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Accounting profession and regulators still struggle with determining a single measurement regime are whole new class of assets has developed-particularly since around the beginning of this century.

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You have been approached by a large accounting firm to provide advice in relation to Virtual assets. In particular, the managers of the firm have requested that you provide a report outlining the following: • what are Virtual assets? How are they different to the commonly understood notion of intangible assets? • Should these items be recognised on the financial statements or would disclosure in the notes be sufficient? Provide real world examples. (Approximately 350 words) • Is income earned in a virtual world “real”? If so, should such profits be repo...

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Question Preview:

You have been approached by a large accounting firm to provide advice in relation to Virtual assets. In particular, the managers of the firm have requested that you provide a report outlining the following: • what are Virtual assets? How are they different to the commonly understood notion of intangible assets? • Should these items be recognised on the financial statements or would disclosure in the notes be sufficient? Provide real world examples. (Approximately 350 words) • Is income earned in a virtual world “real”? If so, should such profits be reported? Need examples. (Approximately 350 words) • If we are required to recognise these items on the financial statements then we need to be able to measure them. What measurement model would you recommend? (Approximately 350 words)

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Virtual assets are the assets which exist in the virtual world while the Intangible assets are the assets which exist in the real world. Virtual assets have various objectives defined over the virtual world which have the following properties:

  • Objectives are durable
  • Property right of the objective is assigned to a specific person in the virtual world.
  • It is possible to transfer the property right to another person by the rule of the virtual world.

As per Financial Accounting Standard Board (ASC 350) defines an intangible asset, other than financial asset that lacks physical substance.

  1. A virtual asset is a representation of currency in some environment or situation. In this context, currency can be defined as either a medium of exchange or a property that has value in a specific environment, such as a video game or a financial trading simulation exercise. Monetary virtual assets are often called virtual currency. Within the world of gaming, virtual assets also include tokens that give the player greater privileges or abilities, such as a special sword or a magic potion. Like the gold and money in games, these assets can be traded for real world currency.

The global secondary market - defined as real money trading between players - turnover was estimated at 880 million dollars in 2005. Before that, in 2004, the American economist Edward Castronova had estimated the turnover at over 100 million dollars based solely on sales figures from the two auction sites eBay and the Korean item Bay. A speculative extrapolation based on these quotes and other industry figures produced a global turnover figure of 2 billion dollars as of 2007.The intangible assets such as Goodwill, Patents, and Trademarks are recognised in Balance sheet in asset side, but when we talk about the virtual assets most scholars think that sale of virtual property for virtual currency is taxable, in other words where the virtual money in traded for real money those transactions are taxable and should be recorded in financial statement. However there are certain legal and practical challenges to the taxation of income from the sale of virtual property. Moreover uncertainty regarding the nature and conceptual location of virtual property makes it difficult to collect and appropriate tax revenue when a sale occurs across multiple jurisdictions. Thus till the time the transaction of virtual world takes place with the real world we cannot record such assets.

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