Question

a) Maddow and Wells, Inc. purchased equity securities in 2018. The management of the company has decided that the securities will not be sold immediately, but will be held for at least three years. This will allow MW to maximize the potential gains from holding the securities. The new accountant at the company wants to classify the securities as held-to-maturity because they will be held for three years; the company has never held securities for this long before. How would you advise the management of the company to classify the securities? At the end of each reporting year, how will the securities be recognized on the company’s books? Support your response with an appropriate ASC reference (ASC xxx-xx-xx-x) or ASU (accounting standard update). Ideally, this part should not exceed one page. (75 points)

b) Cryptocurrency and Initial Coin Offering are unique investing tools. How does the SEC view these two instruments? Use the SEC’s website to find relevant information about the SEC’s stance on these instruments. Support your discussion with relevant citations from the SEC. Use APA formatting. Ideally, this part should not exceed one page. (75 points)

Answer 1

Part (a)

The security will be classified as 'Available for Sale' . The company's accountant wants to classify them as 'Held to Maturity' but it would be incorrect because of the following reasons:

1. Held to Maturity category generally refers to debt instruments (which pay interest equal to coupon rate). Unless, the equity security in question are 'Preferred Shares' (which pay regular interests), they cannot be classified as Held to maturity.
2. The equity securities should always be reported at fair value, while Held to maturity instruments are reported at an amortized value.

Treatment in company's books:

1. The Equity securities will be reported in the Current Assets section of the Balance Sheet. Even though the company plans to hold the security for 3 years it will still be treated as Current asset for the reason that the security can easily be liquidated and there is no amortization on it.
2. The capital gain/(loss) from the security will be presented as 'Unrealized gain/(loss)' under the 'Shareholder's Equity' section.
3. Any gains or losses from the security will be reported in the Cash Flow statement under 'Cash from investing Activities'

Reference: FASB's Accounting Statement Update(ASU): Statement No. 115

Part (b)

SEC's View on the following:

Cryptocurrency

• SEC refers to Cryptocurrency as Virtual currency
• A Cryptoccurency is created using a distributed ledger also known as the blockchain technology
• Blockchain is a digital ledger maintained by the network participants, it uses cryptography to verif the transactions. Hence, a currency created using this technology is referred as Cryptocurrency
• Crypotocuurency can be issued by Individuals or organizations using ICO (Initial Coin offerings) for the purpose of raising capital
• It is a digital representation of value that can be digitally traded and represents a certain inherent value and can be used to make purchases
• Cryptocurrency can perform all the functions a fiat currency (eg: USD, INR etc.) can do but is is not backed by the government or any other body
• Merits - 1) can make transfers without geographic barriers 2) Lower transaction costs as compared to conventional methods 3) Transactions can be verified publicly.
• Demerits - 1) Have substantial risk in form of hacking 2) There is no government backing 3) Since, no central authority looks over it, it makes it hard to trace transactions 4) It is hard for Law enforcement agencies to Freeze Virtual currency

ICO(Initial Coin Offering)

• ICO is used to raise capital by individuals and corporations via cryptocurrency
• The offerings may be registered under SEC if it follows certain characteristics
• Information of a registered offering can be found under form 1 at SEC website through EDGAR
• SEC has advised caution in case the offering is not listed
• ICO's described as crowdfunding contracts may not follow regulations requirements of Regulation Crowdfunding

Refrences:

Website, SEC. “Investor Bulletin: Initial Coin Offerings.” SEC Emblem, 25 July 2017, www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings.

Clayton, Jay. “Statement on Cryptocurrencies and Initial Coin Offerings.” SEC Emblem, 11 Dec. 2017, www.sec.gov/news/public-statement/statement-clayton-2017-12-11.