Virtual Assets as Contemporary Issues of Accounting - Essay Example

Virtual Assets Name Course Institution Date Virtual Assets Introduction Indeed the growth in technology has opened many opportunities. There are just a lot that has been discovered while at the same time much is still expected in the field of technology. In essence, about 50 years from today the world would have undergone significant transformation through innovation and creativity. Part of such overwhelming developments has been reflected through virtual assets. This report seeks to explore the topic of virtual assets. This includes recognition criteria, measurement, disclosure of income derived from the sale of the asset, etc. The report seeks to provide more information about this topic in order to provide guidelines to various stakeholders involved in virtual business. What are Virtual Assets? The nature of changes in the business environment has paved the way for new discoveries. Over and over the business environment has proven to be very dynamic. Globalization has created the need to invent some products that will match with the current demand on the market. In such new discoveries, one of the products that have emerged is what is commonly referred to as a virtual asset. A virtual asset is simply a representation of monetary value. This asset can be traded in for real world currency. In most cases, this is achieved through transfer of ownership from one person to the other. Definitely, the new holder pays the previous owner an equivalent amount of money and then the latter relinquishes possession. The virtual assets vary a lot in terms of nature and other features. The virtual assets are found in virtual economies. This is what is known as 3D environment (Styhre 2003, p. 15). The common types of virtual assets include intellectual properties like online books, online video games, audio products, etc. This is one area that many are either ignorant about or have ignored. Many do not understand how they can make real money while transacting such businesses. Virtual assets have the capacity to enrich people just like other assets if well understood and executed. Many confuse virtual assets with intangible assets. This is probably caused by the close correlation between the two kinds of assets. In general, virtualassets are intangible. They are mainly found online unlike the intangibles. The intangible assets suffer from the fact that they cannot be easily valued based on market price. For instance, it is almost impossible to value a patent. The same is the case when dealing with copyrights. On the other hand, it is clear that a number of platforms have been established that can be used to put a monetary value on virtual assets. Even before that, the nature of some of the virtual assets allows it to be valued monetarily easily. For instance, the sale of online books and video games is not difficult to determine. Such products can be compared to the corresponding physical products. When it comes to valuation of intangible assets, there are many and complicated methodologies for valuation. For instance, when valuing patents, the time period over which the patent was issued is factored. Most of these intangible are amortized over their period. A good example is patents. Patents whose period covers like 8 years will have almost zero value at the end of 8 years. The patent has high economic value at the beginning. Definition Criteria There are key aspects that are embedded in the definition of an asset. In essence, there is an element of economic resource in the item being considered as an asset. In accounting framework, an asset must have the ability to provide future benefits to the organization (Thayer 1999, p. 6). Therefore, the cash flow element of the asset is very important. The issue of tangibility does not make profound significance on the definition of an asset. For instance, there are very many items on the financial statements that though they are intangible, they are not virtual assets. Some of the examples include receivables, prepaid expenses, etc. This therefore points to the fact that the nature of assets is not in terms of tangibility. The various features that have been explained with regards to assets focus on the element of economic value. The virtual assets meet the criterion that has been explained above. These assets, just like the common assets that many organizations are used to, have the economic value. For instance, the online video games derive a lot of economic value to those who own them. While some of them have economic values that exhibit diminishing trends with time, it does not change the point that they have some economic value. An organization that own virtual assets will be in position to generate future economic value for it. From the discussion above, it is clear that the definition of virtual asset meets the basic requirements that have been discussed in this framework. This poses a challenge to entrepreneurs to venture into this sector and explore it fully. It also provides space for innovation of strategies to ensure that optimal returns are harnessed from virtual assets. This presents a completely new perspective of wealth generation. At the same time, it presents a new challenge to the bodies involved in formulating accounting financial reporting rules and guidelines. They ought to embrace the dynamism that relates to accounting and finance