stand-alone functionality (i.e. its ability to produce a drug that treats a disease or condition). Consequently,
the customer obtains a substantial portion of the benefits of the drug compound from that functionality, rather
than from the entity’s ongoing activities. The entity concludes that the criteria in paragraph B58 of IFRS 15
are not met because the contract does not require, and the customer does not reasonably expect, the entity to
undertake activities that significantly affect the intellectual property to which the customer has rights. In its
assessment of the criteria in paragraph B58 of IFRS 15, the entity does not take into consideration the separate
performance obligation of promising to provide a manufacturing service. Consequently, the nature of the
entity’s promise in transferring the licence is to provide a right to use the entity’s intellectual property in the
form and the functionality with which it exists at the point in time that it is granted to the customer.
Consequently, the entity accounts for the licence as a performance obligation satisfied at a point in time.
The entity applies paragraphs 31-38 of IFRS 15 to determine whether the manufacturing service is a
performance obligation satisfied at a point in time or over time.
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9.1.2
Licences of intellectual property that are not distinct
The licences of intellectual property included in the examples above were determined
to be distinct, as they met the two criteria of paragraph 27 of IFRS 15. In other situations,
a licence of intellectual property may not be distinct from other promised goods or
services in a contract, either because it is not capable of being distinct and/or it is not
separately identifiable.
Paragraph B54 of IFRS 15 requires that a licence that is not distinct from other promised
goods or services in a contract be combined into a single performance obligation. It also
identifies two examples of licences of intellectual property that are not distinct from
other goods or services, as follows: [IFRS 15.B54]
‘(a) a licence that forms a component of a tangible good and that is integral to the
functionality of the good; and
(b) a licence that the customer can benefit from only in conjunction with a related
service (such as an online service provided by the entity that enables, by granting
a licence, the customer to access content).’
In both examples, a customer only benefits from the combined output of the licence of
intellectual property and the related good or service. Therefore, the licence is not distinct
and would be combined with those other promised goods or services in the contract.
The standard includes other examples of licences of intellectual property that are not
distinct, which are combined with other promised goods or services because the
customer can only benefit from the licence in conjunction with a related service (as
described in paragraph B54(b) of IFRS 15). For example, Example 55 in IFRS 15 and
Example 56, Case A, in IFRS 15 (included as Example 28.74 at 9.2.1 below) illustrate
contracts that include licences of intellectual property that are not distinct from other
goods or services promised to the customer.
When an entity is required to bundle a licence of intellectual property with other
promised goods or services in a contract, it often needs to consider the licensing
application guidance to help determine the nature of its promise to the customer when
the licence is the predominant item in the combined performance obligation. See 9.2.1
below for further discussion on applying the licensing application guidance to such
performance obligations.
9.1.3 Contractual
restrictions
Some licences contain substantive contractual restrictions on how the customer may
employ a licence. Paragraph B62(a) of IFRS 15 explicitly states an entity must disregard
restrictions of time, geography or use when determining whether the promise to transfer
a licence is satisfied over time or at a point in time; such restrictions define the attributes
of the promised licence, rather than define whether the entity satisfies its performance
obligation at a point in time or over time. [IFRS 15.B62(a)].
While stakeholders acknowledged that paragraph B62 of IFRS 15 is clear that
restrictions of time, geographical region or use do not affect the licensor’s determination
about whether the promise to transfer a licence is satisfied over time or at a point in
time, some stakeholders thought that the standard was unclear about whether particular
types of contractual restrictions would affect the identification of the promised goods
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or services in the contract. For example, an arrangement might grant a customer a
licence to a well-known television programme or movie for a period of time (e.g. three
years), but the customer might be restricted in how often it can show that licensed
content to only once per year during each of those three years. In this instance,
stakeholders thought that it may be unclear whether contractual restrictions affect the
entity’s identification of its promises in the contract (i.e. do the airing restrictions affect
whether the entity has granted one licence or three licences?). [IFRS 15.BC414O].
In considering this issue further, the IASB explained that contracts that include a
promise to grant a licence to a customer require an assessment of the promises in the
contract using the criteria for identifying performance obligations, as is the case with
other contracts. [IFRS 15.BC405-BC406]. This assessment is done before applying the criteria
to determine the nature of an entity’s promise in granting a licence. [IFRS 15.BC414P].
