CROWDFUNDING

Introduction

Crowdfunding is a medium of raising finance where a group of individuals comes together to raise funds for personal projects like starting up a business, growing an existing business, or project targeted savings.

In the ancient African culture, crowdfunding has been known as Ajo (in Yoruba) or Esusu (in Igbo) or Adashi (in Hausa), and it has being in use; for the purposes of managing personal finances, with a view to achieving individual’s objective, where all participants come together to generate a common pool(fund) for the next in line beneficiary, and such is rotated till all participants have been settled in agreement with a schedule of block collection by all concerned accordingly, where all parties fund the pool to achieve their personal objective at different interval.

This medium has kept small scale enterprises in business for a long period of time, as access to capital or loans from commercial banks are near impossible, since it is usually difficult for most informal businesses to secure loans from the bank as the individual might be unable to provide required collateral to secure the funds they intend borrowing or being able to achieve the debt covenant.

In recent times accountant has seen the need to properly treat crowdfunding in other to enhance the fair representation of the financial statement. Crowdfunding can be perceived from four different perspectives;

1. Debt-based Crowdfunding: this is a type of crowdfunding where the parties who pool funds for a business are expecting to receive the principal amount and interest at a later date. This meets the definition of a financial instrument and therefore IFRS 9 financial instrument is applicable by deducting any transaction cost at inceptions and subsequently amortizing the funds over the period the funds will be held.

2. Equity-based Crowdfunding: this is a type of crowdfunding where the parties who pool funds for a business are going to become equity holders. This also meets the definition of a financial instrument and therefore IFRS 9 financial instrument is also applicable. Where the instrument holder has no intention of holding the instrument for long, then it is treated by charging any transaction cost at inception to the Statement of Profit or Loss (SOPL) and then carried at Fair Value Through Profit or Loss (FVTPOL) where the Fair value changes are treated in the SOPL. While on the other hand, where the instrument holder intends to hold the instrument for a foreseeable future, then the transaction cost is capitalized as part of the investment cost and are therefore carried at Fair Value Through Other Comprehensive Income (FVTOCI). And the fair value changes are recognized in OCI.

3. Reward-based Crowdfunding: this is a type of crowdfunding where the parties who pool funds for a business are expecting a reward for the contribution to the operation of the business. This meets the definition of revenue under IFRS 15 revenue from contracts with customers. In this case, we would want to determine the performance obligation which could be related to the transfer of goods(assets) and rendering of services which is overtime. Here when the 5 Step model to recognizing revenue is met then, we would recognize it in the SOPL and where they are not then, we would defer them as a liability.

4. Donation-based crowdfunding: this is a type of crowdfunding where the parties who pool funds for a business do so with no intention of expecting rewards or returns from what they have contributed. This transaction shall be recognized as other income in the SOPL when the donations where received

Conclusion:

It will be important to understand the objective of crowdfunding and what the parties involved stand to gain as this will guide as to how to recognize the transactions in the books of the entity raising the funds.

Article by: Jimoh Abdulkabir Taiwo

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