If a company were to borrow an asset for use in the business, should you recognise this in the accounts (FRS102). If so, how?
Examples: -
- A farming company borrowers a £200k pea viner from a friend of the farmers - There is no consideration and the pea viner must be returned when the owner requests for it to be
- A tourist attraction borrowers a 1kg bar of gold worth £50k to exhibit - There is no consideration and a gold bar must be returned when the owner requests for it to be
The bar of gold is fungible, and in theory the owner could allow the company borrowing the gold to sell the bar, provided that they can provide a replacement bar of the same quality when the owner would like it back.
I don't believe that lease accounting would/could apply, given that there would be no consideration, and that the asset is not being lent for a fixed term.
On the face of it to me, niether transaction would need to be recognised in the accounts. There is, however, a risk to the company of using the asset (eg it is damaged or lost) and therefore perhaps a disclosure is all that is required?
In the gold example, the company could generate £50k of cash from the borrowed of the asset, but would then have an obligation to buy back the same type of gold bar. Would this just be recognised as a £50k provision in the accounts?
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Contrary to how it might appear (and having put the children to bed and reread the thread... I realise I had missed large bits of it as it developed), I do see your point of view. If the transfer of (use of) an asset to the company does not create a debt (as a transfer of (use of) land wouldn't), then there hasn't been the exchange of assets that was my starting point. With land, there would be an undertaking to return the land. It could work like that with crypto.
That's your starting point.
It distinguishes itself from a normal repo because the transfer isn't in return for a cash loan. (Not sure that's relevant, I'm just saying.)
Possibly if there was no disposal of the crypto by anyone in the chain of borrowers, I'd now find myself agreeing with you. But I can't get myself to the place where I can accept that the asset could be disposed of down the chain without also being disposed of by everyone (higher up) in the chain. (No wordplay intended this time, with "chain".)
(Edited for some awful typos!)
I'm sorry that I haven't grasped your point of view. I'm certainly not clear how you believe this arrangement should be accounted for. I'm not even clear whether you are considering the position of the lender or the borrower. Even when you disagree (eg above concerning derivatives), you don't explain why, so there's no possibility of exploring your thinking.
If I may repeat an earlier point, the apparent lack of the documentation for this loan is the source of the difficulty. Knowing the borrower's obligation to the lender helps tell you you to account for it. If that obligation is based on a fixed amount of crypto - ie a varying amount of GBP, then I really do think that is a derivative or some other complex financial instrument.
An embedded derivative arises when some portion of a contract's cash flows are modified in relation to changes in a variable, such as an interest rate, commodity price, etc. I think that may be what you have here.
Although the liability is a fixed amount of coins, that's not your reporting currency, which is presumably GBP. The GBP liability to lender varies according to value of the coins lent.
HMRC aren't the only user. The accounts have to be filed at Companies House and other parties may request them (eg lenders).
I'm in no doubt that the company has an asset and a liability in respect of the borrowed coin. Excluding them means that the financial statements will not show a true and fair view and will not be Companies Act compliant.
There is also a logical inconsistency in that the company is generating a return on an asset it does neither owns nor rents.
What if the borrower has the right to dispose of the gold bar, provided that they returned a gold bar of the same quality?
Then you have a sale of a gold bar (to the 'borrower', now) and a future obligation (on the 'borrower') to deliver a gold bar of a certain specification on a future date. The current value of that future asset (in the 'lenders' accounts) will depend on market value of similar contracts https://www.cmegroup.com/trading/metals/precious/gold.html#
I don’t know anything about crypto currency but isn’t your client just trading in crypto currency as a financial trader? So it is a current asset/inventory which you would mark to market regardless of whether he has it or has lent it.
FRS102 para 20.17 and following set out how lessors account for leases.
When you read it, you may conclude that's not the appropriate accounting treatment.
... that the substantial risks and rewards of ownership remain with the director at the top of the chain.
That's not what you've described. Nor is that the FRS102 definition of an asset.
