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In this issue, Karen Higgins and Kayla Macfarlane provide some insights around the topical issue of crowdfunding.

This article provides a high-level overview around the types of crowdfunding that currently exist in the market and the financial reporting implications that arise. This article also brings to light some of the recent pronouncements from the securities regulators. 

Warm regards,

Chantal Rassart
Partner | Audit Knowledge Management Officer

A new, innovative way to raise capital – but what does it mean for financial reporting?

You have a great idea! For example, a product you’ve developed, or maybe there’s a cause you feel is worth raising charitable donations for. However, you can’t seem to raise the funds you need to propel this idea through conventional sources. So what do you do? Giving up is one option, but another option that has become increasingly popular is crowdfunding. And given the more than $34 billion funding volume it has generated in 2015, crowdfunding is a topic that’s definitely worth talking about!

So what is crowdfunding? Well, as the name suggests, it’s the process of raising funds from a large pool of people. The basic concept is simple: a start-up company needs funds and perhaps wants to ‘test the waters’ for whatever product or concept it’s passionate about and is offering. Donors, on the other hand, simply want a reward. This could take the form of an investment return, some form of patronage, or just a general desire for social participation. Crowdfunding appears to be a mechanism whereby all these objectives are met, and therefore it’s not surprising this funding model has become a growing trend.

Source: 2015CF - Crowdfunding Industry Report

More about crowdfunding

Before getting into some of the relevant financial reporting considerations, we would like to give you a snapshot of what crowdfunding actually is.

It consists of presenting an idea on a crowdfunding platform (such as Kickstarter or Indiegogo) – effectively, people and businesses use the Internet to promote their projects/ideas and obtain funds through a web portal. The basic premise behind crowdfunding platforms is that you are able to raise a large amount of money by reaching a large pool of investors, with each investor usually donating a small sum of money.

Aside from securing funds, many other benefits are attained by using these platforms, for example, early validation of a product or concept, free marketing, free public relations and early access to a loyal customer base. What’s more, many have found that a crowdfunding platform, accompanied by an appropriate crowdfunding model (see below), enables fairly rapid penetration of local and international markets as products and concepts launched in this way have gained take-up at exceptional rates.

Various crowdfunding models exist. In 2015, we have seen that most crowdfunding campaigns fall into one of the following buckets:

So why does it matter for financial reporting? Well, for entities that have already engaged in a crowdfunding campaign, or are considering one, there are some key questions you need to consider if you have to report financial information to stakeholders. What’s more, these questions have started to raise some unique issues when it comes to financial reporting and, in doing so, have sparked the interest of various parties including securities regulators and, of course, the owners of the business themselves.

Financial Reporting Implications

As described above, entities can undertake a number of different types of crowdfunding campaigns that range from a simple donation (without any financial return) to more complex models that involve the entity issuing debt or equity-based instruments.

As we know, understanding the underlying economics is essential in identifying the specific financial reporting implications and how they should be accounted for. Some initial questions to consider would be: what type of entity received the payment (i.e., a charity, not-for-profit, individual, other?) and what, if anything, did the entity promised to give back to the funds provider? Reflecting on the following questions may help you uncover some of the pressure points you may need to consider when working through the financial reporting implications in a particular fact pattern:

The above listing is not exhaustive but it should get you thinking about why and how this has become a hot topic in financial reporting.

So what are the Securities regulators saying?

The development of securities regulations regarding these types of investments continues to evolve. However, on November 5, 2015, the securities regulators in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published in final form Multilateral Instrument “MI 45-108 Crowdfunding," which introduces a crowdfunding prospectus exemption for issuers and a registration framework for funding portals. MI 45-108 will require issuers to distribute their securities through a registered funding portal. These funding portals will fulfill certain gatekeeper functions that include reviewing the issuer’s disclosure and obtaining background checks on the issuer and its directors, executive officers and promoters.

On a related note, in May 2015, the Canadian securities regulators released multilateral CSA Notice “NI 45-316 - Start-up Crowdfunding Registration and Prospectus Exemptions.” This national instrument also provides guidance for entities that are raising capital in return for an equity-type stake in their business. As a result of this national instrument, certain provinces are providing relief in these securities offerings. For example, in some provinces, the provincial regulator has stipulated that ASPE is an acceptable framework for financial statements.

