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ACT 6652 Financial Accounting Research
Research Case Assignment
Summer 2022
Assignment
Prepare following case, following the requirements given in the case.
Case: 19-6 Classification of Cryptocurrency Holdings
Case: Details are on next page
Type: Cryptocurrency
Subject: Learn basic terminology related to cryptocurrencies and to determine the classification
of cryptocurrency holdings in the statement of financial position when an entity accepts
cryptocurrencies as payment for its goods and services.
Applicable courses: Intermediate Financial Accounting and Graduate Financial Accounting
REQUIREMENT: The “Required” components are presented as questions in this. You should
respond to the question, but do so in “report form” or “email message” form. That is, assume
you are responding to your supervisor in a formal memo or report.
Respond here:
Part 1.
[Add space as needed]
Part 2.
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Case 19-6
Classification of Cryptocurrency Holdings
Software Provider (the “Company”) supports and sells computer software. The Company accepts
cryptocurrencies (e.g., Bitcoin, Ether, Ripple) as payment for the sale of its computer software.
The Company holds its cryptocurrencies partially for investment (e.g., expectation that they will
appreciate in value) and partially to use in the future to purchase goods or services.
Cryptocurrency is a new type of value and payment method that is different from fiat currency
(e.g., U.S. dollars and foreign currencies). With the exception of El Salvador which recently
adopted Bitcoin as legal tenderi, cryptocurrencies have no government backing or recognition by
a central authority as legal tender. Their value is only supported by supply and demand.
Cryptocurrencies do not have a physical form but exist as immutable distributed ledgers
(electronic records) maintained on public blockchains. They are different than electronic
instances of cash, such as an online bank account, in that they are not linked to a physical
currency.
Bitcoin and other similar “coins” use cryptography (e.g., use of codes to secure communications)
to control the security and creation of these coins, which led to the term “cryptocurrencies.”
There are other crypto-assets that are not cryptocurrencies, such as tokens and stablecoins. While
the Company in this case study does not accept or transact in tokens or stablecoins, it is
important to distinguish the three.
Cryptocurrency is a unit of value that is native to a blockchain. It is a means of
exchange within the blockchain to incentivize the network of participants to use the
blockchain. The purpose of a cryptocurrency is to function as a medium of exchange, and
it has limited functionality beyond that. Cryptocurrencies are not issued by a
jurisdictional authority, are not considered securities, and do not give rise to a contract
between the holder and another party.
A token is a piece of business logic (i.e., “smart contract”) coded into an existing
blockchain. A token can have a functionality beyond an exchange of value — it can
represent any asset or functionality desired by the developer for use on a platform.
Tokens may be an interest in an entity (e.g., security token), an interest in a specific asset
(asset token), or a right to a future product or service (utility token).
A stablecoin is a digital asset that is a means of exchange similar to a cryptocurrency but
includes a mechanism designed to minimize price volatility by linking its value to the
value of a more traditional asset such as a fiat currency or a commodity. This link is
established through a contract that often allows the holder to redeem the stablecoin for
the corresponding traditional asset (e.g., a stablecoin linked to $1.00 per stablecoin may
be redeemed for $1.00 per stablecoin)
Cryptocurrencies are usually obtained by purchasing or receiving them on a peer-to-peer basis.
That is, they can be received directly from a counterparty in exchange for an asset or service or
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they can be purchased in exchange for a fiat currency, often from an exchange that specializes in
cryptocurrencies.
For a cryptocurrency to function as a means of peer-to-peer exchange, a ledger needs to be
maintained for tracking ownership of the cryptocurrency. For cryptocurrencies, this electronic
ledger is maintained using blockchain. There are many copies of this ledger and many ledger
keepers. Distributing the processing allows many users to each play a small part in the
maintenance of the ledger system; this means that the security of the system does not rely on a
few individuals.
The amount of coins for a particular cryptocurrency that are in circulation may be tightly
controlled. For example, for Bitcoin there is a limit on the number of coins that can exist. New
Bitcoins are only created as payment to processors (called “miners”) for providing the service
of validating and distributing an electronic ledger of these transactions to those involved in
maintaining the blockchain.
Required:
1. How should the Company’s holdings of cryptocurrency be classified in the statement
of financial position under U.S. GAAP and IFRS® Standards?
2. How should the holdings of cryptocurrency be initially and subsequently measured
under
U.S. GAAP and IFRS Standards?
i
As the guidance for the accounting treatment of Bitcoin in El Salvador is currently being developed, please
assume the Company is not located within El Salvador as this situation is outside of the scope of this case.
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