Your borrowed pea viner is comparable to a week's hire of a car - the cost goes through P&L as an expense. But here it's a barter transaction that probably stays below the radar.
Sorry - I'm losing the will here.
I've explained how I believe the crypto should be accounted for in the books of the borrower. I really really don't care about the hypotheticals.
Because comments do not appear in the order they are made, grown up discussions where views may change and develop as the discussion proceeds (as mine have - I now think my initial disposal-in-exchange-for-a-debt-asset stance, which I acknowledged at the time was more instinctive than considered, could be wrong) are really hard to follow in this format. Older and wiser contributors than me - Basil being one such - never use the reply button. I think I will adopt that approach, henceforth.
I also realise I accused you of using land as an (aff) example. I apologise, you didn't.
Let me clarify my closing post yesterday. You appear ("In your view, this would appear to create a disposal right the way up the chain") to have interpreted it as meaning that the disposal down the chain triggers the disposals up the chain. That's not what I meant. Where you have been discussing "risk and reward" with Paul, you could similarly discuss "beneficial ownership" with me - meaning that in my view the disposal happens at the point the loan is made, not at the point the second borrower once removed disposes of the asset.
Your argument ultimately rests on the idea that a replacement asset indistinguishable from the original asset is [the same thing as] the original asset. I don't think it is. And (more importantly) I don't think the law thinks it is.
Praise be!
You can always show him this thread to justify your fees to-date ... and maybe he'd like to put a substantial float behind the bar at whichever hostelry Paul favours - plus some comestibles (coal?) for TD.
I concur, if "same" asset returned then no disposal, if "similar" asset but not "same" returned there, to my mind anyway, has to have been a disposal.
Above to me applies re the original "lender"
Accounting treatment within the borrower is imho a wholly different question re recognition and valuation at the year end dates and for that the starting position, barring anything express within legislation, has to be the financial reporting standards adopted by the "borrower" and how they dictate what gets shown, this imho will not necessarily follow the legal ownership position .
But is it fungible for tax purposes is the $1million question, see this US article from a few years back discussing the likely issues with the IRS.
https://www.forbes.com/sites/robertwood/2017/09/21/irs-could-tax-loans-o...
But is it fungible for tax purposes is the $1million question.
I really don't think it is. (And not just because the word "fungible" does not appear in TCGA (prove me wrong).)
What you do have in TCGA is s21 (defines asset and disposal), s104 (defines securities, in a way that I would say included crypto) and s263AA (which, as DJKL pointed out in the other thread, Richard agreeing, defines securities in a way that does not include crypto) [and of course much else besides, but, OP, you haven't said which (other) bits you think relevant].
I'm out of this thread now unless I see something that changes my mind. Common sense/logic (I know I say apply law not logic, but here IMHO they agree) says that if there is a particular time at which no-one in the chain holds the asset, then the asset must by that time have been disposed of. This bleeding obvious point has been made countless times already, including by Hugo and gillybean04. All I am saying is that the point of disposal by the initial 'lender' is not when the asset leaves the chain, but was when the initial 'loan' by which beneficial ownership was passed to his company was made. Which, btw, DJKL and Richard said ages ago.
Before I left, I meant to ask... Do let us know (in as much detail as you are permitted) the advice your client obtains.
(On your last point, theft is different, as well you know. The entitlement is to the asset stolen, not "similar" assets, to borrow a word from s263AA.)
Also, ignoring the tax position of the party owning at the outset , any learned researched opinions re the accounting treatment within "the borrower" would be welcome, it is an interesting question. (In fact there is likely a newish branch of accounting to be developed regarding the various types of instruments that are developing, I doubt the position will remain static (which may be a concern if this were to be long term)))
While I still think the situation is odd, thank you for coming back with an update. Too many querists disappear leaving an issue unresolved.
I am also interested to hear about the forthcoming update regardless. Though none of them lend it (that I am aware of) I do have clients who invest in crypto. An update worth reading for me.