed digitally.
Cryptocurrencies Are Not Financial Instruments
Many people believe that a cryptocurrency is a form of money because it uses the term “currency”. This is incorrect.
IAS 32 (AG3) defines currency as a financial asset if it has the following characteristics:
It is a symbol of a medium for exchange.
All transactions are recorded and measured in financial statements that are based on currency.
Depositors have a contractual right to access the funds of the entity through cash deposits in banks.
Cryptocurrency has the following alternatives:
Although cryptos can be used to exchange certain goods and services, it is not recognized worldwide. It is also not used to price products or services. Prices are done in regular currency. The same goes for pricing in cryptocurrency. The volatility of cryptocurrency makes it a poor store-of-value. There is also no contract.
IAS 32 defines financial instruments as contracts that result in one person’s financial assets and liabilities. You may have some cryptocurrency, but you don’t have the right to get financial assets or money, because there isn’t a counterpart or contract.
How can accounting and financial services in Dubai or UAE account for cryptocurrency?
Accounting Cryptocurrency Following IFRS
We will discuss two types of entities that might be interested in cryptocurrency:
Cryptocurrency holders
Let’s say you buy cryptocurrency for an investment return, or to store value. You are not directly involved in any mining activities.
Cryptocurrencies mines
You can purchase all hardware needed to create and network new cryptocurrency units.
Accounting for Holders
There was no official guidance on accounting for cryptocurrency holdings until recently. The IFRS Interpretations Committee (IFRIC), however, met June 2019 to discuss the issue and made a decision. This means that we now have some official guidance. The IFRIC decision means that cryptocurrency is now considered an intangible asset in accordance with IAS 38 Intangible Assets.
Cryptocurrency can be considered an asset because it is a resource that an entity controls due to an event in the past, from which future economic benefits will flow to the entity.
IAS 38 defines intangible assets as identifiable non-monetary assets that are not physical. As we explained, cryptocurrency does not contain any physical substance and is therefore a non-monetary asset.
It could be either:
Separate – Dubai chartered accountants are able to separate the entity from it and rent, sell, or transfer it. Because there are no contractual rights or other legal rights, it is not possible to arise from them. The cryptocurrency is separable, and therefore qualifies as an intangible asset.
Dubai accounting services will use the following accounting methods depending on the purpose of the holding.
Tradeable Cryptocurrency
You might need to apply IAS 2 Inventories if you have cryptocurrencies that you intend to sell in your normal business activities. Let’s say your business wants to be a broker-trader for cryptocurrencies. For commodity traders and brokers, IAS 2 should be applied. Commodity traders and brokers measure their inventories at fair price less cost to buy.
No Cryptocurrency Trading Available
Let’s say you have acquired cryptocurrency units for the purpose of holding them and using their value to store it over time or for other purposes. You will need to use the IAS 38 Intangible Assets standard. Unfortunately, IFRIC didn’t make any recommendations or take any decisions regarding the application of IAS 38 to cryptocurrencies.
The main consideration when deciding which model is allowed by IAS 38 applies:
Cost Model
This means that you will need to keep your cryptocurrency at cost less accrued amortization less impairment. Because there won’t be amortization, this is necessary. In general, cryptocurrencies have an indefinite use life. Accounting and financial services in Dubai, UAE can be used to assess any impairments caused by a decrease in cryptocurrency’s fair price. Another problem is that if cryptocurrency’s fair value rises above your cost, this would not be recognized under the cost model.
Modular Revaluation
If there is an active market, you can revalue cryptocurrency to their fair value. You can also account for any gains or losses in other comprehensive income. Although this is not very symmetrical, if you are holding cryptocurrency for capital appreciation it will probably be more appropriate than the cost model. Chartered accountants should not overlook the necessary disclosures. These include information about the fair value and any judgments made.
