Accounting for NFTs under IFRS

Overview:

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).

Initial Measurement

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.

Disclosures

While there are no specific disclosure requirements in place related to NFT’s, the requirements under the relevant accounting standards apply.

Concluding remarks

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.

Outsourcing accounting and finance : Revolutionise Your Operations

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Outsourcing accounting and finance is a growing trend that offers businesses numerous benefits. Keeping the finance function in-house can be expensive and challenging to manage. Here are the big-ticket items that can help in your journey towards revolutionising financial operations.

Cost Savings

Outsourcing accounting and finance can lead to significant cost savings for businesses by eliminating the expenses of hiring and maintaining an in-house finance team. This can allow businesses to invest in other critical areas and achieve their growth objectives.

Access to Expertise

 Outsourcing accounting and finance provides businesses access to a team of highly skilled professionals who specialize in various finance-related areas. This expertise can be invaluable for businesses looking to streamline their financial operations and make informed financial decisions.

Scalability

Outsourcing accounting and finance can easily adapt to changing business needs without the hassle of hiring and training new staff. This allows businesses to remain flexible and agile, focusing on their core functions while experts handle financial operations.

Focus on Core Functions

By outsourcing accounting and finance, businesses can focus on their core functions, such as product development or customer acquisition. With financial operations taken care of by experts, businesses can invest their time and resources into other critical areas, leading to improved productivity and growth.

Risk Management

Outsourcing accounting and finance providers are up-to-date on the latest regulatory and compliance requirements, reducing the risk of non-compliance. They also have robust data security and backup measures in place to protect businesses from data breaches and other cyber threats.

In summary

Outsourcing accounting and finance is the future of financial operations. By outsourcing accounting and finance, businesses can achieve significant cost savings, access expertise, remain scalable, focus on core functions, and mitigate risk. If you are considering outsourcing accounting and finance, evaluate the potential benefits and drawbacks and make an informed decision. With outsourcing accounting and finance, you can revolutionize the way you handle your financial operations and achieve your growth objectives.

Project Accountants specialise in providing a game-changing solution that will transform the way you handle your financial operations irrespective of which industry or sector you operate in. To learn more, please reach out to a member of our team or visit www.projectaccountants.co.uk.

The Rise of Family Offices: Understanding the Benefits of Private Wealth Management Firms

The trend of setting up family offices as private wealth management firms has been growing in recent years. Families are looking for a more effective way to manage their wealth and ensure its longevity. A family office is a customized solution for a single family’s financial needs, offering several advantages over traditional wealth management firms.

One of the key benefits of family offices is that they provide a higher degree of control and customization. Unlike generic wealth management firms, family offices can adapt their services to a family’s unique circumstances and financial goals. This level of personalization is unparalleled in the traditional wealth management industry.

In addition to customization, family offices offer a greater level of privacy and confidentiality. High-net-worth individuals who value their privacy and security can keep their financial information and investments under wraps in a family office. Furthermore, families can work closely with a dedicated team of advisors who understand their needs and goals, resulting in a more personal touch.

A family office also provides a more comprehensive approach to wealth management. From investment management to tax planning, estate planning, and philanthropic planning, family offices can offer a full suite of services. This centralized approach makes it easier for families to manage their wealth and have a single point of contact for all financial needs.

Moreover, a family office promotes greater alignment between a family’s financial goals and their investments. By taking a hands-on approach to wealth management, families can make investment decisions that align with their values and long-term objectives. This level of alignment helps to ensure that a family’s wealth is managed in a way that supports their financial goals.

The rise of family offices is driven by the desire of wealthy families to manage their wealth effectively. With customization, privacy, a comprehensive approach, and alignment with financial goals, family offices offer several benefits over traditional wealth management firms. The family office team at Project Accountants specialise in providing bespoke support to enhance the quality of reporting by family offices. To to learn more about how we can help, please reach out to a member of our team or visit www.projectaccountants.co.uk.