Corporate Digital Asset Accounting and Internal Control Establishment as Key

[Block Media = Lawyer Kang Ryeon-ho] Digital assets (virtual assets) have now evolved beyond speculative assets for some investors, being utilized in various forms such as corporate investment assets, operational assets, and means of payment.

Until now, corporate digital asset accounting has relied on the interpretation of accounting standards due to the absence of explicit criteria in the International Financial Reporting Standards (IFRS), leading to ongoing instances of different accounting treatments for the same transactions across companies.

This uncertainty has been pointed out as a factor hindering the comparability of financial statements and complicating investor decision-making. The Financial Services Commission and the Financial Supervisory Service have prepared and mandated the application of the "Guidelines for Accounting Treatment of Virtual Assets" starting in 2024.

Recently, as the number of corporations holding digital assets has increased, issues regarding the accounting treatment of digital assets have also come to the forefront. The accounting treatment guidelines for digital assets are significant in that they do not establish new accounting standards but rather provide interpretative criteria necessary for applying the existing Korean International Financial Reporting Standards (K-IFRS) to digital asset transactions. Corporations holding digital assets need to base their accounting treatment on these guidelines.

The supervisory guidelines target issuing companies, holding companies, and virtual asset businesses, but the aspect that most directly impacts general companies is the accounting treatment of holding companies. In situations where companies hold various digital assets for investment or business purposes, how to classify these assets, how to measure them, and what disclosures to make have become critical practical issues.

Below, we will focus on the accounting treatment of holding companies within the supervisory guidelines and examine the main contents and practical implications.

The most important feature of the supervisory guidelines is that they do not classify digital assets uniformly as a single asset but clearly state that accounting treatment should differ based on the purpose of holding and economic substance. In other words, companies must comprehensively consider the purpose for acquiring digital assets and whether the digital asset qualifies as a financial product to classify it as inventory, intangible assets, or financial products.

For example, if a company engaged in digital asset trading holds assets for the purpose of trading within a short period, it is likely to classify them as inventory. In contrast, if a general manufacturing or IT company holds Bitcoin or Ethereum for long-term investment purposes, it is generally accounted for as intangible assets. Thus, the supervisory guidelines prioritize economic substance over the mere designation of digital assets, maintaining the principle-based approach of existing IFRS.

Practically, it is noteworthy that the accounting treatment for K-IFRS applicable companies and general corporate accounting standard applicable companies may differ. Under K-IFRS, digital assets are mostly classified as intangible assets, but under general corporate accounting standards, there may be cases where it is difficult to view digital assets held for investment purposes as intangible assets.

To this end, the supervisory guidelines allow companies subject to general corporate accounting standards to use separate account items that can reflect the characteristics of digital assets, such as "other assets." This is expected to provide considerable flexibility for small and unlisted companies in the practical accounting treatment process.

In practice, even for the same digital asset, accounting treatment may differ from company to company. For instance, Company A may hold digital assets to secure payment methods, Company B may hold them for long-term investment, and Company C may hold them for short-term trading. The supervisory guidelines are understood to recognize these differences while requiring the initial acquisition purpose to be clearly documented.

Therefore, companies need to establish internal control procedures that can prove the initial holding purpose through investment committee minutes, board resolutions, and investment policies, rather than merely performing accounting entries.

In practice, there are not infrequent cases where the purpose of holding changes. For example, digital assets acquired for long-term investment may be converted to short-term trading, or assets acquired for operational purposes may be held long-term. In such cases, companies must not only change the account items but also thoroughly review the reasons for the change and the economic substance, and it is crucial to secure objective materials that can prove the validity of the change.

Companies must faithfully disclose the types of digital assets, holding purposes, evaluation methods, risk factors, etc., in the notes to the financial statements, and provide more specific information in accordance with the revised K-IFRS No. 1001. This is a measure to help investors better understand the level of exposure to digital assets and the associated risks. Especially since it is subject to external auditors' review, providing useful information for actual investment decision-making is required rather than mere formal disclosures.

For holding companies, the most significant change can be seen as an improvement in the level of internal control rather than the accounting standards themselves. If an internal control system for the entire process from acquisition to storage and disposal of digital assets is not established, appropriate accounting treatment may also become difficult. In particular, the following matters need to be managed in practice:

First, a clear approval process for the purpose of acquiring digital assets; second, wallet management and access control; third, evaluation and impairment review procedures; fourth, an information management system for financial statement note disclosures. These internal controls are likely to become important audit targets in future external audit processes.

Holding companies of digital assets must go beyond merely classifying digital assets as intangible assets to establish objective grounds for the purpose of acquisition, perform appropriate asset classification based on economic substance, and build an internal control system that can respond to enhanced disclosure requirements.

With the growth of the digital asset market, various digital assets such as token securities (STO), stablecoins, and real-world assets (RWA) are expected to emerge. Therefore, from the corporate perspective, it is necessary to understand the supervisory guidelines not merely as a regulatory compliance target but as a standard to enhance the reliability of accounting information and provide more transparent information to investors. Additionally, an approach where legal and accounting professionals collaborate to review contract structures, the legal nature of assets, and the consistency of accounting treatment is required.

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