in the 21st century. In order to deal with this, it is important to carry out a study into the field in order to fully understand the appropriate measures by the regulatory bodies. This will give business entities flexibility not only in their venture, but also in the presentation of their financial statement. Recognition Criteria In understanding well the recognition of assets, it is appropriate to clarify that when dealing with assets the focus is upon control as opposed to ownership. An entity that has control is the one that recognizes the asset in his/her financial reports and not the entity that is in possession. This can be explained by use of an example of leased assets. An organization may choose to lease an equipment to be used for the assigned duties. In the case of capital leases, such leases take more than 75% of the economic life of the asset. Therefore, the business entity exercises full control of the asset but it does not own it. In this case, the company that is in control of the asset is charged with recognition of the asset in its financial statements throughout the period the asset is in its possession. According to International Accounting Standards Board (IASB), this brings forth the concept of Substance over Form. This particular concept explains the overriding power of control over legal possession. More important is the focus on two main criteria that are used to gauge the recognition of an asset. The first recognition criterion is the ability to generate cash to the business entity in future. Therefore, every asset must possess the ability to generate cash. Second, the asset shall be recognized if it can be measured reliably. This deals with the issue of monetary value. When it comes to virtual assets, the recognition criteria also focus on the issues that have been pointed out above. While the measurability aspect excludes human capital from recognition as an asset, an intangible asset in the category of virtual assets is not affected. The human capital is excluded because it cannot be reliably measured. It is very difficult to put a value on the human capital in an organization. More so, it is not possible for an entity to exercise absolute control over the human capital. This is because the employee stays in the organization as far as they are willing. In contrary, the virtual assets can be controlled fully by the organization. All kinds of virtual assets that have been highlighted and many other that have not been highlighted are fully controlled by the owner. The virtual assets also meet the economic value criterion for recognition. Therefore, these assets can be effectively measured based on their cash flow streams as well as using other indices. Therefore, in line with the virtual assets, recognition into the books of account should take place when the benefits and responsibilities that accrue due to control are fully transferred to the business entity. That is to imply, the organization is in position to receive the economic benefits from the virtual assets while at the same incurring the costs required to maintain the asset. This may be through costs that are incurred to have such virtual assets marketed online. For instance, online video games have beenadvertised on different blogs and websites in order to stimulate demand. This therefore shows that there is little difference between virtual assets and the common assets. Disclosure of Virtual Assets In assessing the mode of disclosure for virtual assets, one ought to embrace the fact that this is an emerging issue. Little has been undertaken in trying to address the disclosure requirements for these assets. Nevertheless, comparison ought to be made in relation to other assets in order to fully understand the best way to disclose such assets (Proctor 2006, p. 15). At the same time, it is good to point out that the nature of virtual goods denotes the ability to be translated into real dollars. This has been the basis upon which taxation advocacy has been made. When one considers the issue of taxation, the issue of disclosure also comes out. The nature of an item the entity’s financial statement determines the taxation treatment as well as the disclosure. In as much as virtual is more of a mimic of real world, the fact that the simulated environment has real currency value must be considered in determining the nature of disclosure. The 3D environment is portrayed with different complexities. Based on the modes of acquisition of a virtual asset, one can see the issue of real currency to be playing a major role. The method commonly known as real money transfer is used to trade real currency amongst players, who happen to be real human beings. These individuals use some form of medium of exchange to trade currency for an in-game item. Having made the above considerations, it is possible to deal with what can be the preferred mode of disclosure of virtual asset on financial account. The most common acquisition methodologies for most of the virtual 3D assets are three. These include the loop trades, loot drops and Real Money Transfer (RMT). Assuming that the virtual asset has been acquired through RMT, then it is supposed to be disclosed on the financial statements. The nature of this transaction by use of real currency is in position to reflect in totality the nature of the asset on the financial statement. Therefore, virtual assets must be fully represented on the