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 companys 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 companys auditor, who creates an additional memo documenting whether or not the auditor concurs with managements 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 TDFs 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 used to actively promote TDFs digital content and provide a means for customers to purchase products in exchange for MANA. Managements 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 $0.069574, over three times its value at the ICO. The token is traded on several cryptocurrency exchanges and has a circulating supply of 1,327,372,145 MANA. It is one of the top forty cryptocurrency tokens by market cap with a current valuation of $92,603,610 and $73,332,007 in recent 24-hour trading volume. Decentraland launched their virtual land marketplace on March 19th, 2020. 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, Decentralands 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 companys 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 companys audit committee and external auditor during the year-end audit prior to the issuance of TDFs December 31, 2020financial 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?

b. Be sure to discuss alternative accounting treatments your group considered and why they are not preferable based on your analysis of GAAP as prescribed in the Accounting Standards Codification.

2. If the MANA is considered an asset, should TDF adjust the carrying value of the MANA for changes in the tokens value? In other words, should the MANA be carried at cost or fair value? (answer a or b and both c & d)

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, 2020?

d. What (if any) journal entry would be required if the MANA value has decreased to $200,000 at December 31, 2020?

3. What sort of information should be disclosed to TDFs 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, 2020. 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.

Please help me answer question 2 with at least 200 words. Thank you!