By Chetan Hans
Partner at Grant Thornton Singapore | CFO Advisory | Crypto Accounting
What is included in this article:
Explanation of SAFT
Blockchain and cryptocurrency has given rise to innovative financial instruments. One such instrument is the Simple Agreement for Future Tokens (SAFT). SAFT notes represent a contractual agreement between investors and blockchain-based projects, facilitating the issuance of tokens in the future.
As these instruments gain prominence, it becomes important to understand how to analyse SAFT notes for accounting under the International Financial Reporting Standards (IFRS).
The IFRS, as a consistent framework ensuring comparability across the global financial ecosystem, becomes especially relevant for emerging financial instruments like SAFT notes.
Understanding Accounting for SAFT under IFRS:
When an entity enters into a SAFT agreement, the fair value of the consideration received, typically in the form of fiat cash or other cryptocurrency, is recognized as a liability on the balance sheet. The question is whether the SAFT note should be classified as a financial liability or non-financial liability.
Classification of SAFT as a Liability and Analysis
According to IFRS 9, a financial liability is defined as follows, which is pertinent to understanding SAFT classification:
A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments.
Also, for these purposes the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
Analysis of SAFT under IFRS: Implications.
Typically SAFT notes do not contain a contractual obligation upon the Company to redeem the SAFT or pay fiat cash or another financial asset as a settlement. SAFT are generally settled by issuances of tokens of the blockchain project. Hence, it is likely to be considered as non-financial liability in the financial statements.
As non-financial liabilities, SAFTs affect the balance sheet differently, impacting equity valuation and liability management strategies. From a tax perspective, the timing and nature of revenue recognition related to SAFTs could vary, necessitating careful tax planning and compliance efforts.
Unlike Initial Coin Offerings (ICOs), SAFTs offer a regulatory-compliant way of fundraising by targeting accredited investors and deferring the issuance of tokens. This distinction influences their accounting treatment under IFRS, as the focus shifts from immediate token sale revenue recognition to the future fulfillment of obligations.
This article does not cover other important considerations, such as the accounting treatment of tokens once issued, how their value is measured and recorded, and the financial statement disclosures required under IFRS.
The Crypto Accounting Solution
To address the complexities outlined, Cryptoworth has introduced a new SAFT module, designed to address the complexities of managing SAFT investments, offering automation, accuracy, and integration with existing ledger systems.
This SAFT Module simplifies the tracking and reporting process, ensuring compliance and enhancing efficiency for crypto businesses. By reducing the need for manual record-keeping, this solution represents a significant advancement in crypto accounting practices.
The accounting for SAFT notes under IFRS requires careful consideration of their unique characteristics and implications for financial reporting, taxation, and investor relations.
As the crypto landscape continues to evolve, so too will the standards and practices for accounting. Understanding and applying IFRS standards to SAFT notes and other innovative financial instruments is essential for accurate and compliant financial reporting.
Credits and Acknowledgment
This article was developed from the foundational notes and expertise of Chetan Hans, Partner at Grant Thornton Singapore, with brief contributions from Cryptoworth’s editorial team. We thank Mr. Hans for his insights into SAFT accounting under IFRS, which served as the basis for this expanded analysis.