Appendix: Virtual Asset Accounting Supervision Guidelines
Last updated
Last updated
<The accounting treatment supervision guidelines for virtual assets, announced by the Financial Services Commission and the Financial Supervisory Service in December 2023, can be found at the link below.>
<The research article on virtual asset accounting supervision guidelines issued by Xangle can be found at the link below.>
<The document below is excerpted from the 2024 Virtual Asset Seminar materials jointly hosted by KPMG Samjong Accounting Corp and CrossAngle Inc. on January 5, 2024. The copyright of these materials belongs to KPMG Samjong Accounting Corp.>
There may be issues regarding how to recognize revenue when the issuer transfers utility tokens according to a token sale contract.
For utility tokens, if the recipient is a customer of the issuer, the company must recognize revenue at the time (or period) of fulfilling the identified performance obligation, considering the nature and scope of the performance obligations, and any consideration received before the completion of these obligations should be recognized as a contract liability.
Performance obligations can typically be verified through whitepapers, sales agreements, and even if not specified in contracts or laws, it's important to consider the company’s business practices, publicly disclosed management policies, or statements that provide legitimate benefits to customers.
Example 1: Transfer of Virtual Assets → Recognize revenue at the time of the asset transfer
The token is completely separate from the platform,
and there are no obligations on the issuer regarding the launch of the project or success of the platform.
"Exceptionally", the performance obligation can be considered fulfilled solely by the transfer of virtual assets.
Example 2: Implementing the platform as promised using the virtual assets → Recognize revenue when the platform is activated
The whitepaper or similar documents promise the realization of the platform or provide legitimate expectations.
The issuer aims to build a beneficial platform for all token purchasers and activate the ecosystem.
Example 3: Providing goods or services obtained through virtual asset payments to token holders → Recognize revenue when the goods or services are provided
The whitepaper or similar documents promise the realization of the platform and the transfer of goods or services, providing legitimate expectations.
The issuer is involved in activating platform ecosystem and supplying goods or services.
The issuer supplies goods or services that can be purchased with tokens on the platform.
When the issuer distributes tokens considering the contribution during the platform and token development process, or based on agreements outside of sales contracts, the accounting treatment depends on the presence of inherent management in the tokens and the nature of the transaction with counterparties.
The presence of inherent rights in the token implies that there is a future obligation to provide goods or services to the token holder (Example 3).
The method of liability measurement is recognized based on the reliably measurable contract consideration.
Example 1: In a situation where there is a future obligation to provide goods or services to the token holder, the accounting treatment for tokens paid to employees as per contract
Recognize the obligation to pay tokens during the period of receiving development labor as a liability and account for it as payroll expenses.
Example 2: In a situation where there is a future obligation to provide goods or services to the token holder, tokens paid as consideration for development services
Recognize the obligation to pay tokens during the period of receiving development services as a liability and apply accounting treatment for related costs.
Example 3: In a situation where there is a future obligation to provide goods or services to the token holder, tokens are distributed for free (Airdrop)
Do not account at the time of distribution, but consider in the revenue recognized at the time of fulfilling the performance obligations.
Security Token utilizes distributed ledger technology to digitize securities under capital market law, and includes not only typical securities like equity and debt securities but also recent non-typical securities like revenue and investment contract securities.
Security tokens are issued in the form of digital assets, but since they are securities, they are subject to regulation under capital market law.
Non-security digital assets will be regulated under the Digital Asset Basic Act currently being pursued in the legislature.
Security tokens link real assets like stocks, bonds, and real estate to blockchain-based digital assets, effectively granting ownership of these digital assets as if acquiring the securities themselves.
Investors in these tokens can easily prove ownership changes through transactions of security-type tokens alone, allowing them to trade ownership of the linked assets and participate in asset distribution and profit sharing through the securities they hold.
To determine if a security token qualifies as a financial asset under accounting standards, it is necessary to comprehensively consider the specific contents of contracts, including future investment contract securities. It must be confirmed whether the security tokens provide the trading parties with contractual rights and obligations to receive cash or equivalents, and these rights and obligations must be substantial and enforceable.
If the security token holders have substantial rights to profits from real assets or residual claims on real assets, they are considered financial assets.
However, if the issuer can change the terms without customer consent or if there are broad issuer liability disclaimers, they are not considered financial assets.
Accounting for the Initial Acquisition Cost of Token
Accounting guidelines provide instructions on how to handle costs incurred by investors when tokens are acquired through various methods and channels.
The specific accounting treatments described in the guidelines are as follows:
Example 1. Paid Acquisition
When tokens are acquired through payment, the initial acquisition cost is calculated by adding directly related costs to the purchase price.
If tokens re-enter the issuer through paid purchases following distribution, contract liabilities and payment considerations should be offset prior to the completion of performance obligations.
Example 2. Acquisition through Platform Operation or Mining : Acquisition through Platform Operation Without a Third-Party Contract* or Mining
If tokens are acquired through platform operations or mining not based on a contract with a third party, any costs incurred** that are directly associated with the acquisition of tokens should be recognized as the acquisition cost.
