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Crowdfunding and impairment of financial instruments - Coggle Diagram
Crowdfunding and impairment of financial instruments
Crowdfunding
funding of a new start-up or project by collecting cash from a variety of individuals/entities
often via the Internet
4 common ways of raising funds
Equity-based crowdfunding: The equity-based approach is targeted at investors who receive shares in the new company.
Debt-based crowdfunding: With debt-based crowdfunding, a contributor makes a loan to a business that’s looking to crowdfund, with the intention of subsequently being repaid with interest.
Reward-based crowdfunding: This involves promising specific items (rewards) to contributors before the launch of a new project, product, or business. A reward-based campaign isn’t generally targeted at contributors who are looking to profit from their investment but at those who want to own a new product.
Donation-based crowdfunding: Contributors make 'donations' to a project or company and may receive existing ‘rewards’ in return. Some forms of donation-based crowdfunding don’t involve any sort of reward as donors wish to contribute to further a particular cause.
Considerations
Equity based will fall under IFRS 9 Financial Instruments
Debt based will fall under IAS 32 Financial Instruments Presentation
Reward based (involve issuing of rewards) should use IFRS 15 Revenue to determine when to recognise revenue
For each performance obligation, the company will need to determine whether the performance obligation is satisfied over time
If one or more of the criteria in IFRS 15 are met, then the company recognises revenue over time
If none of the criteria is met, then control transfers to the customer at a point in time and the company recognises revenue at that point in time
However, if the company cannot reasonably measure the outcome but expects to recover the costs incurred in satisfying the performance obligation, then it recognises revenue to the extent of the costs incurred.
Balance will be showed as accrued revenue
Guidance
Remember the following
The importance of a robust conceptual framework
An understanding that rules will not be able to cover all situations
Use of reasonable judgement is always needed in the decision-making process
The impairment of financial instruments
Expected Credit Loss (ECL) model
which requires a calculation of the expected value decrease in a financial asset.
Essentially, a provision is required for expected credit losses on the financial asset over a period of time
Expected losses should be discounted to the reporting date using the effective interest rate of the financial asset that was determined at initial recognition
IFRS 9 introduces a three-stage approach
refer to the older notes on impairment of financial instruments
For trade receivables or contract assets that do not contain a significant financing component
the loss allowance should be measured, at initial recognition and throughout the life of the receivable,
at an amount equal to lifetime ECL.
As an exception to the general model, if the credit risk of a financial instrument is low at the reporting date,