Skip to main content

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

Comments

Popular posts from this blog

Crowdfunding heads to Georgetown

So first Fundrise raises $31Million for real estate crowdfunding.  Now Realty Mogul, a real estate crowdfunding platform, responds quickly with a rare opportunity to be a part of a $31.8 million project in the exclusive Georgetown neighborhood of Washington DC. #crowdfundrealestate Realty Mogul, along with   JOSS Realty Partners ( "JOSS" ) , is introducing the Georgetown Plaza to the crowdfunding world. This 150,097 square foot   Class B office building is  located on Wisconsin Avenue, Washington DC's major north-south artery and half a mile north of Georgetown University's main campus and Georgetown University Hospital. The primary objective of this investment crowdfunding campaign is to acquire, lease-up, and reposition the office building before reselling. In this crowdfunding transaction, Realty Mogul investors will hold a partnership equity stake in Realty Mogul 19, LLC.   Realty Mogul 19, LLC will subsequently invest in 2233 Wisconsin NY Member L

Why we are so optimistic about crowdfunding for minorities

Dr. Mark Dean - On the IBM team that developed PC : "Mark E. Dean (born March 2, 1957) is an African American inventor and a computer engineer. He led the team that developed the ISA bus, and he led the design team responsible for creating the first one-gigahertz computer processor chip. Dean has also helped in the early development of the computer keyboard. He holds three of IBM's original nine PC patents." Jesse Russell , recognized father of digital cellular technology: "Jesse Eugene Russell (b April 26, 1948) is an African-American inventor and one of the visionaries’ whose innovative perspectives profoundly influenced the wireless communications industry, (a) driver of growth in the 21st century. Trained as an electrical engineer at Tennessee State University and Stanford University , and recognized globally as a thought-leader, technology expert and inventor in the field of wireless communication for over 20 years.." Emmitt McHenry , Founder of Ne