products. During a reporting period, customers purchase products for CU100,000 and earn 10,000 points that
are redeemable for future purchases. The consideration is fixed and the stand-alone selling price of the
purchased products is CU100,000. The entity expects 9,500 points to be redeemed. The entity estimates a
stand-alone selling price of CU0.95 per point (totalling CU9,500) on the basis of the likelihood of redemption
in accordance with paragraph B42 of IFRS 15.
The points provide a material right to customers that they would not receive without entering into a contract.
Consequently, the entity concludes that the promise to provide points to the customer is a performance
obligation. The entity allocates the transaction price (CU100,000) to the product and the points on a relative
stand-alone selling price basis as follows:
CU
Product
91,324
[CU100,000 × (CU100,000 stand-alone selling price ÷ CU109,500)]
Points
8,676
[CU100,000 × (CU9,500 stand-alone selling price ÷ CU109,500)]
At the end of the first reporting period, 4,500 points have been redeemed and the entity continues to expect
9,500 points to be redeemed in total. The entity recognises revenue for the loyalty points of CU4,110 [(4,500
points ÷ 9,500 points) × CU8,676] and recognises a contract liability of CU4,566 (CU8,676 – CU4,110) for
the unredeemed points at the end of the first reporting period.
At the end of the second reporting period, 8,500 points have been redeemed cumulatively. The entity updates
its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. The
entity recognises revenue for the loyalty points of CU3,493 {[(8,500 total points redeemed ÷ 9,700 total
points expected to be redeemed) × CU8,676 initial allocation] – CU4,110 recognised in the first reporting
period}. The contract liability balance is CU1,073 (CU8,676 initial allocation – CU7,603 of cumulative
revenue recognised).
As depicted in Example 28.72 above (i.e. paragraphs IE269-IE270 of IFRS 15), entities
need to routinely refine and evaluate estimates of gift card redemption rates.
8.10.1
Implementation questions on breakage
8.10.1.A
Are customers’ unexercised rights (i.e. breakage) a form of variable
consideration?
Although the breakage application guidance in paragraph B46 of IFRS 15 specifically
refers to the constraint on variable consideration, we do not believe breakage is a form
of variable consideration (see 6.2 above). This is because it does not affect the
transaction price. Breakage is a recognition concept (Step 5) that could affect the timing
of revenue recognition. It is not a measurement concept (Step 3). For example, the
transaction price for a sale of a £20 gift card is fixed at £20 regardless of the expected
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breakage amount. The expected breakage, however, could affect the timing of revenue
recognition because an entity is required under paragraph B46 of IFRS 15 to ‘recognise
the expected breakage amount as revenue in proportion to the pattern of rights
exercised by the customer’ if it expects to be entitled to a breakage amount. [IFRS 15.B46].
9
IFRS 15 – LICENCES OF INTELLECTUAL PROPERTY
IFRS 15 provides application guidance for recognising revenue from licences of
intellectual property that differs in some respects from the requirements for other
promised goods or services.
Given that licences include a wide array of features and economic characteristics, the
Board decided that an entity needs to evaluate the nature of its promise to grant a
licence of intellectual property in order to determine whether the promise is satisfied
(and revenue is recognised) over time or at a point in time. A licence provides either:
[IFRS 15.B56]
• a right to access the entity’s intellectual property throughout the licence period,
which results in revenue that is recognised over time; or
• a right to use the entity’s intellectual property as it exists at the point in time in
which the licence is granted, which results in revenue that is recognised at a point
in time.
The standard states that licences of intellectual property establish a customer’s rights to
the intellectual property of an entity and may include licences for any of the following:
software and technology, media and entertainment (e.g. motion pictures and music),
franchises, patents, trademarks and copyrights. [IFRS 15.B52].
The application guidance provided on licences of intellectual property is only
applicable to licences that are distinct. When the licence is the only promised item
(either explicitly or implicitly) in the contract, the application guidance is clearly
applicable to that licence. The assessment as to whether the contract includes a distinct
licence of intellectual property may be straightforward for many contracts. However, if
there are multiple promises in a contract, entities may have to more carefully evaluate
the nature of the rights conveyed.
