Accounting for NFTs (Non-Fungible Tokens) under IFRS can be challenging considering the nature of assets and process involved in creation and underlying commercial activity.
NFT is a unique digital asset that is verified using blockchain technology, making it a one-of-a-kind item that cannot be replicated or exchanged for something else. During the creation process, digital assets are tokenized via blockchain technology and are assigned with unique identification codes and metadata that makes them unique.
NFTs are typically created on Ethereum, the most popular blockchain platform for creating NFTs. During the minting process, a smart contract is created. A smart contract is a self-executing contract that automatically enforces the terms of the agreement between the buyer and seller of NFT.
Some of the key features of NFT include transparency, digital ownership, and traceability.
Use cases of NFT transcend digital art, collectibles, gaming, music, real estate, etc.
Accounting of NFTS:
As with any other asset, the accounting treatment of NFTs would depend on their economic substance. Accounting for NFTs can be challenging, given their unique characteristics and the regulatory landscape.
Here are some general guidelines for accounting for NFTS as per the International Financial Reporting Standards (IFRS).
Depending on the economic substance, an asset may be accounted for under IAS 38 Intangibles Assets or IAS 2 Inventory.
NFTs acquired for the purpose of trading are likely to be classified as inventory under IAS 2. They are initially measured at cost and subsequently at lower of cost or net realisable value. On the sale of asset, any purchase/creation costs would be expensed.
An asset that meets the criteria under IAS 38 should be initially measured at cost. Subsequently, the asset is measured either on cost model or revaluation model as per the entity’s policy.
IFRS 15 revenue considerations
Where an entity earns income arising in the course of its ordinary activities involving NFTs, IFRS 15 considerations apply. In this case he five-step model would need to be followed. A summary of the model is presented below for reference.
Step 1: Identify the contract:
The first step is to identify whether a contract exists with the customer, and if so, what the terms of that contract are.
Step 2: Identify the performance obligation:
The second step is to identify the performance obligation for example sale of NFT.
Step 3: Determine the transaction price:
Transaction price can be in the form of cash or non-cash consideration. The transaction price can be variable for example in the form of royalty paid to the seller when the purchaser resells the NFT.
Step 4: Allocate the transaction price:
In general, the entire transaction price for NFTs would be allocated to the performance obligation in relation to transferring ownership of the NFT.
Step 5: Recognise the revenue:
Revenue would be recognised in accordance with the transferability of risk and rewards associated with NFT.
While there are no specific disclosure requirements in place related to NFT’s, the requirements under the relevant accounting standards apply.
The NFT market is getting traction by the day. However, it’s important to note that the NFT market is subject to volatility and fluctuations. That being said, the potential use cases for NFTs are broad, and the technology has the potential to disrupt various industries. With new players entering the market, increased integration with mainstream platforms, and the emergence of niche marketplaces, the NFT market is poised for continued growth and innovation. NFT might become one of the game-changing innovations capable of bringing sustainable and robust economic development.
Project Accountants take pride in providing accounting support to businesses having exposure in the NFT space. Please reach out to a member of our team or visit www.projectaccountants.co.uk to find more about how we can help.