In the Basis for Conclusions, the IASB further explained that they considered Example 59 in
IFRS 15 (see Example 28.76 at 9.3.2 below) in the context of this issue. The entity concludes
that its only performance obligation is to grant the customer a right to use the music
recording. When, where and how the right can be used is defined by the attributes of time
(i.e. two years), geographical scope (i.e. Country A) and permitted use (i.e. in commercials). If,
instead, the entity had granted the customer rights to use the recording for two different time
periods in two geographical locations, for example, years X1-X3 in Country A and years
X2-X4 in Country B, the entity would need to use the criteria for identifying performance
obligations in paragraphs 27-30 of IFRS 15 to determine whether the contract included one
licence that covers both countries or separate licences for each country. [IFRS 15.BC414Q].
Consequently, the entity considers all of the contractual terms to determine whether the
promised rights result in the transfer to the customer of one or more licences. In making this
determination, judgement is needed to distinguish between contractual provisions that create
promises to transfer rights to use the entity’s intellectual property from contractual provisions
that establish when, where and how those rights may be used. Therefore, in the Board’s view,
the clarifications made to the requirements on identifying performance obligations in
paragraphs 22-30 of IFRS 15 provide sufficient guidance to entities. [IFRS 15.BC414P].
We believe a critical part of the evaluation of co
ntractual restrictions is whether the lifting
of a restriction at a future date requires an entity to grant additional rights to the customer
at that future date in order to fulfil its promises under the contract. The presence of a
requirement to grant additional rights to the customer indicates that there may be multiple
performance obligations that need to be accounted for under Step 2 of the model.
Entities may need to use significant judgement to distinguish between a single promised
licence with multiple attributes and a licence that contains multiple promises to the
customer that may be separate performance obligations.
ASC 606 requires that entities distinguish between contractual provisions that define the
attributes of a single promised licence (e.g. restrictions of time, geography or use) and
contractual provisions that require them to transfer additional goods or services to customers
(e.g. additional rights to use or access intellectual property). Contractual provisions that are
attributes of a promised licence define the scope of a customer’s rights to intellectual
property and do not affect whether a performance obligation is satisfied at a point in time or
over time. Nor do they affect the number of performance obligations in the contract.
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The IASB decided not to clarify the requirements for identifying performance
obligations in a contract containing one or more licences since it had clarified the
general requirements for identifying performance obligations. [IFRS 15.BC414P].
As a result, ASC 606 includes guidance on contractual restrictions that differs from the
requirements in IFRS 15. However, the IASB noted in the Basis for Conclusions that,
consistent with the ASC 606, an entity needs to apply the requirements in Step 2 of the
general model on identifying performance obligations when distinguishing between
contractual provisions that create promises to transfer additional rights from those that
are merely attributes of a licence that establish when, where and how the right may be
used. [IFRS 15.BC414P]. Under both IFRS 15 and ASC 606, an entity may need to apply
significant judgement to distinguish between a single promised licence with multiple
attributes and a licence that contains multiple promises to the customer that may be
separate performance obligations.
9.1.4
Guarantees to defend or maintain a patent
IFRS 15 states that a guarantee provided by an entity that it has a valid patent to intellectual
property and that it will defend or maintain a patent does not represent a performance
obligation in a licensing contract. This is because ‘the act of defending a patent protects the
value of the entity’s intellectual property assets and provides assurance to the customer
that the licence transferred meets the specifications of the licence promised in the
contract’. Furthermore, this type of guarantee does not affect the licensor’s determination
as to whether the licence provides a right to access intellectual property (satisfied over
time) or a right to use intellectual property (satisfied at a point in time). [IFRS 15.B62(b)].
It is not unusual for intellectual property arrangements to include a clause that requires a
licensor to defend and maintain related patents. While patent defence and maintenance
is a continuing obligation, it is an obligation to ensure the licensee can continue to use the
intellectual property as intended, and, as discussed above, is not a promised good or
service under IFRS 15 that should be evaluated under Step 2. However, if there are
questions regarding the validity of a patent at the time a licence arrangement is entered
into, licensors need to consider whether that component of the arrangement meets the
attributes to be considered a contract within the scope of the model (see 4.1 above).