Licences of intellectual property are frequently included in multiple-element
arrangements with promises for additional goods or services that may be explicit or
implicit. In these situations, an entity first applies the requirements of Step 2 of the
model to determine whether the licence of intellectual property is distinct, as discussed
at 5 above and 9.1 below.
For most licences that are not distinct, an entity would follow the general
requirements in Step 5 of the model to account for the recognition of revenue for the
performance obligation that includes the licence (i.e.
the requirements in
paragraphs 31-36 of IFRS 15 to determine whether the performance obligation
transfers over time or at a point in time, as discussed at 8.1 and 8.3 above).
Furthermore, the IASB noted in the Basis for Conclusions that there may be some
situations in which, even though the licence is not distinct from the good or service
transferred with the licence, the licence is the primary or dominant component
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(i.e. the predominant item) of the combined performance obligation. [IFRS 15.BC407]. In
such situations, the IASB indicated that the application guidance for licences still
applies. The Board provided no application guidance or bright lines for determining
when a licence is the primary or dominant component. However, the IASB referred
to an example in the Basis for Conclusions to illustrate this concept further.
[IFRS 15.BC414X]. See 9.2.1 below for further discussion. The determination of whether
a licence is the predominant component may be obvious in some cases, but not in
others. Therefore, entities may need to exercise significant judgement and consider
both qualitative and quantitative factors.
9.1
Identifying performance obligations in a licensing arrangement
Contracts for licences of intellectual property frequently include explicit or implicit
promises for additional goods or services (e.g. equipment, when-and-if available
upgrades, maintenance and installation). Consistent with Step 2 of the general model
(see 5 above), entities need to apply the requirements on identifying performa
nce
obligations in paragraphs 22-30 of IFRS 15, when a contract with a customer includes a
licence of intellectual property and other promised goods or services, in order to
appropriately determine whether the licence of intellectual property and the other
promises are distinct (i.e. are separate performance obligations).
In respect of identifying performance obligations in a licensing arrangement, the
standard states that ‘[i]n addition to a promise to grant a licence to a customer, an entity
may also promise to transfer other goods or services to the customer. Those promises
may be explicitly stated in the contract or implied by an entity’s customary business
practices, published policies or specific statements (see paragraph 24). As with other
types of contracts, when a contract with a customer includes a promise to grant a licence
in addition to other promised goods or services, an entity applies paragraphs 22–30 to
identify each of the performance obligations in the contract.’ [IFRS 15.B53].
As discussed at 5.2 above, the standard outlines a two-step process for determining
whether a promised good or service (including a licence of intellectual property) is
distinct and, therefore, is a performance obligation as follows:
(1) consideration of the individual good or service (i.e. whether the good or service is
capable of being distinct); and
(2) consideration of whether the good or service is separately identifiable from other
promises in the contract (i.e. whether the promise to transfer the good or service
is distinct in the context of the contract).
To conclude that a good or service is distinct, an entity needs to determine that the
good or service is both capable of being distinct and distinct in the context of the
contract. These requirements need to be applied to determine whether a promise to
grant a licence of intellectual property is distinct from other promised goods or
services in the contract. Therefore, entities are required to assess whether the
customer can benefit from a licence of intellectual property on its own or together
with readily available resources (i.e. whether it is capable of being distinct) and
whether the entity’s promise to transfer a licence of intellectual property is separately
identifiable from other promises in the contract (i.e. whether it is distinct in the
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context of the contract).The assessment of whether a licence of intellectual property
is distinct needs to be based on the facts and circumstances of each contract.
9.1.1
Licences of intellectual property that are distinct
Licences are frequently capable of being distinct (i.e. the first criteria of a distinct good
or service) as a customer can often obtain at least some benefit from the licence of
intellectual property on its own or with other readily available resources. Consider
Example 28.21, Case A, at 5.2.3 above, which includes a contract for a software licence
that is transferred along with installation services, technical support and unspecified
software updates. The installation service is routinely performed by other entities and
does not significantly modify the software. The software licence is delivered before the
other goods or services and remains functional without the updates and technical
support. The entity concludes that the customer can benefit from each of the goods or
services either on their own or together with other goods or services that are readily
available. That is, each good or service, including the software licence, is capable of
being distinct under paragraph 27 of IFRS 15.
