Home » Accounting for Staking Rewards: A Quick Dive Under IFRS

Accounting for Staking Rewards: A Quick Dive Under IFRS

This article explores the accounting for staking rewards by validators and delegators under the International Financial Reporting Standards (IFRS). We will examine the critical roles of these participants in maintaining network security and how their contributions are accounted for from a financial reporting perspective.

Revenue recognition for crypto staking rewards: A complex terrain

Staking involves participants locking up cryptocurrency to support the operations and security of a blockchain network. 

  • Validators propose and validate new blocks and secure the network based on their staked tokens. They earn rewards for their role. 
  • Delegators participate by entrusting their tokens to validators without running nodes themselves. Delegators earn rewards based on their staked amount and contribute to network security by choosing trustworthy validators. 

Both validators and delegators play critical roles in proof-of-stake systems, maintaining decentralization and consensus while earning rewards for securing the blockchain.

Determination of the appropriate accounting and/or presentation requirements is often intricately linked to the underlying business model under which the ‘staking’ activity is being undertaken.

The business model along with a meticulous evaluation of the specific context and related contractual arrangements is critical to determining whether staking rewards are ‘revenues’ under IFRS 15 or other income. In our experience, this assessment requires significant judgment and consideration of numerous factors, both business as well as operational.

Entities should also carefully consider the nature of the underlying tokens/cryptocurrencies being transacted and the substance of the contractual arrangements to determine whether the application of IFRS 9 requirements is triggered.

Differences in blockchain protocols may significantly influence how IFRS 15 is applied, including aspects such as the calculation and timing of staking rewards. Moreover, the revenue recognition for delegators may be influenced by the terms outlined in their agreements with validators, such as staking service provider agreements.

Companies typically involved in staking are ‘new-age’ businesses with unconventional business models. The application of accounting standards, especially IFRS 15 Revenues from Contracts with Customers, would require judgment and a careful interpretation of the underlying guidance in the standards.

Avinash Musti
Director – Assurance and Accounting Technical | Grant Thornton Singapore

Validators and Delegators: Revenue Recognition and Contractual Considerations

Generally, the revenue consideration for validators and delegators is summarised as follows:

1.  Validators

Determining whether revenue earned from staking rewards constitutes revenue from a contract with a customer under IFRS 15 or falls under the category of ‘other revenue’ necessitates an examination of the circumstances, particularly the protocols of the blockchain involved.  If validators operate individually IFRS 15 may not be applicable and staking rewards may be recognized as “other income”. Conversely, if the validator operates in a pool, it may be able to consider itself to be a service provider to the pool operator and apply IFRS 15 Revenue from Contracts with Customers.

2.  Delegators

In instances where the validator assumes the principal role in validation activities, the staking rewards revenue received by delegators may qualify as revenue from a contractual agreement with a customer.

Complexities in Applying IFRS 15 to Staking Rewards:

Some areas of complexity in applying IFRS 15 to staking rewards include:

a)  Noncash consideration:

Staking rewards are typically disbursed in the native token of the blockchain, constituting noncash consideration. According to IFRS 15, noncash consideration is valued at its fair value at contract inception. Consequently, staking rewards revenue should be recognized based on the fair value of the tokens allocated to the entity at the onset of the contract. Any disparity between the fair value at contract inception and the value upon receipt or availability for withdrawal/transfer does not impact the recognized revenue.

Those remeasurement gains/losses are dealt with separately as part of the holder’s consideration of cryptocurrency holdings. Read Grant Thornton article ‘IFRS Viewpoint – Accounting for cryptocurrencies’ discussing accounting implications for cryptocurrency holdings.

The determination of contract inception may vary depending on the blockchain, with considerations such as the entity’s ability to de-stake tokens at any time or the obligation to remain staked for a predefined duration affecting this assessment.

b)  Variability in staking rewards:

The amount of staking rewards attributable to validation activities often exhibits variability. Entities may recognize staking rewards revenue when the amount becomes determinable or calculable, typically relying on factors like the total number of staked tokens or the circulating supply of native tokens.

However, if the amount remains indeterminate or is contingent on external factors beyond the entity’s control, it may be subject to constraints outlined in IFRS 15 regarding variable consideration. In such cases, the constrained amount is excluded from the transaction price. It is not recognized as revenue until the relevant inputs or actions become known or knowable to the entity.

The application of these principles varies depending on the specific circumstances of each staking scenario, with some blockchains witnessing the realization of rewards well after the completion of the associated validation activity.

Delegators must consider whether the validator acts as the principal in validation activities, as this determines if staking rewards qualify as revenue from a contract under IFRS 15.

The challenges include assessing the fair value of noncash staking rewards at contract inception and handling remeasurement gains or losses separately from recognized revenue.

Yes, delegators can recognize staking rewards as revenue from a contractual agreement if the validator assumes the principal role in the validation activities.

Differences in blockchain protocols affect the calculation, timing, and determinability of staking rewards, influencing how IFRS 15 is applied to each scenario. Consult with your crypto accounting expert for accurate guidance on your situation as a validator.

Author

  • Chetan Hans

    Chetan is the Partner – CFO services at Granth Thornton Singapore. He has more than 16 years of experience in servicing large national and multinational clients in the areas of Assurance, Indian GAAP, US GAAP and IFRS technical accounting advisory, specifically in the areas of financial instruments, leases, consolidation, revenue recognition, business combinations, and cryptoassets/ cryptocurrencies.

Chetan Hans

Chetan is the Partner – CFO services at Granth Thornton Singapore. He has more than 16 years of experience in servicing large national and multinational clients in the areas of Assurance, Indian GAAP, US GAAP and IFRS technical accounting advisory, specifically in the areas of financial instruments, leases, consolidation, revenue recognition, business combinations, and cryptoassets/ cryptocurrencies.

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