Accounting for Digital Currency: Contemporary Issues and Solutions

This report examines the accounting treatment of digital currencies, specifically focusing on cryptocurrencies like Bitcoin. It addresses the challenges of classifying digital currencies within accounting frameworks, considering whether they should be treated as cash equivalents, financial instruments, or intangible assets. The report references IAS 7 and IAS 32 to explain why digital currencies do not fit the definitions of cash or financial instruments. It then aligns digital currencies with the definition of intangible assets under IAS 38. The report further outlines two distinct accounting methods depending on whether the currency is held by a company on its own behalf or by a dealer on behalf of customers. For company-held currencies, it discusses valuation at market price or at the lower of cost or disposable value. For dealer-held currencies, it explains the recognition of assets and liabilities with no gain or loss recorded. The report provides a comprehensive overview of digital currency accounting, supported by relevant references.

ACCOUNTING THEORY AND APPLICATION

Digital currency is a type of currency that is present only e in a digital form or an electronic form
but there is no existence of it in a physical form. Digital currency can also be called as electronic
money or currency, cyber cash, and digital money. These currencies are intangible in nature and
can be transacted through computers or electronic wallets only that are connected to the internet.
These currencies are considered to be the cheapest method to trade because there is an absence of
intermediaries. There are many advantages of using digital currencies such as it brings
transparency in dealings and record keeping (Bruner, Eades and Schill, 2017). There are two
forms of digital currency which are virtual currency and crypto currency. Although there are two
forms of digital currency, there are many types.
The use of digital currency is increasing at a very fast pace and there was a very big confusion
regarding its treatment in accounting. It was not clear whether these digital currencies should be
treated as cash equivalent or any other financial asset, intangible asset or an inventory. Digital
currencies cannot be considered as cash and cash equivalents as per IAS 7 statement of cash
flows because it has not been issued by the central bank and also lacks a broad acceptance for
exchange. It is not considered to be a financial instrument also because as per IAS 32 financial
instruments there is no contractual relationship present which would require one party to be the
holder of financial liability and other to be the holder of a financial asset (Khan and Jain, 2014).
Digital currency made the definition provided by IAS 38 intangible asset. A digital currency can
be considered to be an intangible asset because it is an identifiable non-monetary acid which
does not have any physical substance. Accounting for these digital currencies is done in two
different ways in two different cases (Fairhurst, 2015). The digital currency that has been taken
for this solution is crypto currency.
Accounting for crypto currencies when the currency is held by a company on its behalf- The
digital currency is measured at market price on the balance sheet date if it has an active market.
The difference between the market price and the carrying amount of the digital currency is
considered to be a gain or loss. In the absence of an active market, the digital currency is
measured at lower of cost or disposable value. If the disposal value is less than the carrying
amount insert difference is recognized as a loss which is Irreversible in the subsequent periods.

Accounting for crypto currency is held by a dealer on behalf of its customers - the dealer of
digital currency is required to recognize it as an asset in a case when it is deposited based on a
contract. Initially, the digital currency should be measured at the market price on the date at
which the currency was deposited (Palepu, Healy and Peek, 2016). The dealer should also record
a liability at the same time because he should return the digital currency. The amount of liability
that will be recorded will be equal to the asset recorded. There should be no gain or loss when
the digital currencies are in the hands of the dealer which are held in behalf of customers.

REFERENCES
Bruner, R., Eades, K. and Schill, M. (2017). Case studies in finance. Dubuque, IA: McGraw-Hill
Education.
Fairhurst, D. (2015). Using Excel for Business Analysis A Guide to Financial Modelling
Fundamenta. John Wiley & Sons.
Khan, M. and Jain, P. (2014). Financial management. New Delhi: McGraw Hill Education.
Palepu, K., Healy, P. and Peek, E. (2016). Business analysis and valuation. Andover, Hampshire,
United Kingdom: Cengage Learning EMEA.