Sunday, June 15, 2014

Crowdfunding Accounting 101 - Revenue Recognition in Crowdfunding

A start-up using crowd funding to create a product is different from a normal company. The start-up has cash inflows from donations but does not have a product, yet. In this situation, we recommend using completed-contract method to recognize revenue.
Under this way of thinking, we assume the start-up is akin to a project or a long-term contract. The crowdfunding company will find it difficult to estimate the revenue from crowdfunders and, hence, the cost of rewards or perks. Under International Financial Reporting Standards (IFRS) and GAAP guidelines, if the firm cannot reliably measure the outcome of the project, revenue should be recognized based on contract costs. These costs should be expensed when incurred. Profit is recognized only at the completion of the project.
In summary, for crowdfunding companies, revenue, expense, and profit are recognized only when the crowdfunded product is actually manufactured.1
For example, assume that AAA Corp. wants to manufacture bicycles and is seeking a crowdfunding from community to do so. AAA can’t estimate the outcome of crowdfunding and, as a result, cannot tell how many bicycles they will manufacture. Assume AAA will manufacture it's first bike in August, and we are now in June. f the number of units created cannot be reliably estimated, revenue should be recognized only to the extent that costs are incurred in the following period.
AAA Crowdfunding Income Statement

June
July
Aug
Total
Revenue from crowdfunding
$400
$300
$300
$1,000
Expense
$400
$300
$100
$800
Net Income
$0
$0
$200
$200

1 CFA, Financial Reporting and Analysis, 2012

Post by:
Ziqi Chen, Master of Science in Finance, August, 2014
Johns Hopkins University Carey Business School 
NCS Intern, Summer 2014

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