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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