What is Crowdfunding in Accounting?

Crowdfunding is a financing method where many people contribute small amounts to finance a project, product or business. As part of the broader concept of crowdsourcing , crowdfunding represents a specific form of crowdfunding. From an accounting perspective, crowdfunding brings unique challenges related to accounting , tax treatment and legal requirements. For Norwegian companies using crowdfunding, it is essential to understand how these funds should be treated according to the Norwegian Accounting Act and applicable accounting rules.

Types of Crowdfunding and Accounting Treatment

Crowdfunding can be divided into four main categories, each with its own accounting implications and documentation requirements.

1. Reward-based Crowdfunding

This is the most common form of crowdfunding, where contributors receive products or services as a thank you for their contribution. From an accounting perspective, this is treated as a pre-sale or advance payment .

Accounting: * Funds received are recorded as short-term liabilities (advances from customers) * Revenue is only recognized when the product/service is delivered. * VAT treatment follows normal rules for the sale of goods/services

2. Donation-based Crowdfunding (Donation-based)

Here, contributors give money without expecting anything in return. This is treated as a gift or grant in the accounts.

Accounting: * Revenue is recognized immediately upon receipt. * Usually not subject to VAT (gifts are exempt from VAT) * May be taxable income for recipient

3. Equity-based Crowdfunding (Equity-based)

Investors buy shares or ownership interests in the company. This is treated as share capital or equity injection .

Accounting: * Increase in equity * Must comply with the Companies Act and share registration requirements * Not subject to VAT

4. Debt-based Crowdfunding (Debt-based/P2P Lending)

Contributors lend money to the business with the expectation of repayment with interest. This is treated as long-term debt . This form of crowdfunding is also known as crowdlending or peer-to-peer lending.

Accounting: * Recorded as a liability in the balance sheet * Interest costs are expensed on an ongoing basis. * Not subject to VAT

Accounting for Crowdfunding Transactions

Proper accounting for crowdfunding activities requires understanding when and how different transactions should be treated. The table below shows the most common scenarios:

Crowdfunding Type	Accounting at Reception	Posting upon Delivery	VAT processing
Reward-based	Short-term liabilities (Advances from customers)	Sales revenue + VAT	25% VAT on goods/services
Donation-based	Other operating income	-	Excluding VAT
Equity-based	Equity (Share Capital)	-	Excluding VAT
Loan-based	Long-term debt	Interest expense (current)	Excluding VAT

Practical Example: Reward-Based Crowdfunding

Let's look at a concrete example where a company raises 500,000 NOK through reward-based crowdfunding to produce a new product:

Phase 1 - Receiving funds:

 Debet: Bank 500.000
 Kredit: Forskudd fra kunder 500.000

Phase 2 - Delivery of products (incl. 25% VAT):

 Debet: Forskudd fra kunder 500.000
 Kredit: Salgsinntekt 400.000
 Kredit: Utgående MVA 100.000

Tax Consequences

The tax treatment of crowdfunding income depends on the type of crowdfunding and the company's organizational form. For limited liability companies, the following main rules apply:

Taxable Income

• Reward-based crowdfunding: Taxable as ordinary business income
• Donation-based crowdfunding: May be taxable, depends on purpose and structure
• Loan-based crowdfunding: The loan amount is not taxable, but interest costs are deductible (see crowdlending for detailed information)

Tax-Free Income

• Equity-based crowdfunding: Not taxable for the company (equity injection)
• Government grants: Often tax-free if they meet specific criteria

Legal Requirements and Regulation

Crowdfunding in Norway is regulated by several laws and regulations, depending on the type of crowdfunding:

Financial Supervisory Authority Regulation

• Equity-based crowdfunding: Requires permission from the Norwegian Financial Supervisory Authority for professional players
• Loan-based crowdfunding: Covered by the Credit Supervision Act
• Securities legislation: Applies to equity-based crowdfunding above certain thresholds

Bookkeeping and Documentation

All crowdfunding transactions must be documented according to accounting regulations :

• Attachments : All transactions must have sufficient documentation
• Certification : Crowdfunding revenues must be certified like other business transactions
• Storage: Documentation must be kept for a minimum of 5 years

Challenges and Risk Factors

Crowdfunding brings several accounting and business challenges that companies need to be aware of:

Accounting Challenges

• Timing of revenue recognition: When should crowdfunding funds be recognized as revenue?
• Currency risk: International crowdfunding campaigns may involve currency exposure
• Complex VAT treatment: Different crowdfunding types have different VAT implications

Business Risk Factors

• Delivery risk: Inability to deliver promised products/services
• Solvency : Crowdfunding funds must be managed responsibly
• Regulatory risk: Changes in legislation may affect crowdfunding activities

Best Practices for Crowdfunding Accounting

To ensure proper accounting and compliance with legal requirements, the following best practices are recommended:

1. Establish Clear Routines

• Separate bank account: Use your own account for crowdfunding funds
• Detailed documentation: Record all contributors and their contributions
• Regular reconciliation : Reconcile crowdfunding accounts monthly

2. Implement Internal Control

• Approval processes: Establish clear procedures for using crowdfunding funds
• Reporting: Create regular reports to stakeholders
• Audit: Consider external auditing for larger crowdfunding projects

3. Tax planning

• Early advice: Consult an accountant or tax advisor early in the process
• Documentation: Ensure sufficient documentation for tax purposes
• Accrual: Plan the tax timing of income and expenses

Crowdfunding and Financial Reporting

Crowdfunding activities must be accurately reflected in the company's financial reports. This includes:

Balance

• Assets: Crowdfunding funds increase bank deposits
• Debt: Advances from customers (reward-based) or loans (loan-based)
• Equity: Increase through equity-based crowdfunding

Income statement

• Revenue: Crowdfunding revenue classified by type
• Costs: Costs associated with crowdfunding campaigns
• Financial costs: Interest costs on crowdfunding loans

International Aspects

For Norwegian companies that use international crowdfunding platforms, additional complexities arise:

Currency handling

• Currency conversion: Crowdfunding funds in foreign currency must be converted to NOK
• Currency risk: Fluctuations in exchange rates may affect the value of the funds.
• Hedging: Consider currency hedging for larger amounts

Tax Implications

• Double taxation: Risk of taxation in both Norway and abroad
• Withholding tax: Some countries may charge withholding tax on crowdfunding income
• Reporting requirements: International transactions may trigger special reporting requirements

Future Developments

The crowdfunding market is evolving rapidly, and new regulations and technologies are impacting accounting treatment:

Regulatory Changes

• EU regulation: New EU rules for crowdfunding may affect Norwegian players
• Digital currencies: Crowdfunding with cryptocurrencies creates new accounting challenges
• Automation: Increased use of automated accounting solutions for crowdfunding

Technological Innovations

• Blockchain: Can improve transparency and traceability in crowdfunding
• AI and Machine Learning: Automating Accounting and Risk Management
• Integrated platforms: Better integration between crowdfunding platforms and accounting systems

Conclusion

Crowdfunding represents an important financing method for modern businesses, but requires a thorough understanding of the accounting and legal implications. Proper processing of crowdfunding transactions is essential to maintain accounting integrity and comply with applicable legislation.

Companies considering crowdfunding should:

• Plan thoroughly: Understand accounting implications before the campaign starts
• Seek professional advice: Consult an accountant and legal advisor
• Establish robust systems: Implement tracking and reporting systems
• Maintain transparency: Communicate openly with contributors and stakeholders

With proper planning and implementation, crowdfunding can be a valuable source of financing that strengthens a company's working capital and growth opportunities, while meeting all accounting and legal requirements.