face of financial statements. Just like the presentation of other financial assets, the virtual assets can also be further explained by use of notes to the financial statements. The notes to the financial statements must provide an explanation to the various issues relating the acquisition and representation of these virtual assets. This will explain further the mode of acquisition. This is to guide the user on the various issues relating to virtual assets. Through this representation, it makes it easy when the company is carrying out audit work on the financial statements. Reporting of Income from Virtual Goods The income that is earned from virtual world is consumed or spent just like any other income. This focuses mainly on the Real Money Transfer which provides the opportunity for players to translate their virtual money into real dollars (Silva & Prange 2007, p. 512). In many countries, income recognition is made with little or no conservatism. That is to imply that income is considered so without much consideration to where the income is earned from. The profits realized from the virtual world must be reported appropriately. This again points to the issue of taxation that has been a debate in the recent past. The fact that taxation issue arises points to the fact that profits can be realized very well from the exchange transactions involving virtual assets. The contradicting element in such transactions is based on the fact that some of exchange transactions appear more of services as opposed to assets (Lee 2005, p. 14). The business entity involved ought to point out such issues in order to be sure the product that is being traded in that case. At the end of it, it does not matter so much whether the product being traded in is a service of a real good. As long as income can be realized from the asset, it is expected that profit must be calculated from it. In doing this, attention is paid to the fact that virtual world economy has been thriving very much. It requires that policies be put in place progressively with time in order to embrace the dynamism of the products involved. Measurement Model The measurement of an asset is determined by its nature. The aim of the accounting principles relating to measurement is trying as much as possible to present the fair value of the asset. In this setting, the fair view is the market value of the said asset. In most cases, organizations have opted for historical cost model to measure its asset. This model is used to record the value of the asset using the price at the date of acquisition. Most of the assets that have been valued used this model are often physical in nature. For instance, machinery, equipment, motor vehicles, inventory, etc. When it comes to virtual goods, it is a bit difficult on the choice of method to be used. Nevertheless, it is good to rule out the use of historical cost method based on the nature of the assets involved. One the financial statement, the virtual assets ought to be measured by use of price-adjusted model. That is to imply that the measurement of these assets ought to put into consideration the dynamic nature of most of the virtual assets. For this reason, its value must continually be adjusted based on the price changes on the market. This makes more sense as compared to the historical cost model. The price adjusted model presents a more realistic value of the value of the asset. The idea behind this is not only to ensure fair valuation of the organization, but also to organization does not unnecessary tax on the asset. This definitely arises through poor valuation. Organizations are keen to ensure that such issues are appropriately dealt with in order to avoid unnecessary losses to the organization. At the same time, organization must put in the required expertise in advisory to provide the required information on the different types of the virtual assets and their subsequent treatment. Conclusion The issue of virtual asset is truly complex. The commonly referred to 2D and 3D environment seemingly presents varied complexities when dealing with assets in a virtual environment. The accounting framework ought to be alert in relation to the various developments taking place in this virtual economy. This is to ensure that the practitioners in different fields are appropriately informed on the recommended mode of treatment to such issues. So far, little has been done to address the complexities involved in dealing with the earnings derived from virtual economies. References Davis, M. A 2011, Virtualization Security Checklist,InformationWeek, No. 1313, p44-45. Lee, P 2005, The growth in the computer game market is leading to real legal issues in virtual worlds, Lawyer, Vol. 19 Issue 19, p14-14. Hightower, R 2008, Internal Controls, Policies and Procedures, Wiley, New Jersey, pp. Laudon, K. & Laudon, J 2013, Management Information Systems, Prentice Hall, New York, pp. 249-278. Lowood, H 2011, Perfect Capture: Three Takes on Replay, Machinima and the History of Virtual Worlds, Journal of Visual Culture, Vol. 10 Issue 1, p113-124. Proctor, R 2006, Managerial Accounting for Business Decisions, Prentice Hall, New York, p. 355-367. Rizzo, A. A.; Schultheis, M; Kerns, K. A. & Mateer, C 2004, Analysis of assets for virtual reality applications in neuropsychology, Neuropsychological Rehabilitation, Vol. 14, No. ½, pp. 207-240. 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