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Korean Financial Regulator Reveals Crypto Accounting Guidelines to Prevent Inflated Company…

Policy & Regulation·July 11, 2023, 7:42 AM

The Korean Financial Services Commission (FSC) has announced new regulations to address accounting uncertainties in the blockchain industry, according to local news outlet KBS News. The rapid growth of the industry and the increasing impact of cryptocurrency transactions on corporate accounting have resulted in confusion due to the lack of clear guidelines.

Last month, the National Assembly’s plenary session passed the Virtual Asset User Protection Bill, emphasizing the need for improved regulation. In line with this development, the FSC has introduced practical guidelines and measures to resolve accounting uncertainties.

The FSC has introduced two measures to achieve this goal: virtual asset accounting guidelines and mandatory disclosure of virtual assets in annotations within financial statements.

Photo by Beatriz Pérez Moya on Unsplash

 

Accounting guidelines

The virtual asset accounting guidelines state that when an issuer sells virtual assets to a customer, they must fulfill all obligations, such as the sales process, in order to recognize it as revenue. Any costs incurred during the issuance of a virtual asset and the creation of its platform should be recognized as expenses, unless there is clear evidence that these activities specifically contribute to the development of the virtual asset. Additionally, any reserved virtual assets after issuance cannot be treated as assets on the company’s balance sheet. These guidelines aim to prevent companies from artificially inflating the value of their companies using virtual assets.

When recognizing virtual assets as assets or liabilities, virtual asset service providers (VASPs) must consider the concept of economic control. Economic control refers to the entity’s authority to dispose of a virtual asset without needing customer authorization.

 

Virtual assets in annotations

Furthermore, companies are obligated to disclose their virtual asset transactions and holdings in annotations to the financial statement. This requirement ensures that users of corporate accounting information have sufficient details. Public companies holding virtual assets for investment purposes must state the basis for classifying the assets as assets or liabilities. They must also provide the book and market values of their virtual assets in their financial statements.

Companies that have created or issued virtual assets are required to provide comprehensive information about the quantity and characteristics of these assets. They must also explain their revenue recognition methodology in the event of asset sales. Companies must provide disclosure regarding the historical utilization of cryptocurrencies that have been issued but remain unsold. This disclosure includes various factors such as portfolios and volumes.

VASPs must disclose the volume and market value of virtual assets entrusted to them by customers for each asset, regardless of whether these assets are recognized as assets or liabilities. VASPs also have to provide information about the level of protection measures they have implemented to mitigate risks such as hacking.

The FSC expects that these measures will enable readers of financial statements to make meaningful comparisons between VASPs while ensuring the provision of reliable information.

The accounting guidelines, after incorporating industry feedback, are expected to undergo deliberations and resolutions by both the accounting standards review committee and the Korean Securities and Futures Commission, as per local news outlet Kyunghyang Shinmun. Once the guidelines receive final approval, they will be promulgated and implemented immediately. This process is anticipated to take place between October and November.

Meanwhile, the inclusion of virtual asset disclosures in the annotations of financial statements will be enforced next January.

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