In a decisive move to prevent a recurrence of the WEMIX accounting controversy, the South Korean government has prepared new guidelines for the accounting of virtual assets, according to a local news outlet. This action comes in response to the confusion and market uncertainty caused by the lack of clear accounting standards for cryptocurrencies.
South Korean FSC Prepares Crypto Accounting Rules
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) announced on July 11th that they had prepared specific guidelines for supervisory work. These guidelines fall within the scope of reasonable interpretation of the International Financial Reporting Standards (IFRS). The move is seen as a significant step towards resolving the market uncertainty that has plagued the virtual asset sector.
The WEMIX accounting controversy highlighted the urgent need for such guidelines. The incident involved a lack of clarity in accounting practices for virtual assets, leading to confusion and controversy. The new guidelines aim to provide a clear framework for the accounting of virtual assets, thereby preventing such incidents from recurring.
The Supervisory Guidelines provide explicit direction on accounting standards for each transaction type and phase associated with virtual assets.
Previously, there was some ambiguity regarding whether a company could sell its own virtual assets to customers and instantly record the received monetary consideration as revenue. This led to varying criteria for determining the moment of revenue recognition among different issuing entities and instances where the company and auditors had conflicting views.
For instance, during the issuance of Wemix by WeMade, a disagreement arose with Samjung Accounting Corporation. WeMade initially accounted for all the funds obtained through issuance as assets and short-term revenue. However, following the auditor’s objection, it classified it as a liability and postponed the revenue reflection.
A government official said, “It is expected that reliable and useful information will be faithfully provided so that comparisons between companies can be made.”
Authorities On Crypto Asset Revenue Recognition
In the future, virtual asset issuers will recognize sales revenue only after fulfilling all obligations to asset holders. Until then, payments received must be recognized as liabilities. These obligations typically occur in three stages, and barring exceptional circumstances, the issuer cannot arbitrarily change the scope of obligations to advance revenue recognition.
Moreover, if an asset is listed as a liability on an issuer’s financial statement, the issuer must fully compensate for any losses due to hacking. However, if it’s classified as a customer’s asset, the issuer may be liable for damages but isn’t obligated to reimburse the stolen amount.
The new guidelines clarify that costs incurred in developing virtual assets and their platforms cannot be recognized as intangible assets unless they meet the stringent requirements outlined in the intangible asset standard. If these requirements are not met, such costs are accounted for as expenses when incurred.
The standard lists six requirements for development costs, all of which must be met for recognition. However, providing objective evidence for these requirements is expected to be challenging.
If an intangible asset is recognized, it must be reviewed annually for potential impairment. Virtual assets retained by the issuer post-issuance are not recorded as assets in financial statements unless there are directly related costs.
Future decisions on asset and liability recognition will consider the level of legal property rights protection for customers. For instance, if a customer cannot claim legal property rights over entrusted virtual assets in case of hacking, or if the operator can freely use these assets, it will be determined whether they should be recognized as the operator’s assets or liabilities.
Token securities that meet the definition of a financial instrument will be classified as financial assets and liabilities. With the revised Capital Markets Act, such token securities can now be considered financial securities.