*While smart contracts generally follow the guidelines outlined in Example 3, for smart contracts within a corporate group's platform, it is necessary to substantively determine whether they are based on contracts with third parties.
**Costs include server rental fees, electricity charges, and computational operating expenses.
Example 3. Acquisition through Provision of Services or Other Exchanges: Acquisition of Tokens in Exchange for Platform Development or Operational Services, or Through Exchange of Non-Monetary Assets
If the fair value of the tokens cannot be reasonably measured, recognize the income and expenses related to the tokens based on the fair value of the tokens.
If the fair value of the tokens cannot be reasonably measured, measure using the standalone selling price of the services provided or the fair value of the assets exchanged.
Example 4. Receipt of Tokens for Free (e.g., Airdrop):
When receiving an airdrop, if the tokens received can be freely used within the platform for goods or services, and their fair value can be reasonably measured, they should be recognized at fair value. If not, they should initially be recognized at zero value. Consideration must be given to the impact of a large-scale free distribution, which might affect the fair value formed before the distribution, indicating that a reasonable fair value may not have been established.
For normal transactions from a third party, if the fair value of the tokens can be reasonably measured, they should be recognized at fair value; otherwise, they should be recognized at zero value.
Example 5. Acquisition of Security Tokens: Acquisition of Security Tokens that qualify as Financial Assets
Measure them at fair value at the initial recognition point. If they are not measured at fair value through profit or loss (FVPL), adjust the fair value by the transaction costs directly related to the acquisition.
For tokens held in custody by a business operator, it is essential to determine who—either the customer or the business operator—controls the tokens to decide on the recognition of assets and liabilities.
The scope of entities considered for this accounting treatment is not limited to those legally defined as virtual asset service providers. This category includes:
Virtual asset trading brokers
Providers of electronic wallet services for storing and managing virtual assets
Providers of decentralized finance (DeFi) and staking services, among others
The control over the economic resources, which allows directing their use and deriving economic benefits, must be assessed.
Typically, control of economic resources originates from the ability to exercise legal rights, though other factors may also be considered:
Private contracts between the operator and the customer
Regulations and laws supervising the operator, such as the Virtual Asset Laws and the Act on Reporting and Using Specified Financial Transaction Information
The level of custody and management of customer-entrusted tokens by the operator
Example 1: Private Contract Between Operator and Customer
If the operator has explicit or implicit rights to autonomously use the entrusted tokens, those tokens are considered assets of the operator.
Whether the rights, interests, or legal ownership of the tokens are transferred to the operator based on the contract
Whether the operator can sell, transfer, lend, mortgage, or collateralize the deposited tokens without the consent or notification of the entrusted customer
Whether the entrusted customer can transfer or withdraw the deposited tokens to another exchange or wallet at any time
If there are separate contracts affecting the rights and obligations of the entrusted customer and the operator
Whether any restrictions imposed by the operator affect the customer's ability to receive all economic benefits related to their tokens.
Who benefits in the event of a hard fork
Example 2: Laws and Regulations Supervising the Operator, such as the Virtual Asset Laws and the Act on Reporting and Using Specified Financial Transaction Information
If the customer cannot assert legal ownership of the entrusted tokens in events like hacking, it becomes difficult to consider these tokens as the customer's assets.
Whether the owner of the tokens is specified in the applicable laws for the operator and the entrusted customer
Whether the entrusted customer has legal rights in the event of the operator's bankruptcy, liquidation, or dissolution (e.g., protection from the operator’s creditors, exclusion from the bankruptcy estate)
Whether the entrusted customer legally has the ability to withdraw the tokens at any time, and if not, whether they have a right to receive the tokens deposited by law
Example 3: Level of Management and Custody by the Operator
In cases where the private keys are lost due to operational breaches, cybersecurity attacks, theft, or fraud, and the tokens cannot be retrieved, who would bear the risk of loss
Whether the customer-entrusted tokens are stored separately or mixed with other customer tokens
Whether the blockchain addresses of the entrusted tokens are traceable
Whether a third-party custodian holds the entrusted tokens and records transactions on behalf of the entrusted customer
Whether the exchange stores the customer's crypto assets in a hot wallet or a cold wallet
When measuring fair value, it should be based on the value at the date of measurement, assuming that the asset is exchanged in
a normal transaction
between market participants
in the most accessible,
principal or most advantageous market.
For virtual assets classified as intangible assets, fair value should be measured based on the price in an active market.
Although virtual assets traded on exchanges may have an active market, simply being listed on an exchange does not automatically satisfy the criteria for an active market, thus requiring a review of whether the definition of an active market is met.
Quantitative assessment: Virtual assets should be traded with sufficient frequency and volume to continuously provide pricing information.
Qualitative assessment: The size of the transactions must be judged to be sufficient using objective indicators that can determine the scale of trading, such as daily market capitalization turnover rates and trading volume turnover rates.
