By Markus Vogel – Chair, Crypto Valley Association Working Group Tax / Accounting / Structuring & Tax Partner at KPMG Switzerland
With the release of the Q&A on special accounting topics (Accounting of ICO’s with Utility Tokens) by EXPERTsuisse the very first Swiss accounting guidelines for the issuance of utility tokens have been established. This constitutes a remarkable milestone achievement in the midst of the so called “Crypto Winter”.
EXPERTsuisse, the Swiss Expert Association for audit, tax and fiduciary practitioners, has mandated its Accounting Standards Committee to establish the very first Swiss ICO accounting guidelines for utility tokens in close collaboration with the CVA Working Group Tax / Accounting / Structuring.
The result of this fruitful collaboration is the Q&A referred to above.
In parallel, KPMG Switzerland, Strategic Partner of the CVA, has also edited an article (in German) in EXPERT FOCUS covering the publication of the Q&A.
It can be accessed here.
What’s the relevance of the Q&A?
The new ICO accounting guidelines for utility tokens revise the currently widely applied and tax driven practice of the „provision model“. Under the provision model any kind of proceeds originated in token sales / ICO activities are recognized as taxable income resp. revenue. However, this taxable income is offset by a provision in the same amount. In turn, corporate income taxation of ICO proceeds is deferred until the ICO project completion.
After having reviewed the current practice from a Swiss accounting perspective, it has been found that there are several inconsistencies with general accounting principles which need to be addressed.
What are the new guidelines?
The new ICO accounting guidelines are illustrated in the Q&A at hand of a simplified, but still representative case study named “Open.” Open engages in the development of an open-source blockchain protocol. In case of a successful delivery of the protocol, the ICO participants shall be entitled to partake in the allocation of the genesis block.
The new ICO accounting guidelines for utility tokens closely follow the accounting principles for long-term manufacturing orders under Swiss GAAP FER 22/3 and are also in line with the Swiss Code of Obligations. Although there is usually no legally enforceable contractual relationship, the public announcement of the development of the platform within the whitepaper is sufficient to assume a factual obligation. Hence, the respective ICO company has the implicit order from the token purchasers to put sincere efforts into the development of the respective decentralized platform. These efforts are considered to be financed at hand of so called advance payments without repayment obligations.
Since it is assumed that the prerequisites for the application of the usual “percentage-of-completion-method” are likely not fulfilled, any proceeds from an ICO project needs to be recognized as revenue in the amount of expenses directly attributable to the ICO project in a given fiscal year without disclosing any profit element.
Having said that, any expenses directly attributable to the ICO project can be deducted from the received advance payments (without repayment obligations) which are considered as liabilities in the balance sheet.
As a consequence, any “excess advance payment amount” at the end of the development phase of the decentralized protocol shall be recognized as revenue respectively profit. In case, it becomes evident that the raised financing is not sufficient to cover all development expenses for the ICO project, a so-called contingency provision needs to be booked. Reflecting on the outcome under the new ICO accounting guidelines, the profit recognition for accounting and tax purposes still corresponds to the timing under the provision model.
Besides the above-mentioned changes, the new ICO accounting guidelines for utility tokens have also specified the accounting treatment of own token reserves (from genesis mining). They stipulate that any own token reserves need to be priced at historic production costs in the financial statement of the respective ICO company since a market price valuation appears to be inappropriate.
As outlined in the beginning, today’s publication of the Swiss ICO accounting guidelines for utility tokens is an outstanding achievement and emphasizes the uniqueness of the ecosystem Crypto Valley and all Switzerland can offer to anyone working on the break-through of this great emerging technology.
The Accounting Standards Committee and the CVA Working Group Tax / Accounting / Structuring continue their productive collaboration and have already started working on the respective accounting guidelines for asset tokens.