Companies and other types of legal persons are subject to accounting rules and guidelines which are set out to ensure presentation of complete, consistent, and comparable financial information. Virtual shares that you intend to issue to your community members embed certain rights and obligations that may need to be reflected in your financial statements. It is therefore important that you consider the applicable accounting rules already when designing the virtual share program and prepare your accounts correctly.

As the rights granted to recipients and your corresponding obligations may take very different forms and the accounting standards vary from country to country, we are not in a position to describe the accounting treatment of all potential scenarios. Also, we are not financial advisers, and this information is provided to you for informational purposes only. Please seek guidance from applicable accounting standard (e.g., IFRS, UK GAAP, US GAAP or other) and consult with your external financial consultant or auditor, if needed.

What should you pay attention to?

Firstly, it is important to clearly determine the design of the virtual asset (reward) program, see design the program – what rights are given to whom and correspondingly, what are your obligations, at issue of virtual shares or in the future. Rights and obligations shall be recognised based on their actual substance. Virtual shares alone have usually no monetary value.

Secondly, and closely related to the first point – who is the person granting the rights and undertaking obligations? In some programs the issuer or the obliged person may be your shareholder, parent company or subsidiary. So certain rights and obligations or costs and revenue should be recorded not in your accounts but by another person.

Thirdly, the rights and obligations embedded in a virtual share are often conditional and there is a possibility that they may not realise at all or the exact value of such rights or obligations is unknown until future date or event. You should therefore assess if and when to record a right or an obligation in accordance with the accrual and conservatism principles.

In some cases, you may need to determine if to record and report obligations in the notes to your reports as off-balance sheet items. Similarly, the same may apply to the recipient regarding the corresponding rights.

Some examples

  • In case of company sale payments, the recipient is entitled to receive a payment based on the ‘trigger event’ (e.g., an IPO, sale of shares in an M&A transaction). At the time of issuing virtual shares, there is no certainty that such event will happen and there is no certainty in the value of the shares to be determined for that event. In such case, it is very probable that there are no obligations that you can recognise in your accounts at the time of issuing virtual shares. However, when the probability of the ‘trigger event’ occurrence increases and the details become clearer, you may need to recognise such obligation in your accounts.
  • In case of milestone payments, the recipient has the right to receive certain (regular) payments at certain future dates or upon certain events. For example, payments will be made whenever the quarterly revenue of the company exceeds amount X. Depending on the set threshold, the monetary value of such obligation may be clear already at the time of issue of the virtual share or become clear very shortly and with regularity thereafter. So, you may need to record the obligation from the beginning and adjust it accordingly over time.
  • Utility-like instruments (previously referred to as tokens) may take very different forms, e.g., a price discount, a free product, a rebate. Depending on the exact design of the program, such transactions may need to be recorded either in your balance sheet accounts or the P/L accounts.
  • Badges which are designed to record an accomplishment or a participation in an event do not normally grant any economic rights or value to the recipient and are therefore not values that can be recognised in your financial reports. Issuing collectible tokens which represent digital items that are of value to a collector may affect your balance sheet if the digital items have been recorded as your assets.

Accounting matters are often discussed together with legal and tax aspects. Please see relevant sections on our website - legal, taxation.

Last updated: 29/08/2023

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