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Accounting for Cryptographic Assets in the United Arab Emirates: A Guide

Cryptographic assets, particularly bitcoins, have recently attracted a lot of attention and interest from investors all around the world. Even in the United Arab Emirates, more and more exchange platforms are springing up to make cryptographic asset trading easier. The subject of cryptographic assets is new to everyone and is continually evolving, with no clear accounting techniques outlined anywhere. Due to the various features and factors involved in the process of managing cryptographic assets, it may appear difficult to apply accounting judgments when analyzing accounting for cryptographic assets.

Here we go through some of the key characteristics of those assets that each organization must assess on a case-by-case basis in order to determine the proper accounting treatment in accordance with the accounting framework that applies to them.

What do you mean when you say "cryptographic assets"?

Cryptographic assets are digital representations of transferable assets that are secure enough to prevent duplication and are managed using blockchain technology. Cryptocurrencies are the most well-known cryptographic assets on the market, with Bitcoin and Ether being the most well-known in recent years.

Many sites now accept cryptographic assets as payment instead of traditional currencies in return for products and services. Some regulators have recognized such cryptographic assets as legal securities.

How can accounting treatments for cryptographic assets be determined?

Although the accounting treatment for each cryptographic asset may differ from case to case, the following are a few key characteristics of such assets that will aid in determining the right accounting method:

  1. The reason or motive behind retaining the cryptographic asset, similar to any other asset, plays a crucial part in classifying and recording the cryptographic asset. For example, if an entity keeps such assets for sale in the ordinary course of business, those assets may meet the criteria for classification as inventory under IAS 2. 
  2. What is the source of the cryptographic asset’s intrinsic value? –This will be determined by the origins of each cryptographic asset and the circumstances under which it is kept in digital form. Cryptocurrencies, for example, are valued based on supply and demand, whereas asset-backed tokens are valued based on the underlying assets.
  3. Is the person holding the cryptographic asset the true owner, or is he or she acting on someone else’s behalf?–The ownership and rights to the assets will determine whether the assets are reported on the balance sheet or recognized as off-balance sheet items. Even in the UAE, various cryptographic trading exchanges are being established, making this criterion even more relevant with crypto asset accounting. The rights of those trading platforms can be examined by looking at their client agreements, and proper accounting treatments for cryptographic assets can then be applied.

Cryptographic assets can be categorized into multiple types of assets based on the study of the preceding elements and a more extensive inspection, such as inventories, intangible assets, and so on. Cryptographic assets will almost certainly not fall under the category of property, plant, and equipment because they are intangible.

What are the main issues in identifying how cryptographic assets should be treated in accounting?

  • Because the field of cryptographic assets is continuously growing, everyone taking part in it should know recent advances to stay current on any changes that may occur. 
  • There are hybrid variants of cryptographic assets that contain a combination of many characters, making accounting treatment determination difficult in some cases.
  • Due to the lack of an exclusive recommendation in IFRS for cryptographic assets, users may be forced to categorize and account for these assets using current standards’ general accounting principles and guidelines. 
  • The volatility of their prices makes determining a reasonable valuation of crypto assets difficult.

Because there is no accounting standard that particularly addresses the accounting for cryptographic assets and related transactions, it necessitates extensive judgment and a detailed grasp of the underlying facts and circumstances. However, this does not rule out the possibility of no or restricted disclosures for cryptographic assets and related transactions. Apart from the fact that this is a legal domain, the fundamental reason for transparency on the essential facts and circumstances is that cryptographic assets and related transactions are a hot topic among all stakeholders (especially shareholders, analysts, and regulators). 

As a result, companies should make sure their financial statements provide clear and comprehensive disclosures. Those may include some of the applicable generic disclosures required by IFRS depending on the accounting categorization by the holder/issuer.

Please contact Alya Auditors if you have any questions about accounting for cryptographic assets.

Cryptographic assets, by their very nature and forms, necessitate subject matter expertise to implement and maintain the accounting techniques consistently. Alya auditors have a dedicated accounting team with professionals that have solved challenging accounting issues in a variety of industries in the UAE. To record and manage your Cryptographic assets or any associated business, we can provide you with value-added accounting and other consultation services. We may share industry best practices and advice with you to help you streamline your accounting processes and meet regulatory obligations as quickly as possible.

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