If an entity determines that a licence of intellectual property and other promised goods
or services are capable of being distinct, the second step in the evaluation is to
determine whether they are distinct in the context of the contract. As part of this
evaluation, an entity considers the indicators for whether the goods or services are not
separately identifiable, including whether:
(1) the entity provides a significant service of integrating the licence and other goods
or services into a combined output or outputs;
(2) the licence and other goods or services significantly modify or customise each
other; or
(3) the licence and other goods or services are highly interdependent or highly
interrelated, such that the entity would not be able to fulfil its promise to transfer
the licence independently of fulfilling its promise to transfer the other goods or
services to the customer.
Continuing with Example 28.21, Case A, discussed above, the entity considers the
separately identifiable principle and factors in paragraph 29 of IFRS 15 and determines
that the promise to transfer each good and service, including the software licence, is
separately identifiable. In reaching this determination, the entity considers that the
installation services are routine and can be obtained from other providers. In addition, the
entity considers that, although it integrates the software into the customer’s system, the
software updates do not significantly affect the customer’s ability to use and benefit from
the software licence during the licence period. Therefore, neither the installation services
nor the software updates significantly affect the customer’s ability to use and benefit from
the software licence. The entity further observes that none of the promised goods or
services significantly modify or customise one another and the entity is not providing a
significant service of integrating the software and services into one combined output.
Lastly, the software and the services are not deemed to be highly interdependent or highly
interrelated because the entity would be able to fulfil its promise to transfer the initial
software licence independent from its promise to subsequently provide the installation
service, software updates and the technical support.
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The following example from the standard also illustrates a contract for which a licence
of intellectual property is determined to be distinct from other promised goods or
services. [IFRS 15.IE281, IE285-IE288].
Example 28.73: Identifying a distinct licence (licence is distinct)
An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for
10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the
entity will not undertake any activities to support the drug, which is consistent with its customary business practices.
Case B – Licence is distinct
In this case, the manufacturing process used to produce the drug is not unique or specialised and several other
entities can also manufacture the drug for the customer.
The entity assesses the goods and services promised to the customer to determine which goods and services are
distinct, and it concludes that the criteria in paragraph 27 of IFRS 15 are met for each of the licence and the
manufacturing service. The entity concludes that the criterion in paragraph 27(a) of IFRS 15 is met because the
customer can benefit from the licence together with readily available resources other than the entity’s
manufacturing service (because there are other entities that can provide the manufacturing
service), and can benefit
from the manufacturing service together with the licence transferred to the customer at the start of the contract.
The entity also concludes that its promises to grant the licence and to provide the manufacturing service are
separately identifiable (i.e. the criterion in paragraph 27(b) of IFRS 15 is met). The entity concludes that the
licence and the manufacturing service are not inputs to a combined item in this contract on the basis of the
principle and the factors in paragraph 29 of IFRS 15. In reaching this conclusion, the entity considers that the
customer could separately purchase the licence without significantly affecting its ability to benefit from the
licence. Neither the licence, nor the manufacturing service, is significantly modified or customised by the
other and the entity is not providing a significant service of integrating those items into a combined output.
The entity further considers that the licence and the manufacturing service are not highly interdependent or
highly interrelated because the entity would be able to fulfil its promise to transfer the licence independently
of fulfilling its promise to subsequently manufacture the drug for the customer. Similarly, the entity would
be able to manufacture the drug for the customer even if the customer had previously obtained the licence
and initially utilised a different manufacturer. Thus, although the manufacturing service necessarily depends
on the licence in this contract (i.e. the entity would not provide the manufacturing service without the
customer having obtained the licence), the licence and the manufacturing service do not significantly affect
each other. Consequently, the entity concludes that its promises to grant the licence and to provide the
manufacturing service are distinct and that there are two performance obligations:
(a) licence of patent rights; and
(b) manufacturing
service.
The entity assesses, in accordance with paragraph B58 of IFRS 15, the nature of the entity’s promise to grant
the licence. The drug is a mature product (i.e. it has been approved, is currently being manufactured and has
been sold commercially for the last several years). For these types of mature products, the entity’s customary
business practices are not to undertake any activities to support the drug. The drug compound has significant
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 442
