What is crowd funding and how do you account for the cash received?
Traditionally when companies wanted funding, they would either go to a bank to borrow or issue equity via the stock market. The internet has facilitated the disintermediation of raising finance. This simply means that companies can raise finance (get funding) direct from investors (the crowd). So crowdfunding is the funding of a new start up or project by collecting cash from a variety of individuals or entities (the crowd.)
How to account for monies received from crowdfunding?
There is no specific accounting standard that deals with the accounting of cash received from a crowdfunding operation. And it is this that potentially makes it a current issue to be examined at SBR! Clearly when cash is received the asset of bank will be debited. But where to credit? Before reaching any conclusion, it will be necessary to properly understand the true nature of the terms of the crowdfunding. What does the crowd get in return? Do they have a right to their money back? Are they now a part owner of the business? Has the business sold them something in return? These are the key issues to resolve!
Crowdfunding could be debt!
If the monies that have been received have to be repaid, then there is a present obligation and a liability is recognised. This financial liability and would be initially recognised at the fair value less issue costs; i.e at the net proceeds of issue. IFRS 9 Financial Instruments applies. The default accounting treatment for such financial instruments is amortised cost. The profit and loss account will be charged with an effective rate of interest on the debt.
Crowdfunding could equity!
If the monies that have been received represent a payment in return for an ownership interest; then an equity instrument has been issued. Again, the relevant standard to apply is IFRS 9 Financial Instruments. Such an issue of equity shares is also initially recognised at fair value less issue costs i.e. the net proceeds of issue.
Crowd funding could be revenue!
It is possible that the monies have been received because the company is making a sale. In return the crowd are getting a product or service. If that is the substance of the crowdfunding arrangement, then IFRS15 Revenue from Contracts with Customers applies. Revenue will be recognised when the performance obligations are fulfilled and control passes, and before that arises the monies received will be accounted for as a deferred income i.e. a liability.
Conclusion
It will always be necessary to understand the terms that underpin any monies received through crowd funding so that the accounting treatment is a faithful representation.
Tom Clendon is an online ACCA SBR lecturer and podcaster who likes to keep things simple and to help students pass SBR!