Accounting of Native Tokens under IFRS in Issuers’ Books

gm accountants 👋

Let’s get into the nitty-gritty of accounting for native tokens. Whether you're deep into staking, issuing tokens, or managing your DeFi empire, getting the accounting right is key. In the world of web3, native tokens power everything, from decentralized apps to governance. 

And for issuers, the entities creating these tokens, this means some serious financial implications.

Important Disclaimer: 

The information in this article is for informational purposes only and should not be considered accounting advice. The IFRIC Update March 2019 does not provide explicit guidance on accounting for native tokens under IFRS. This is my attempt to provide some insights into this gray area of crypto accounting.

Overview of Native Tokens

Native tokens are the backbone of blockchain ecosystems. Whether you’re dealing with utility tokens (tokens that give you access to a service) or security tokens (tokens representing a financial interest, like shares), their classification in your books matters. 

Why? Because how you categorize them determines how they’re reported on your financials - liabilities, equity, or something else.

What it Means to Be an Issuer

If you’re the issuer, you're the one pulling the strings. You’re minting, distributing, and controlling the native tokens, like Ethereum’s ETH or Solana’s SOL. Think of it like printing money but in a decentralized world. This means you’re responsible for how these tokens hit your financials. Issuers need to classify them correctly and ensure they’re accounted for at every stage - from minting to spending.

Applicable IFRS Standards for Native Tokens

Before you dive into journal entries, you need to know which accounting standards apply. Luckily, we've got you covered:

• IFRS 2: Share-Based Payments - When tokens are issued to employees, they’re treated as compensation at fair value. Track these like you would with stock options.
• IFRS 9: Financial Instruments - If your tokens are considered financial assets or liabilities, this standard helps you handle subsequent revaluation (spoiler: gains and losses hit your profit or loss account).
• IFRS 15: Revenue from Contracts - Got tokens tied to services or products? Recognize revenue when your performance obligations are met.‍
• IAS 38: Intangible Assets - Most tokens are classified as intangible assets. They’re either measured at cost or fair value depending on whether you’ve got a reliable principal market to value them.

Before deciding on the accounting treatment, refer to our article here if you need help creating your chart of accounts.

Accounting Treatment for Native Tokens

[fs-toc-h2]Liability Case

If your tokens don’t represent a stake in the company’s assets, they’re considered financial liabilities. That means your token holders are probably expecting to get something back - like stablecoins or another financial asset.

Example: You issue a token that holders can redeem for stablecoin/fiat. That’s a financial liability under IAS 32.

Journal Entry Example:

Dr. Stablecoins/Cash   $1,000,000
    Cr. Financial Liability (Tokens) $1,000,000

[fs-toc-h2]Equity Case: Your Token = Ownership

Tokens that give holders a claim on your company’s assets or give voting rights? Yep, those are equity instruments. If your token holders are in it for the long haul and expect ownership perks, that’s equity. No need to remeasure, just recognize it at fair value.

Example: A company issues governance tokens with voting rights and a claim on residual assets. That’s equity under IAS 32.

Journal Entry Example:

Dr. Stablecoins/Cash   $1,000,000
      Cr. Equity (Token Issuance) $1,000,000

[fs-toc-h2]Subsequent Measurement: When You Spend Those Tokens

Tokens aren’t just sitting around. Whether you’re paying consultants or spending tokens on grants, you’ve got to derecognize them when spent. When they leave your wallet, it’s time to record the expense.

Example: If you spend 10,000 tokens on a project, you record it like this:

Journal Entry Example:

Dr. Consultancy Expense $10,000
      Cr. Tokens (Intangible Asset)   $10,000

[fs-toc-h2]Off-Balance Sheet: Should Tokens Stay or Go?

The off-balance sheet approach might seem tempting, but IFRS isn’t a fan. If you’re holding tokens and you control them, they belong on the balance sheet. Whether they’re deferred revenue or an asset, get them on the books.

[fs-toc-h2]Fair Value 

Tokens that are actively traded in markets? Use the IFRS 13 hierarchy to measure their fair value. If you’ve got Level 1 inputs, use the market price. For Level 2 or 3, things get trickier—you might need to use valuation models.

Example: If you trade tokens on multiple exchanges, figure out the principal market with the most volume.

Practical Examples: Real-Life Token Accounting

[fs-toc-h2]Scenario 1: ICO (Initial Coin Offering)

Let’s say you’re BlockchainCo and you’ve just raised $1,000,000 in Ethereum through an ICO by issuing 1,000,000 tokens. Congrats! Now, let’s break down how you handle that in your financials. You need to treat those proceeds as deferred revenue until you deliver on your promises (aka, performance obligations).

Journal Entry Example:

Dr. Crypto Assets (cash equivalent)    $1,000,000
      Cr. Deferred Revenue (liability)        $1,000,000

[fs-toc-h2]Scenario 2: SAFTs (Simple Agreements for Future Tokens)

So you’ve entered into a SAFT, where DevCo raises $500,000 in fiat for tokens to be issued later. Until those tokens are actually minted, you’ve got a ‘contract liability’ on your hands under IFRS 15. Time to track that like the degen accountant you are!

Journal Entry Example:

Dr. Bank (cash)                  $500,000
      Cr. Contract Liability (SAFT)    $500,000

[fs-toc-h2]Scenario 3: Paying Your Team in Tokens (IFRS 2)

You’ve decided to compensate your employees with tokens. Let’s say you hand out 1,000 tokens, each valued at $5 on the grant date. You’ll need to recognize an expense for this based on the fair value of the tokens. It’s kinda like stock options but way cooler.

Journal Entry Example:

Dr. Employee Compensation Expense      $5,000
      Cr. Liability/Equity (Tokens Issued)           $5,000

[fs-toc-h2]Scenario 4: Foundation Receives Tokens from DevCo at FMV

Let’s say the foundation receives tokens from DevCo, valued at $100,000 at fair market value. Here’s how you’d recognize it in your books.

Journal Entry Example:

Dr. Intangible Assets (Tokens) $100,000
      Cr. Contribution/Equity (from DevCo)  $100,000

Wrapping Up

In April 2022, the IASB decided not to add cryptocurrencies to its work plan until 2026, so that means we’re not expecting any further guidance on accounting for native tokens till then.

To wrap up, whether your tokens are liabilities, equity, or intangible assets, the way you classify them will make or break your financials. Stay on top of fair value, recognize them right, and disclose those risks. After all, it’s your DeFi empire on the line!