This week, the Korea Financial Services Commission (FSC) released guidance on accounting for cryptocurrencies, or virtual currencies. His preference is to follow the standards of the International Accounting Standards Board (IASB). While the US is consulting on a proposed standard, the IASB is reluctant to prioritize work on crypto assets.

Therefore, the Korea FSC published an accounting standard that makes disclosure of virtual asset transactions mandatory and a guideline on how to account for transactions.

crypto custody

In the US, custody of crypto assets has become controversial after the SEC issued an accounting bulletin requiring assets in custody to appear on the balance sheet as assets and liabilities. That’s because the SEC believes that there are higher technical risks that create legal risks. Typically, assets held in escrow are treated as belonging to customers and would not be on the balance sheet.

Korea’s position is to consider economic control over virtual assets. Or rather that is the plan for the future. In his opinion, control comes down to the level of legal protection. For example, if the custodian is free to use the assets, then they should be on the balance sheet. Or if the client can’t assert ownership of it in the event of a hack, then it should be on the balance sheet.

These considerations are part of the ‘guidance’, but disclosure is mandatory. Whether or not cryptocurrencies are directly on the balance sheet, assets in custody must be disclosed, including the volume and market value of each virtual asset. There should also be disclosures about the risks of hacking and the level of insurance.

Cryptographic Disclosures

In addition to custody, disclosures are also mandatory for virtual asset issuers and token holders. Those who own crypto assets must disclose accounting policy, book value, and market value. They will appear as intangible assets or inventory depending on their purpose for the company.

The accounting of self-issued tokens is another controversial topic. Consider the rough balance produced by FTX’s Sam Bankman Fried that included self-issued tokens.

Money from issued tokens is often considered as revenue, but the timing is sometimes questionable.

In conventional accounting, if you receive payment for services in advance, that is a liability to your client. At the time you render the service, the amount changes from a liability to income. Guidance from Korea suggests that crypto tokens should have a similar treatment: revenue should only be recognized after obligations related to the tokens have been met.

Korean companies have to disclose their revenue recognition policy, as well as amounts and business models. “It is mandatory to describe in detail,” says the FSC.

The company must report the number of tokens that have not yet been released. However, the guidance states that in most cases it is a note and the assets should not appear on the balance sheet.

Years ago, Web3 startup Animoca Brands was reprimanded by the Australian Stock Exchange (ASX) for recognizing revenue too early for token issues. The $2.4 million issuance related to The Sandbox metaverse that became a huge source of revenue for the company. While The Sandbox token’s price is down 95% from its peak, it still has a market capitalization of nearly $800 million.