Financial Reporting Case

Fall 2018
Professor Brian Fitzgerald

Background:

This case describes a common scenario accountants and auditors face: Management has decided
to enter into a transaction. After the fact, the company needs to determine how to account for it in
their financial statements. Oftentimes, the company’s controller or financial reporting manager
drafts a memo documenting his/her assessment of the appropriate accounting for the transaction.
The memo is frequently reviewed by the company’s auditor, who creates an additional memo
documenting whether or not the auditor concurs with management’s proposed accounting for the
transaction. In this case, you are asked to evaluate how a company should account for a
cryptocurrency token purchase.

Case Facts:

You are the financial reporting manager at TDF Enterprises, a publicly-traded company that
prepares financial statements in accordance with U.S. GAAP. You were recently informed that
the company has purchased $250,000 of MANA, a material amount for the company. MANA is a
cryptocurrency token developed on the Ethereum blockchain. The MANA token was launched in
a 2017 initial coin offering (ICO). The token can be currently used to claim parcels of virtual
land in Decentraland, a developing 3D virtual world. Within Decentraland, MANA can also be
used to buy goods and services from other users.

The MANA purchase was made by company management as part of its plans to expand TDF’s
presence in the virtual reality market. The company is currently assessing the viability of using
its MANA to build a virtual storefront within Decentraland. If built, the storefront would be use
to actively promote TDF’s digital content and provide a means for customers to purchase
products in exchange for MANA. Management’s decision on whether to move forward with
plans to construct the storefront is contingent on increased user interest in the Decentraland
virtual world.

Early interest in Decentraland and the MANA token was strong with the ICO selling out in 35
seconds. One MANA token is currently worth $0.078150, over three times its value at the ICO.
The token is traded on several cryptocurrency exchanges and has a circulating supply of
1,050,141,509 MANA. It is one of the top forty cryptocurrency tokens by market cap with a
current valuation of $82,068,559 and $4,486,824 in recent 24-hour trading volume. Decentraland
launched their virtual land marketplace on March 19th, 2018. The marketplace allows users to
buy, sell and trade parcels of land within the virtual landscape. A recent article published on
Bloomberg highlights building developments in Genesis City, Decentraland’s first virtual city.
By design, there is a finite amount of virtual land available, which has led users to engage in
speculative transactions for the most prized parcels.

At the present, you have been asked to determine how TDF should account for the MANA
purchase. In two weeks, you will meet with the company’s controller to discuss the transaction.
In preparation for the meeting, you have decided to draft a memo outlining what you believe is
the preferred accounting for the MANA purchase. The memo will also be reviewed by the
company’s audit committee and external auditor during the year-end audit prior to the issuance
of TDF’s December 31, 2018 financial statements.

Case Requirements:

Prepare a memo documenting how TDF enterprises should account for the MANA purchase
under US GAAP. The memo should include consideration of the following:
1. What type of account should be used to record the purchase of MANA? At first,
consider whether MANA meets the definition of an asset or whether the expenditure
should be recorded as an expense in the current period. If it is an asset, what type of
asset is it (e.g. cash, an investment, or an intangible asset)?
a. Assume that the MANA purchase was made for cash. What journal entry should
be made to record the purchase?
2. If the MANA is considered an asset, should TDF adjust the carrying value of the MANA
for changes in the token’s value? In other words, should the MANA be carried at cost or
fair value?
a. If MANA should be carried at cost, describe whether and how TDF should
assess if the asset is impaired at period-end.
b. If MANA should be carried at fair value, should changes in value be recorded
through the income statement or other comprehensive income?
c. What (if any) journal entry would be required if the MANA value has increased
to $300,000 at December 31, 2018?
d. What (if any) journal entry would be required if the MANA value has decreased
to $200,000 at December 31, 2018?
3. What sort of information should be disclosed to TDF’s investors about the MANA
purchase?
a. Make an initial draft of the footnote TDF should include in its 10-K filing to
describe the purchase of MANA and change in value through December 31,
2018. For the purposes of the draft footnote, you can choose whether the MANA
value has increased or decreased during the period (i.e. your response to part 2c
or 2d, above).

All responses to the above questions should be based on your interpretation of current US GAAP
contained in the Accounting Standards Codification. Your consideration of the above questions
must include specific references to the applicable sections of the Codification. Refer to the
Financial Reporting Case instructions for instructions on how to access the Codification.

US GAAP does not currently discuss how to account for cryptocurrency transactions. Therefore,
a major aspect of this assignment is building a case for which type of account, as described by its
characteristics in the Codification, should be used to record the transaction. Based on this
assessment, you will be able to answer questions about subsequent measurement and disclosure
using the applicable sections of the Codification for the particular account.
This process of interpreting how GAAP should be applied to a unique scenario is something that
accountants and auditors do on a regular basis. Oftentimes, there are several ways to account for
the scenario that are all supported—to some degree—by GAAP. The inherent subjectivity of
each scenario requires professional judgement. As in practice, the rationale behind your
responses to the case requirements is just as important as the answers to the questions
themselves. This rationale should be clearly and concisely documented in the required memo.

In addition to the Accounting Standards Codification, the following resources may be of interest
in analyzing the case:
 Coinmarketcap information on the MANA token
o https://coinmarketcap.com/currencies/decentraland/
 Decentraland whitepaper
o https://decentraland.org/whitepaper.pdf
 ‘Making a Killing in Virtual Real Estate’ as published on Bloomberg
o https://www.bloomberg.com/news/articles/2018-06-12/making-a-killing-in-
virtual-real-estate
 ‘Decentraland raises $24 million in 35 seconds, leaving retail investors out in the cold’
o https://bravenewcoin.com/insights/decentraland-raises-24-million-in-35-seconds-
leaving-retail-investors-out-in-the-cold
 ‘Decentraland’s Virtual LAND Sale Stats —Data   From March’
o https://cryptocurrencyhub.io/decentralands-virtual-land-sale-stats-data-from-
march-a57019a10c8a