The Sultanate of Oman is geared up for a new source of funding as the Capital Market Authority (CMA) issued the rules for Crowdfunding Platforms (wide decision number E/153/2021, dated November 21, 2021).
Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people (crowd) via online platforms or websites.
While the rules lay down the important provisions, there are no accounting guidelines in the rules, nor do the International Financial Reporting Standards (IFRS) define the accounting treatment for operators or applicants for fundraising. Below are some of the best practices for operators and applicants for fundraising:
Accounting for the Operator
The operator's income stream consists of fees for providing the platform or fees after successful crowdfunding. Operator needs to follow the IFRS 15 "Revenue Recognition" which follows the five-step model framework namely;
• Identify the contract(s) with a customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognise revenue when (or as) the entity satisfies a performance obligation
While the fees, if any, for providing a platform can be recognised on hosting the application on the platform, the success fees will depend on successful fundraising by the applicant or reaching the target. The operator has to keep the funds separate from its book in an escrow account till the target is achieved. Once the target is achieved in the stipulated time frame, the operator will deduct the fees and pass the funds to the applicant. In the event of failure to achieve the target, the funds will be returned to the crowd funders with no deductions.
Accounting for Applicant for fundraising
The accounting for the applicant depends on the method of crowdfunding as below:
Peer-to-peer lending: If the applicant receives the money, which represents a debt instrument or advance, and the money that has been received has to be repaid, then there is a present obligation and a liability is to be recognised. This financial liability and would be initially recognised at the fair value less issue costs in line with provisions of IFRS 9 "Financial Instruments" applies. The default accounting treatment for such financial instruments is amortised cost. The profit and loss account will be charged with an effective rate of interest on the debt.
Equity crowdfunding: If the applicant receives the money, which represents an ownership interest; then an equity instrument has been issued. The relevant standard will also be IFRS 9, "Financial Instruments". The issue of equity shares will be initially recognised at fair value less issue costs.
Rewards-based crowdfunding: If the applicant receives the money because of a sale or reward or if that is the substance of the crowdfunding arrangement, then IFRS 15 "Revenue from Contracts with Customers'', applies. Revenue will be recognised when the performance obligations are fulfilled and control passes.
Donation-based crowdfunding: If the applicant receives the money in the form of donation, then applicant may need to draft the accounting policies in line with the provisions of the IAS 20 "Government Grants" as there could be a number of conditions attached to the funding. Donations will only be recognised on the completion of such conditions.
CMA rules will encourage more and more applicants to start their operations in the Sultanate of Oman, and it will not only help corporate or big entrepreneurs to raise capital to start and grow their businesses, but also help small and medium scale businesses to secure funds through alternative sources of funding. Operator and applicant needs to follow the best practices as above to curb the accounting challenges and make Oman more sustainable and attractive for international investors. (The author is CEO of Baker Tilly Oman)
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