Coinbase, the largest cryptocurrency exchange in the United States, recorded a net loss of $78.9 million in the first quarter of 2023, but reported a net profit of $1.2 billion in the first quarter of last year, a year ago. The reason the net profit increased by nearly $1.3 billion in one year was due to accounting regulations. The Financial Accounting Standards Board (FASB) in the United States allowed corporations to reflect the value of cryptocurrencies, such as Bitcoin, in their profit and loss statements starting in December 2023, allowing Coinbase's cryptocurrency worth $650 million to be recognized as net profit at once. Until then, the evaluation profits of cryptocurrencies held by corporations were not reflected in the profit and loss statements.
On the other hand, Korea has allowed corporations to invest in and trade cryptocurrencies starting in the second half of this year, but it has adopted different accounting standards from the United States. While it is possible to reflect the evaluation profits of cryptocurrencies, like in the United States, as profits that increase the value of the company, it could also be reflected as other comprehensive income that increases equity. For example, if Bitcoin is purchased for 100 million won and the price rises to 110 million won, the increase of 10 million won will only be reflected as other comprehensive income and will not help in enhancing the company's value such as earnings per share (EPS). Conversely, if the price drops to 90 million won, the decline will be treated as impairment, leading to a decrease in performance. Therefore, investing in cryptocurrencies does not have advantages in terms of performance.
According to the cryptocurrency accounting treatment guidelines released by the Financial Services Commission in December 2023, cryptocurrencies purchased by corporations for strategic and investment purposes are classified as intangible assets. Intangible assets do not have a physical existence but are identifiable assets, with patents being a representative example. Even if the value of intangible assets increases, it is reflected as other comprehensive income depending on conditions and does not increase net profit.
Instead, financial authorities have classified cryptocurrencies held for sale in the ordinary course of business as inventories, allowing them to be reflected in profit and loss statements. This means that only when corporations buy and sell cryptocurrencies for the purpose of gaining short-term price differences (price fluctuation profits) will they be reflected in profit and loss.
Ultimately, corporations can increase net profit through short-term capital gains investments, but engaging in long-term investments will lead to an increase in other comprehensive income. While the increase in other comprehensive income has the advantage of increasing equity and defending against profit and loss volatility during sharp declines in cryptocurrency prices, it cannot demonstrate investment performance. In particular, it has been pointed out that the strategy of increasing Bitcoin holdings over a long period acts as an impediment to assetization strategies.
On the other hand, while the United States classified cryptocurrencies as intangible assets in December 2023, it changed the rules to reflect the valuation gains due to price fluctuations of cryptocurrencies in profit and loss statements on a quarterly basis. This has been officially applied from this year, and Coinbase implemented this improvement immediately after it was announced.
Financial authorities believe that corporations should handle accounting differently based on the purpose and intention of investing in cryptocurrencies. It is not merely a matter of choosing whether to reflect cryptocurrency evaluation gains in profit and loss or in other comprehensive income.
A financial authority official noted, "As investment in cryptocurrencies becomes more active, there are discussions in the International Financial Reporting Standards (IFRS) about creating separate accounting standards," and added, "If it is newly established in IFRS, Korea could also make different choices." Regarding the changes in the U.S. accounting system, he stated, "Whether changing to reflect cryptocurrency evaluation gains in profit and loss should be regarded as an improvement is questionable."