Accounting for Use of Tokens for Compensation under IFRS

This article delves into the intricacies of accounting for token-based compensation under IFRS, providing insights into the relevant standards, recognition, measurement, and disclosure requirements.

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• Cryptocurrency accounting treatment IFRS: Understanding IFRS standards for proper cryptocurrency accounting is crucial for accurate financial reporting.
• Accounting for cryptocurrency Grant Thornton: GT offers insights and best practices for accounting for cryptocurrencies within the IFRS framework.
• IAS 2 cryptocurrency: How IAS 2 applies to cryptocurrency inventory valuation and its impact on financial statements.

What is Token-Based Compensation?

Token-based compensation involves granting employees or other stakeholders cryptocurrency tokens, which are digital assets that can represent various rights or assets. These tokens can be used as an incentive mechanism, similar to traditional stock options or equity-based compensation plans. Given their unique nature, accounting for tokens presents challenges that require careful consideration under IFRS.

Relevant IFRS Standards

Following IFRS standards may be pertinent when evaluating accounting for token-based compensation:

1. IFRS 2: Share-Based Payment – This standard applies to transactions where an entity receives goods or services in exchange for equity instruments or cash payments based on the price of equity instruments. If the tokens issued to employees meet the definition of an equity instrument, the arrangements would be in the scope of IFRS 2. (read more in IFRS.org)
2. IAS 19: Employee Benefits – If the tokens issued to employees are not in the scope of IFRS 2, they would fall within the scope of IAS 19 as a non-cash employee benefit. (see more in IFRS.org)

Recognition and Measurement

Initial Recognition

For token-based compensation arrangements that meet the definition of a share-based payment under IFRS 2, the entity must recognize the compensation for the services it receives from the employees. Typically, this requires entities to determine the grant date for employee compensation and at this point, the entity must measure the tokens granted at their fair value. The fair value of tokens is recognized as an expense over the vesting period. 

Fair Value at Grant Date: The fair value of the tokens granted is determined at the grant date. This valuation should reflect the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Subsequent Measurement

• Equity-Settled Share-Based Payments: Once the fair value of the tokens is determined at the grant date, it is not subsequently remeasured. The expense is recognized over the vesting period, reflecting the services received. Any changes in the fair value of the tokens after the grant date do not affect the recognized expense.
• Cash-Settled Share-Based Payments: The fair value of the liability is remeasured at each reporting date until the liability is settled, with changes in fair value recognized in profit or loss.

Recognition and Measurement under IAS 19: Employee Benefits

When token-based compensation does not meet the definition of an equity instrument of the ICO entity (i.e., it is not a contract that has a residual interest in the assets of the entity after deducting all liabilities), the arrangements fall within the scope of IAS 19 as a non-cash employee benefit.

Initial Recognition

Under IAS 19, tokens granted as part of an employee benefits package should be recognized when the employee renders the service. The tokens are measured at their fair value at the date the benefits are granted. The fair value of the tokens at the date of the grant should be used to measure the employee benefit.

Subsequent Measurement

• Short-Term Employee Benefits: If the tokens are considered short-term benefits, they should be measured at their undiscounted amount at the date of grant and recognized as an expense as the employee renders the service.
• Long-Term Employee Benefits: For long-term benefits, the fair value of the tokens should be remeasured at each reporting date until the benefit is settled, with changes in fair value recognized in profit or loss. The entity should also consider the time value of money if the benefits are not expected to be settled within 12 months after the end of the period in which the employee renders the service.

Given the lack of precise guidance on accounting for token-based compensation under IFRS, judgment is required by the preparers of financial statements to determine the appropriate accounting position. 

Conclusion

Accounting for token-based compensation under IFRS presents unique challenges that require a nuanced understanding of the applicable standards. Entities must carefully assess whether these arrangements fall under IFRS 2 or IAS 19, ensuring accurate recognition and measurement of the tokens involved. As the use of digital assets continues to evolve, staying informed of the latest developments in accounting standards is essential for maintaining compliance and transparency in financial reporting.

Credits and Acknowledgment

This article was developed from commentary, notes, and expertise of Chetan Hans, Partner at Grant Thornton Singapore

FAQs of Accounting for Tokens Used as Compensation