Accounting for Initial Coin Offerings (“ICOs”)

19 February 2018

The views in this blog are the views of the author and do not constitute a PwC view on accounting for ICOs. Discussion of the accounting issues associated with digital currencies is not investment advice or the endorsement of digital currencies or digital currency investing.

What is an initial coin offering? 

When I first heard about an ICO (“Initial Coin Offering”), I said “are you sure you don’t mean an IPO buddy?” After being told I needed to get with the times, I decided to keep quiet and do a bit of research to make sure I could still hang with the cool crypto kids.

 You, like me, might need a crash course in ICOs. Here’s my layman’s take on them. An ICO is a combination of crowd funding with blockchain. A group of people put together a white paper requesting funding for an innovative idea (often an eCommerce platform), describing the business model, and explaining what investors might get if they choose to invest. 

Investors are ’issued’ with a digital coin (based on blockchain technology) if they decide to take part in the ICO. They typically pay in cash or in another cryptourrency. The digital coins detail who the investors are and the white paper explains what benefits holding the digital coins will provide. ICOs are relatively new and their terms and conditions can vary significantly. Some digital coins give the investors access to a portion of the benefits from the underlying venture or activity. For example, it might be a portion of the fee that a developed platform charges on each transaction or maybe a discount on those fees for the coin holder. The benefits of the digital coins are unlikely to be access to the future profits of the venture (like a normal share), but rather give the coin holder access to free or discounted goods that are the output of the activity or venture. And some ICOs provide no benefit other than that the initial digital coins are issued at a discount to the expected issue price of future coins. If the venture is successful, the investors can sell their digital coins to other parties, , and pocket the appreciation. However, if the developers don’t manage to finalise their idea, often there is no obligation to refund any funding to the investors.

So what are the accounting issues? 

Unsurprisingly IFRS isn’t designed with blockchain business models in mind. Here are a couple of the juiciest problems that are keeping me awake at night: 

  1. Is it a barter arrangement for the issuer (developer) and the investor? How should the developers account for the initial issuance of the digital coins? The developers are often receiving a cryptocurrency (rather than traditional currency) in exchange for issuing the digital coins. That seems like a barter arrangement, i.e. a digital coin for some cryptocurrency. This might allow the developer to determine the value of consideration by reference to the spot value of the cryptocurrency that they receive. But it doesn’t help decide what to do with the credit. 
  2. If ICOs are a capital raising, are they debt or equity? Many digital coins do not give the holder a right to any residual interest in the platform or the entity that issued the coins, nor do they generally give the holder the ability to vote on any decisions relating to the operating activities of the platform. However, the digital coins generally last as long as the underlying activity exists and give their holders special benefits that others do not enjoy. They don’t seem to meet the definition of equity, but it does feel in many cases like the holders are entitled to benefits into perpetuity, much like a share. What about those coins that entitle the holder to a portion of every transaction fee? Does the entity have a contractual obligation to make a stream of payments in perpetuity? Or even a constructive obligation? If so, does the entity need to recognise a liability for the present value of all the future expected transaction fees to be paid to coin holders when the coins are issued. Interesting recognition and measurement issues:– good luck with that.
  3. If not debt or equity under IAS 32, what else? The developer has promised to develop the proposed platform and provide discounts or other benefits in exchange for consideration; but the investor has no right to a refund if the developer fails. Is this in the scope of IFRS 15? There seems to be a contract as defined by IFRS 15 and an implied obligation to develop and maintain the platform and maybe provide other benefits.
  4. If in the scope of IFRS 15, how many performance obligations are there? What are the promises in the contract, if the ICO consideration is deferred revenue? Is the promise to build a platform and make it available and provide benefits for as long as the platform exists. Are these distinct? IFRS 15 requires an allocation of the consideration based on relative stand-alone selling prices. What is the relative stand-alone selling price of an untested IT platform and VIP access to that platform indefinitely? Even if an entity could allocate, the access to the platform is indefinite or as long as the platform operates. We are left trying to work out how to recognise an obligation to provide access indefinitely? – I think I’d have more luck trying to guess the price of Bitcoin in a year’s time! 


I don’t know what the answers at this stage, but I do think this is an area that needs focus from regulators, standard setters and auditors if we’re going to try and provide users with useful information. Is it time to think about an ICO for a platform that will solve by consensus all the difficult accounting problems in the world – subscribe now, tokens are limited ;-)

This week's guest blogger is Gary Berchowitz, connect with him on LinkedIn.



Wow, this has so many angles to it. Thank you for sharing.

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