Furthermore, as discussed above, because such a provision is to ensure that the licensee
can continue to use the intellectual property as intended, it is similar to an assurance-
type warranty discussed in 10.1 (i.e. a warranty that promises the customer that the
delivered product is as specified in the contract). Assurance-type warranties are not
within the scope of IFRS 15 and, as stated in paragraph B30 of IFRS 15, would be
accounted for in accordance with the requirements for product warranties in IAS 37.
9.1.5
Implementation questions on identifying performance obligations in
a licensing arrangement
9.1.5.A
Accounting for modifications to licences of intellectual property
A licence provides a customer with a right to use or a right to access the intellectual property
of an entity. The terms of each licence of intellectual property are defined by the contract,
which establishes the customer’s rights (e.g. period of time, area of use). We believe that when
a contract that only includes a licence of intellectual property is modified, the additional
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and/or modified licence of intellectual property is distinct from the original licence because
the new and/or modified rights will always differ from those conveyed by the original licence.
The standard contains requirements on accounting for contract modification (see 4.4
above) and requires that a modification in which the additional promised goods or
services are distinct be accounted for on a prospective basis, as follows:
• the modification is accounted for as a separate contract if the additional
consideration from the modification reflects the new licence’s stand-alone selling
price in accordance with paragraph 20(b) of IFRS 15; and
• if the additional consideration does not reflect the stand-alone selling price of the
new licence, the modification is accounted for in accordance with paragraph 21(a)
of IFRS 15.
For a modification accounted for as a termination of the original contract and creation
of a new contract in accordance with paragraph 21(a) of IFRS 15, any revenue
recognised to date under the original contract is not adjusted. At the date of the
modification, the remaining unrecognised transaction price from the original contract
(if any) and the additional transaction price from the new contract are allocated to the
remaining performance obligation(s) in the new contract. Any revenue allocated to a
performance obligation created at the modification date for the renewal or extension of
a licence would be recognised when (or as) that performance obligation is satisfied,
which may not be until the beginning of the renewal or extension period (see 9.4 below).
9.2
Determining the nature of the entity’s promise in granting a licence
Entities need to evaluate the nature of a 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. In order to help entities in determining
whether a licence provides a customer with a right to access or a right to use the
intellectual property (which is important when determining the period of performance
and, therefore, the timing of revenue recognition – see 9.3 below), the Board provided
application guidance that clarifies that an entity’s promise is to provide a right to access
the entity’s intellectual prop
erty if all of the following criteria are met: [IFRS 15.B58]
(a) the contract requires, or the customer reasonably expects, that the entity will
undertake activities that significantly affect the intellectual property to which the
customer has rights;
(b) the rights granted by the licence directly expose the customer to any positive or
negative effects of the entity’s activities identified in (a); and
(c) those activities do not result in the transfer of a good or a service to the customer
as those activities occur.
The standard lists an entity’s customary business practices, published policies or specific
statements as factors that may indicate that a customer could reasonably expect that an
entity will undertake activities that significantly affect the intellectual property.
Although not determinative, the existence of a shared economic interest (that is related
to the intellectual property to which the customer has rights) between the entity and
the customer (e.g. a sales-based royalty) may also provide such an indication. [IFRS 15.B59].
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In providing this application guidance, the Board decided to focus on the characteristics
of a licence that provides a right to access the entity’s intellectual property. If the
licensed intellectual property does not have those characteristics, it provides a right to
use the entity’s intellectual property, by default. This analysis is focused on situations in
which the underlying intellectual property is subject to change over the licence period.
The key determinants of whether the nature of an entity’s promise is a right to access
the entity’s intellectual property are whether: (1) the entity is required to undertake
activities that affect the licensed intellectual property (or the customer has a reasonable
expectation that the entity will do so); and (2) the customer is exposed to positive or
negative effects resulting from those changes.
It is important to note that when an entity is making this assessment, it excludes the effect
of any other performance obligations in the contract. For example, if an entity enters into a
contract to license software and provide access to any future upgrades to that software
during the licence period, the entity first determines whether the licence and the promise
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 443
