1. Introduction
In News, May 2017, we mentioned accounting rules on virtual currencies in different countries.
Although the Accounting Standards Board of Japan (ASBJ, a private sector independent accounting standard-setting board) was expected to announce the exposure draft around September, 2017, the discussion has not reached the goal yet. The release of the exposure draft will be extended to December, 2017.
In this News, we will mention some points at issue of Japanese accounting rules on virtual currencies at this stage, based on the ASBJ’s discussion materials.

2. Summary
The ASBJ’s discussion materials include (i) the ASBJ’s proposals on the main points at issue about virtual currencies, (ii) the ASBJ’s opinions about the proposals, and (iii) the ASBJ’s amended proposals by reflecting opinions. The main points at issue are as follows:

① When to recognize gain or loss from the sale of virtual currencies
② How to recognize users’ assets and liabilities in virtual currency (VC) exchange operators’ book account
③ Accounting rules on evaluating virtual currencies at fiscal year-end
Details are mentioned below.

3. Details
① When to recognize gain or loss from the sale of virtual currencies
Point at issue: When is the gain or loss from the sale of virtual currencies recognized?

ASBJ’s proposals
(1) The gain or loss from the sale of virtual currencies should be recognized at the time of concluding the sales and purchase contract.

Reasons for proposals
・The conclusion of the sales and purchase contract could be a unified standard for each company to make the accounting treatment on the sales of virtual currencies.
・After concluding the sales and purchase contract, a VC exchange operator (a seller of virtual currencies) is generally segregated from the risk of price fluctuation in virtual currencies.

Opinions on proposals
In negotiated transactions between companies, the time of determining the actual sales and purchase price does not necessarily coincide with the time of concluding the sales and purchase contract.

ASBJ’s responses
None

② How to recognize users’ assets and liabilities in VC exchange operators’ book account
Point at issue: Should users’ virtual currencies be recorded on VC exchange operators’ balance sheet or not? Also, how are the users’ virtual currencies evaluated at fiscal year-end?

ASBJ’s proposals
(1) Users’ virtual currencies should be recorded not only as assets but as liabilities on VC exchange operators’ balance sheet.
(2) As indicated below, VC exchange operators should evaluate users’ virtual currencies in the same way as the proprietary virtual currencies. The amount recorded as assets should also be recorded as liabilities.
・In cases where an active market exists : evaluated at the fair market value (FMV)
・In cases where an active market does not exist : evaluated at the acquisition value

Reasons for proposals
・Since VC exchange operators can manage or dispose of users’ virtual currencies with private keys, etc., they should treat users’ virtual currencies in the same way as the proprietary virtual currencies.
・In cases where VC exchange operators go bankrupt, the clients’ right of segregation is denied.

Opinions on proposals
・Since the data for virtual currencies deposited from users is not well connected with VC exchange operators’ accounting system at this moment, smooth accounting transaction is not feasible yet.
・The same accounting treatment as the bank institutions to hold securities from clients (off-balanced) should be applied.

ASBJ’s responses
None

③ Accounting treatment of evaluating virtual currencies at fiscal year-end
Issue 1: How are the proprietary virtual currencies evaluated at fiscal year-end?

ASBJ’s proposals
(1) In cases where an active market exits
   ・VC exchange operators’ proprietary virtual currencies should be evaluated at the FMV.
   ・The difference with the book value is recognized as profit or loss.
(2) In cases where an active market does not exist
   ・VC exchange operators’ proprietary virtual currencies should be evaluated at the book value.
   ・In cases where the book value is greater than the disposable value, the difference should be recognized as impairment losses.

Reasons for proposals
・In cases where an active market exits
　In cases where virtual currencies are to be held for the purpose of getting sales profit from the fluctuation of prices, the FMV is reasonable.
・In cases where an active market does not exist
　In cases where an active market does not exist, it is considered that virtual currencies are to be held for the long term. In such cases, it is difficult to grasp the objective FMV and the acquisition value is more reasonable for evaluation.

Opinions against proposals
・In cases where virtual currencies in an active market are to be held for the long-term, the valuation difference at fiscal year-end should be recognized as other comprehensive income.

 ASBJ’s responses
None

Issue 2: What are the criteria for an “active market”?

ASBJ’s proposals
(1) In cases where buy-sell transactions of virtual currencies are not frequent enough or there is no buy-sell transaction at exchanges or shops, it is difficult to grasp the objective FMV and considered that an active market does not exist.
(2) The frequency of buy-sell transactions is assessed from the following points:
・In cases where several VC exchange operators make frequent transactions at exchanges or shops, is it feasible to grasp the objective and trustworthy FMV?
・Is it feasible to adopt the relevant FMV when selling or exchanging virtual currencies?

Reasons for proposals
・In order to grasp the trustworthy and feasible FMV, such exchanges should have large scale transactions.

Opinions on proposals
・Judging only whether virtual currencies are transacted at several exchanges or shops is insufficient.
・Judging by transactions at several exchanges or shops cannot be a crucial point for the feasibility of selling or exchanging virtual currencies. More detailed rules should be set up.

ASBJ’s responses
・Whether virtual currencies are transacted at several exchanges or shops cannot be a criterion for an active market.
・An active market should be judged from the point whether the feasibility of selling or exchanging virtual currencies has enough liquidity.

 
Issue 3: What is exactly the FMV at an active market?

ASBJ’s proposals
(1) The FMV at an active market is the transaction value at the most active exchange or shop.
(2) From the viewpoint of independence, the VC exchange operators cannot use the transaction value at their own exchanges or shops in evaluating the proprietary virtual currencies.

Reasons for proposals
It makes reference to Practical Guidance for Accounting Standard for Financial Instruments.

Opinions on proposals
・In fact, it is difficult to grasp the trade volume of each exchange or shop properly and comprehensively.
・Virtual currency users choose exchanges not by the trade volume but by the reasonability of the sales and purchase prices or handling charges.
・On the condition that VC exchange operators maintain the independence, they should be allowed to apply the FMV at their own exchanges or shops in evaluating the propriety virtual currencies.

ASBJ’s responses
・Instead of applying the transaction value at several active exchanges or shops, the transaction value in VC exchange operators’ own exchanges or shops is to be used as  the market value.
・In cases where the VC exchange operator has its own exchange and the ratio of its own trade volume in the total trade volume is judged as less important, the transaction value at its own exchange is to be used as the market value.

4. Conclusion
In this News, we have introduced the discussion materials for the accounting rules on virtual currencies. The ASBJ’s announcement in December will deepen your understanding.

Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.

(Reference)
The ASBJ’s website (Japanese)
https://www.asb.or.jp/jp/project/proceedings.html
Accessed on November 29, 2017