Translated by Clara Kim & Lani Oh 

Table of Contents

1. Introduction

2. Accounting Supervisory Guidelines

2-1. Token Issuers

2-2. Token Holding Companies

2-3. VASP

2-4. Fair Value Measurement of Digital Assets

3. Mandatory Disclosures of Notes

4. Final Thoughts

 

1. Introduction

South Korea’s steadily growing interest in Web3 is prompting various listed companies—not only the gaming industry, the OB in the Korean crypto industry—to venture into the crypto asset business. By 2022, these companies raised approximately 79.8 billion KRW through the issuance and sale of tokens, and listed companies held third-party issued tokens with a market value of around 20 billion KRW.

Though crypto assets have increasing impact on the accounting practices of listed companies, there has been a lack of clear guidelines for digital asset accounting treatment in Korea. This is primarily due to the adoption of Korean International Financial Reporting Standards (K-IFRS) by domestic listed companies.

The International Accounting Standards Board (IASB) took a reserved approach in its 2022 five-year plan by excluding the accounting policies for crypto transactions, in contrast to the proactive stance of the U.S. and Japan in issuing accounting guidelines of crypto assets by respectively adopting US-GAAP and J-GAAP. On July 11, the Financial Services Commission (FSC) made a significant announcement that mandates guidelines for crypto accounting and note disclosures. This article explores the key points of this announcement and its potential impact on corporate accounting.

2. Accounting Supervisory Guidelines

The existing international accounting standards only provide accounting treatment standards for holding digital assets. On the other hand, there were no standards for the issuance of cryptocurrencies. As a result, listed companies that issue, distribute, and manage their own tokens had considerable difficulties in accounting in the absence of clear guidelines. Although the new guideline is not a new accounting standard nor a new interpretation, it is expected to resolve accounting uncertainties by providing specific guidelines on issuing and holding digital assets within the scope of international accounting standards.

2-1. Token Issuers

Token sale proceeds received in advance as liability, and recognized as income after completion of obligations

First, when a company sells its own tokens to customers,  it is required to recognize the sales revenue as income only after fulfilling all obligations to the token buyers. Even if the payment is received in advance, if the company has not fulfilled all of its obligations, the payment received will be recognized as a liability until after all obligations are fulfilled. As previously mentioned, there was no specific guideline on when an entity should recognize revenue from the sale of its own tokens, which led to disagreements between companies and auditors on the timing of revenue recognition, such as in the case of WeMade's restatement of revenue in March last year—the company excluded KRW 225 billion in WeMix liquidity from revenue and recognized them as a liability.

WeMade’s Correction of Revenue Fluctuation Disclosure, Source: DART

The introduction of this guideline means that the recognition timing of revenue from token sales will be determined by the issuing company's performance obligations, which will be determined by the nature of the token as describe in the white paper. Currently, most of the tokens issued by domestic listed companies are utility tokens, and companies promise to provide services, platforms, etc. that can utilize tokens rather than simply issuing tokens to form the utility of tokens. Therefore, in order for a company to recognize token sale proceeds as income, it must fulfill all the obligations promised in the white paper. By fulfilling the performance obligations, the company can transition from recognizing the token sale proceeds as liabilities to recognizing them as revenue, based on the extent of obligation fulfillment.

Excluding exceptional cases, self-issued tokens are not recognized as assets

As will be discussed in 2-2, Token Holding Companies, companies that hold digital assets will recognize most of them as intangible assets, with some exceptions. Therefore, companies that issue tokens will be subject to the same accounting standards as companies that develop intangible assets. In the intangible asset standards that most digital assets will be subject to, there is a concept called development activities. Some examples are as follows:

• Activities that design, build, and test prototypes and models prior to production or use
• Activities that design tools, jigs, molds, dies, etc. related to new technology
• Activities that design, construct, and operate pilot plants that are not economically feasible for commercial production purposes
• Activities that design, fabricate, and test the final selected design for a new or improved material, device, product, process, system, or service

If the costs incurred to develop an intangible asset qualify as development activities described above, the costs can be capitalized and included in the acquisition cost of the intangible asset. If the costs incurred in the process of developing the intangible asset do not qualify, they are all accounted for as expenses. The same goes for tokens as well. Unless the company can provide clear evidence that the costs incurred in developing and issuing the platform and token constitute development activities under the intangible asset standard, all such costs should be expensed and not included in the cost of the token. Since token issuance can be done with minimal transaction fees, most self-issued tokens are not expected to meet the development activity criteria and will be expensed rather than capitalized.

Also, tokens that are internally reserved after issuance are not recognized as assets. However, in exceptional cases where direct attributable costs arise during the token issuance process, they can be recognized as assets. The supervisory guideline defines utility tokens as those that can generate economic benefits by providing goods and services in the future. Therefore, at the time of development, it is unlikely that utility tokens will meet the definition of an asset as defined by accounting standards. In other words, no issuance costs will be incurred except in very exceptional circumstances. These accounting guidelines seem to aim at preventing developers from inflating token issuance-related costs, capitalizing them, and distorting the financial statements.

2-2. Token Holding Companies

Utility tokens are intangible assets and token securities are financial instruments