As a final word for anyone interested in what’s happening south of the border, similar exemptions may apply. On October 30, 2015, the Securities and Exchange Commission (SEC) proposed amendments to existing rules under the Securities Act Rule (147). The amendments will regulate the funding portals that offerings are conducted through, and require that companies provide certain disclosures when raising capital through one of these intermediary platforms.

The future of crowdfunding

Clearly, based on the growth and trends evidenced over the last few years, we have entered a new era of social funding, which isn’t really surprising given the advent of social media, which has changed practically every aspect of our lives. It was only a matter of time before it impacted the financial reporting world as well. Potentially we can expect to see an expansion of crowdfunding and even a retail version of crowdfunding down the road within Canada and in international markets. Suffice it to say that this topic is likely to continue to garner interest – and generate financial reporting questions – in the years to come!

Standard-setting activities & insights

International Financial Reporting Standards

IASB proposes amendments to IAS 40 on transfers of investment property
On November 19, 2015, the International Accounting Standards Board (IASB) published an Exposure Draft (ED) of proposed amendments to IAS 40, Investment Property. The amendments address transfers of investment property. Comments are requested by March 18, 2016. Read more

IASB publishes proposals for amendments under its annual improvements project (cycle 2014-2016)
On November 19, 2015, the IASB published an exposure draft Annual Improvements to IFRSs 2014–2016 Cycle. It contains proposed amendments to three International Financial Reporting Standards (IFRSs) (IFRS 1, First-time Adoption of International Financial Reporting Standards, IFRS 12, Disclosure of Interests in Other Entities, and IAS 28, Investments in Associates and Joint Ventures) as result of the IASB's annual improvements project. Comments are requested by February 17, 2016. Read more

AcSB Draft IFRIC Interpretation – Foreign Currency Transactions and Advance Consideration and Uncertainty over Income Tax Treatments
On November 17, 2015, the Accounting Standards Board (AcSB) issued two Draft Interpretations: (i) Foreign Currency Transactions and Advance Consideration; and (ii) Uncertainty over Income Tax Treatments, which correspond to the proposed IFRIC Interpretations issued by the International Accounting Standards Board’s IFRS Interpretations Committee on this topic. Stakeholders are encouraged to submit their comments by January 19, 2016.

IASB publishes update on the definition of a lease
On October 29, 2015, the IASB staff published a short project update providing an overview of how a lease will be defined in the IASB's new standard on leases. It also includes a working draft of the application guidance and accompanying illustrative examples to be included in the forthcoming standard on the definition of a lease. Read more

IASB publishes draft guidance to help management apply the concept of materiality
On October 28, 2015, the IASB published draft guidance to help company management determine whether information is material. The guidance is part of the IASB’s wider initiative to improve disclosures. The deadline for submitting comments on the draft Practice Statement is February 26, 2016. Read more

IASB updates work plan
On October 26, 2015, the International Accounting Standards Board released an updated work plan. Two projects have been added to the work plan: i) Annual improvements 2015–2017; and ii) Remeasurement of previously held interests – obtaining control or joint control in a joint operation that constitutes a business. Read more

IASB tentatively decides on effective date of IFRS 16
On October 20, 2015, the IASB voted on the effective date of IFRS 16, the new standard on leases. As recommended by the staff, the IASB voted for an effective date of January 1, 2019, with early application permitted but only if the entity is also applying IFRS 15, Revenue from contracts with customers. Read more

Accounting Standards for Private Enterprises

FYI Article – 2015 Annual Improvements: Clarifying the Standards
On November 3, 2015, the Accounting Standards Board released an article on its recently issued amendments regarding disclosures of business combinations; investments; leases; and property, plant and equipment; and the measurement of a defined benefit plan obligation. Read more

Public Sector Accounting Standards

CPA Magazine Standards Speak – Why the PSA Discussion Group Matters
On October 9, 2015, the Public Sector Accounting Board (PSAB) released an article in which Andrew Newman, chair of the PSA discussion group, explains the objective of the group. He also provides a few examples of its discussions that led to new initiatives. Read more

