Accounting for Cryptocurrency in Dubai
Cryptocurrency is any type of currency whose existence is either digital or virtual and uses cryptography to secure transactions. Cryptocurrency is issued through a decentralised system to record transactions and issue new units. These transactions do not rely on banks or any such central authority. Cryptocurrencies are stored in digital wallets.
These digital form assets are transferred and exchanged through a technology called blockchain technology. The most popular cryptocurrencies that we have come across these days are bitcoin and ether. The high volatility of the cryptocurrency causes major issues when converting to a regular mode of currency or cash.
The accounting structure in Dubai is determined by IFRS. IFRS denotes accounting standards which explain the standpoint of cryptocurrency. They are IAS 38 and IAS 21. IAS 38 regulation under IFRS categorises cryptocurrency under the head of intangible assets. As we use cryptocurrency similar to that of intangible assets, no specific accounting standard was created for accounting cryptocurrency. IAS 38 defines intangible assets as non-monetary assets that have no physical existence. It can only be identified when it is separable or if it arises from legal or contractual rights.
Cryptocurrency also corresponds to IAS 21 – The effects of change in foreign currency which means that a non-monetary asset does not allow the holder to receive currency units in place of it.
IAS 38 also prescribes that the revaluation of intangible assets has to be measured at cost or revaluation. When measured at cost on initial recognition and then recognised at cost less amortisation or impairment losses. It can be measured at revalued cost if it has an active market. But in the case of every cryptocurrency, it is not desirable to expect an active market all the time. So it can be switched between cost and revalued cost measurement models.
IAS 13 fair value measurement; can determine the fair value of an asset in an active market. It can be applied to cryptocurrencies which have a regular active market like Bitcoin.
The next accounting standard applicable for cryptocurrencies under IFRS is IAS 2 which talks about the inventories of intangible assets. It defines that the inventory should be either measured at cost or fair value through profit or loss. This measurement system is only applicable when cryptocurrency is obtained for a short period of time and to see it immediately to attain high levels of profits from the general fluctuation.
IAS 1 denotes the presentation of financial statements where the disclosure of the holding assets such as cryptocurrencies needs to be mentioned if they are part of any significant changes in the financial statements.
IAS 10; requires the entity to disclose any material changes respective to adjusting events. This would mainly encompass any changes in the economic decisions which might affect the preparation of financial statements.
IAS 32; if the financial instruments make a connection with currency and cash.
The further authorisation of cryptocurrencies is handed over by the VARA or Virtual Asset Regulatory Authority in Dubai.
The VARA guides:
- To authorise or licence any form of virtual currency or assets across mainland Dubai and across the free zones except Dubai International Financial Centre.
- To manage the asset forms and their respective portfolios
- To protect the personal data and information of the beneficiaries
- To take relevant measures against violators.
Only with the approval of VARA, one can trade virtual currencies or cryptocurrencies in Dubai.
The difficulties in the bookkeeping of cryptocurrencies:
Instability of their costs deters from determining the actual valuation of the cryptocurrencies.
The mixed features of cryptocurrencies or cryptographic resources can make bookkeeping tedious under certain circumstances.
Need to update all the latest enhancements that have come over the field of cryptocurrency which makes it difficult to maintain the books because of the high fluctuations in the turn of features.
The accounting structure created for Dubai with respect to cryptocurrency is not as simple as it seems. As there are no specific IFRS standards that describe the accounting transactions, therefore, existing standards have to be incorporated. But as Dubai is welcoming more and more cryptocurrency investors because of the immense capital gains, there has to be a well-structured understanding of cryptocurrency and adapt to such situations so that it brings about the best accounting practices.