Is Revenue Gross or Net in Crypto Financial Statements?

Should the revenue of VASP be presented as gross or net in the financial statements?

A crucial aspect of financial reporting for VASPs is determining whether revenue should be recognized on a gross or net basis, depending on their role as a principal or agent. Understanding these classifications is vital for maintaining accurate financial statements and regulatory compliance.

What is a VASP? 

Virtual Asset Service Provider (VASP) is an entity that facilitates the exchange, transfer, or custody of digital assets, such as cryptocurrencies. VASPs operate similarly to traditional financial institutions but deal with virtual currencies, often offering services like trading platforms, wallets, and payment processors.

They are key players in the crypto ecosystem, enabling customers to buy, sell, and manage their virtual assets while adhering to financial regulations and managing custody risks. facilitate crypto transactions, providing services like token exchanges, custody, and payment processing. 

The key question revolves around whether they act as principals (recognizing gross revenue) or agents (recognizing net revenue). 

Understanding IFRS 15’s guidance on revenue recognition helps ensure accurate financial reporting for these unique service providers.

When a customer buys a token on a VASP, does the VASP

1️⃣ Recognises a gross Revenue and a gross COGS or

2️⃣ Just the net transaction fee income in the revenue

VASP revenue from IFRS view

Following IFRS 15 Revenue from a contract with a customer, an entity is a principal (and, therefore, records revenue on a gross basis) if it controls a promised good or service before transferring that good or service to the customer. An entity is an agent (and, therefore, records as revenue the net amount that it retains for its agency services) if its role is to arrange for another entity to provide the goods or services.

Under IFRS 15, determining whether a Virtual Asset Service Provider (VASP) should recognize revenue on a gross or net basis hinges on whether the entity acts as a principal or an agent. A principal is responsible for delivering a service or product and exercises control over it before transferring it to the customer. In contrast, an agent merely facilitates the transaction, arranging for another entity to provide the service or product.

IFRS 15.B35-B36: A principal recognizes revenue and expenses in gross amounts, whereas an agent recognizes only the net amount retained for its agency services, regardless of whether gross cash flows pass through the agent.

IFRS 15.B34A: A two-step framework is provided for determining whether an entity is acting as a principal or agent:

1. Identify the specific goods or services provided.
2. Evaluate if the entity controls these goods or services before transfer to the customer.

Indicators of control include the VASP being responsible for ensuring the cryptocurrency meets customer specifications, assuming inventory risk, and setting the transaction price. If the VASP controls these elements, it should recognize gross revenue. Conversely, if the VASP merely facilitates the transaction (e.g., by connecting buyers and sellers), it should recognize only net revenue, reflecting the fee or commission it retains.

This distinction is critical for VASPs to accurately represent their financial performance, avoid misstatements, and maintain compliance with IFRS guidelines.

As professional judgment is required in determining control, some factors that the VASP  can consider include:

1️⃣ If the VASP controls the cryptocurrency before it is transferred to the buyer and as such carries the custody risk.

2️⃣ If the VASP sets the price for the transaction.

3️⃣ If the VASP is responsible for the fulfillment of the sale.

From analyzing financial statements of various VASPs, it seems like OTC will recognize gross while payment service providers and exchanges recognize net. However, this is not always the case. 

 Gross vs. Net Revenue Recognition for VASPs, A Comparative Table.

Questions on Compliance and Financial Strategy:

• How do VASPs ensure compliance with IFRS 15 regarding gross versus net revenue recognition?
• What are the strategic implications of choosing gross versus net revenue recognition for VASPs?
• How does the decision between principal and agent roles affect a VASP’s financial risk management?
• What steps can VASPs take to mitigate risks related to misclassification of revenue in financial statements?
• How can VASPs adjust their financial strategies to align with evolving regulatory guidelines?

2 real case studies from listed companies

Paypal Holdings

Paypal Holdings is a payment service provider, listed as an entity in the United States. According to PayPal’s financial statement, revenue is recognized on a net basis.

Net Revenues

Our revenues are classified into the following two categories:

1. Transaction revenues: Net transaction fees charged to merchants and consumers on a transaction basis based on the TPV completed on our payments platform. Growth in TPV is directly impacted by the number of payment transactions we enable on our payments platform. We generate additional revenue from merchants and consumers: on transactions where we perform currency conversion, when we allow cross-border transactions (i.e., transactions where the merchant and consumer are in different countries), to facilitate the instant transfer of funds for our customers from their PayPal or Venmo account to their bank account or debit card, to facilitate the purchase and sale of cryptocurrencies, as contractual compensation from sellers that violate our contractual terms (for example, through fraud or counterfeiting), and other miscellaneous fees.
2.  Revenues from other value-added services: Net revenues are derived primarily from revenue earned through partnerships, referral fees, subscription fees, gateway fees, and other services we provide to our merchants and consumers. We also earn revenues from interest and fees earned on our portfolio of loans receivable, and interest earned on certain assets underlying customer balances.

Net Revenue Analysis The components of our net revenues for the years ended December 31, 2023, 2022, and 2021 were as follows (in millions):

Transaction Revenues Transaction revenues grew by $1.7 billion, or 7%, in 2023 compared to 2022 driven primarily by growth in TPV and the number of payment transactions from our Braintree products and services, partially offset by a decline in revenues from our core PayPal products and services, including declines in contractual compensation of $190 million from sellers that violated our contractual terms predominantly in international markets. Transaction revenues for the year ended December 31, 2023, were also impacted unfavorably by lower net gains due to hedging activities as compared to the same period of the prior year. The graphs below present the respective key metrics (in millions) for the years ended December 31, 2023, 2022, and 2021:

Sinohope Technology Holdings

Sinohope Technology Holding is an OTC Trading company, listed as an entity in Hong Kong. According to Sinohope’s financial statement, revenue is recognized on a gross basis.

Performance Obligation and Timing of Recognition

The Group trades cryptocurrencies over the counter and in cryptocurrency exchange. The transaction price is derived from the unit price of cryptocurrencies and transaction volume. Cryptocurrency trading is recognized at a point in time upon which each trade transaction is completed.

The sale amounts received from counterparties are recorded as revenue on a gross basis and the associated cost as the cost of revenues, as the Company is the principal in the trading transaction. The Company has concluded it is the principal because it controls the cryptocurrencies before delivery to the counterparties, it is primarily responsible for the delivery of the cryptocurrencies to the counterparties, it is exposed to risks arising from fluctuations of the market price and inventory risk of cryptocurrencies before delivery to counterparties, and has discretion in setting prices charged to counterparties.

Revenue mainly includes cryptocurrency trading, the provision of technology solution services, and the provision of a virtual asset ecosystem for the year. The Group’s disaggregated revenue from its major products and service lines are as follows:

Conclusion

By carefully evaluating whether they act as principals or agents, VASPs can ensure compliance with IFRS 15 and provide a clear picture of their financial health. This distinction is crucial for accurate reporting, risk management, and strategic financial planning.