US GAAP

FASB to issue its final standard on leases
On November 11, 2015, the Financial Accounting Standards Board (FASB) finished its re-deliberations related to its upcoming standards on leases. The FASB decided on a dual approach for lessee accounting whereby a lessee would account for most existing capital leases as Type A leases and most existing operating leases as Type B leases. The International Accounting Standards Board decided that all leases should be accounted for by lessees as Type A leases (i.e., effectively every lease would be reflected as an installment purchase). For public business entities (PBEs), the new leases standard would be effective for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption would be permitted for all entities. Read more

AICPA begins developing revenue recognition implementation guidance
On November 2, 2015, the Financial Reporting Executive Committee of the American Institute of Certified Public Accountants released for public comment nine working drafts on accounting issues associated with the implementation of the new revenue standard. Read more

SEC issues final rule on crowdfunding
On October 30, 2015, the Securities and Exchange Commission (SEC) issued a final rule, "Regulation Crowdfunding," which would permit eligible companies to use “crowdfunding” to offer and sell securities. The final rule (mandated by Title III of the JOBS Act) permits an individual to use crowdfunding to invest in eligible companies, subject to certain thresholds; however, the amount of money a company can raise through crowdfunding offerings would be limited to $1 million in a 12-month period. Read more

Securities regulatory matters

Regulators Finalize Offering Memorandum Exemption
On October 29, 2015, several securities regulatory authorities published Multilateral CSA Notice of Amendments to National Instrument 45-106, Prospectus Exemptions Relating to the Offering Memorandum Exemption. As a result of the amendments, the offering memorandum exemption will now be available in all jurisdictions of Canada. Provided all necessary ministerial approvals are obtained, the final amendments will come into force in Ontario on January 13, 2016 and in Alberta, New Brunswick, Nova Scotia, Quebec and Saskatchewan on April 30, 2016. Read more

AMF 2015 Activity Report – Continuous Disclosure Review Program of Companies
In September 2015, the Autorité des marchés financiers issued this report, which includes the principal findings arising from the reviews of companies conducted within the scope of its 13th annual Continuous Disclosure Review Program (CDR Program). Read more

Assurance

IInvitation to Comment – AASB Draft Strategic Plan for 2016-2021
On November 10, 2015, the Auditing and Assurance Standards Board (AASB) issued an Invitation to Comment on its next strategic plan, which outlines the AASB’s vision, mission and strategic objectives that will guide its standard-setting activities. Stakeholders are encouraged to submit their comments by February 19, 2016. Read more

Basis for Conclusions – Section 7150, Auditor’s Consent to the Use of a Report of the Auditor Included in an Offering Document
On November 3, 2015, the AASB released a document in which it summarizes the process followed in developing amendments to this standard and the conclusions it reached. The AASB's objectives in amending Section 7150 included: i) to address requirements of certain Canadian stock exchanges for the auditor’s consent to include statements that were not previously contemplated; and ii) to correct an oversight in existing Section 7150. Read more

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IFRS checklists for 2015

Publication date: November 2015
Our 2015 IFRS disclosure checklists are now available. The 2015 IFRS compliance, presentation and disclosure checklist summarizes the requirements set out in IFRSs and the IAS 34 checklist summarizes the requirements of IAS 34, Interim Financial Reporting.

2015 ASPE Alert

Publication date: November 2015
In preparation for the year-end financial reporting cycle for many private enterprises, we released our 2015 Accounting Standards for Private Enterprises (ASPE) alert. This alert provides a high-level overview of the major changes in ASPE that could affect organizations and the steps they need to take to ensure that they are up to date.

SEC Comment Letters — Including Industry Insights: What SEC Comment Letters — Including Industry Insights: What "Edgar" Told Us (Ninth Edition)

Publication date: October 2015
This new release in the Deloitte (United States) SEC Comment Letter series includes extracts of frequently issued SEC staff comments, additional analysis, and links to resources that are relevant to SEC filers.

Base Erosion and Profit Shifting

Publication date: October 2015
In this issue, John Jarrett, Associate Director, ESG research at FTSE Russell and Heather Evans, National Managing Partner, Tax, Deloitte Canada, discuss the biggest change to international tax practices in over a generation. For organizations with multinational operations, BEPS and the global tax reset is much more than a tax issue – it is a business issue that will require the input of the C-suite and the board of directors.

Business news highlights

We continuously review relevant business e-publications and listed below is a selection of newsworthy items that we believe you will find interesting and relevant.

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Chantal Rassart, CPA, CA
Partner | Audit Knowledge Management Officer