to provide future updates are separate performance obligations. If they are separate, when
the entity considers whether it has a contractual (explicit or implicit) obligation to undertake
activities to change the software during the licence period, it excludes any changes and
activities associated with the performance obligation to provide future upgrades.
While the activities considered in this assessment do not include those that are a
performance obligation, these activities can be part of an entity’s ongoing ordinary
activities and customary business practices (i.e. they do not have to be activities the
entity is undertaking specifically as a result of the contract with the customer). In
addition, the IASB noted, in the Basis for Conclusions, that the existence of a shared
economic interest between the parties (e.g. sales-based or usage-based royalties) may
be an indicator that the customer has a reasonable expectation that the entity will
undertake such activities. [IFRS 15.BC413].
After an entity has identified the activities for this assessment, it must determine if those
activities significantly affect the intellectual property to which the customer has rights.
The standard clarifies that such activities significantly affect the intellectual property if
they: [IFRS 15.B59A]
• significantly change the form (e.g. design or content) or functionality (e.g. the ability
to perform a function or task) of the intellectual property; or
• affect the ability of the customer to obtain benefit from the intellectual property
(e.g. the benefit from a brand is often derived from, or dependent upon, the entity’s
ongoing activities that support or maintain the value of the intellectual property).
If the intellectual property has significant stand-alone functionality, the standard clarifies
that the customer derives a substantial portion of the benefit of that intellectual property
from that functionality. As such, ‘the ability of the customer to obtain benefit from that
intellectual property would not be significantly affected by the entity’s activities unless
those activities significantly change its form or functionality.’ Therefore, if the intellectual
property has significant stand-alone functionality, revenue is recognised at a point in time.
Examples of types of intellectual property that may have significant stand-alone
functionality that are mentioned in the standard include software, biological compounds
or drug formulas, and completed media content. [IFRS 15.B59A].
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The IASB has not defined the term ‘significant stand-alone functionality’, but has made
clarifications to the examples in the standard to illustrate when the intellectual property
to which the customer has rights may have significant stand-alone functionality. In some
cases, it will be clear when intellectual property has significant stand-alone
functionality. If there is no significant stand-alone functionality, the benefit to the
customer might be substantially derived from the value of the intellectual property and
the entity’s activities to support or maintain that value. The IASB noted, however, that
an entity may need to apply judgement to determine whether the intellectual property
to which the customer has rights has significant stand-alone functionality. [IFRS 15.BC414I].
It is important for entities that provide licences of intellectual property to their customers
to appropriately identify the performance obligations as part of Step 2 of the model
because those conclusions may directly affect their evaluation of whether the entity’s
activities significantly change the form or functionality of the intellectual property or
affect the ability of the customer to obtain benefit from the intellectual property.
Unlike IFRS 15, the FASB’s standard requires entities to classify intellectual property in
one of two categories to determine the nature of the entity’s promise in granting a
licence as detailed below:
• Functional: This intellectual property has significant stand-alone functionality (e.g.
many types of software, completed media content such as films, television shows
and music). Revenue for these licences is recognised at the point in time when the
intellectual property is made available for the customer’s use and benefit if the
functionality is not expected to change substantively as a result of the licensor’s
ongoing activities that do not transfer another good or service to the customer. If
the functionality of the intellectual property is expected to substantively change
because of the activities of the licensor that do not transfer promised goods or
services and the customer is contractually or practically required to use the latest
version of the intellectual property, revenue for the licence is recognised over
time. The FASB noted in its Basis for Conclusions on ASU 2016-10 that it expects
entities to meet the criteria to recognise licences of functional intellectual property
over time infrequently, if at all.
• Symbolic: This intellectual property does not have significant stand-alone
functionality (e.g. brands, team and trade names, character images). The utility of
symbolic intellectual property is derived from the licensor’s ongoing or past
activities (e.g. activities that support the value of character images licensed from
an animated film). Revenue from these licences is recognised over time as the
performance obligation is satisfied (e.g. over the licence period).
The IASB and FASB agreed that their approaches will generally result in consistent
answers, but the Boards acknowledged that different outcomes may arise due to the
different approaches when entities license brand names that no longer have any related
ongoing activities (e.g. the licence to the brand name of a defunct sports team, such as
the Brooklyn Dodgers). Under the FASB’s approach, a licence of a brand name would
be classified as symbolic intellectual property and revenue would be recognised over
time, regardless of whether there are any related ongoing activities. Under the IASB’s
approach, revenue is recognised at a point in time if there are no ongoing activities that
significantly affect the intellectual property. [IFRS 15.BC414K, BC414N].
2232 Chapter 28
9.2.1
Applying the licensing application guidance to a single (bundled)
performance obligation that includes a licence of intellectual property
IFRS 15 does not explicitly state that an entity needs to consider the nature of its
promise in granting a licence when applying the general revenue recognition model to
performance obligations that are comprised of both a licence (that is not distinct) and
other goods or services. However, the Board clarified in the Basis for Conclusions that
to the extent that an entity is required to combine a licence with other promised goods
or services in a single performance obligation and the licence is the primary or dominant
component (i.e. the predominant item) of that performance obligation, the entity needs
to consider the licensing application guidance to help determine the nature of its
promise to the customer. [IFRS 15.BC407].
If the licence is a predominant item of a single performance obligation, entities need to
consider the licensing application guidance when:
• determining whether the performance obligation is satisfied over time or at a point
in time; and
• selecting an appropriate method for measuring progress of that performance
obligation if it is satisfied over time.
Considering the nature of an entity’s promise in granting a licence that is part of a single
combined performance obligation is not a separate step or evaluation in the revenue
model. Rather, it is part of the overall requirements in Step 5 of the model to determine
whether that single performance obligation is satisfied over time or at a point in time and
the appropriate measure of progress toward the satisfaction, if it is satisfied over time.
The Board did not provide application guidance or bright lines for determining when a
licence is the primary or dominant (i.e. the predominant) component. However, the
IASB explained in the Basis for Conclusions that, in some instances, not considering the
nature of the entity’s promise in granting a licence that is combined with other promised
goods or services in a single performance obligation would result in accounting that does
not best reflect the entity’s performance. For example, consider a situation where an
entity grants a 10-year licence that is not distinct from a one-year service arrangement.
The IASB noted that a distinct licence that provides access to an entity’s intellectual
property over a 10-year period could not be considered completely satisfied before the
end of the access period. The IASB observed in that example that it is, therefore,
inappropriate to conclude that a single performance obligation that includes that licence
is satisfied over the one-year period of the service arrangement. [IFRS 15.BC414X].
The standard includes examples that illustrate how an entity applies the licensing
application guidance to help determine the nature of a performance obligation that
includes a licence of intellectual property and other promised goods or services.
In Example 28.74 below an entity licences the patent rights for an approved drug
compound to its customer and also promises to manufacture the drug for the customer.
The entity considers that no other entity can perform the manufacturing service because
of the highly specialised nature of the manufacturing process. Therefore, the licence
cannot be purchased separately from the manufacturing service and the customer cannot
benefit from the licence on its own or with other readily available resources (i.e. the
licence and the manufacturing service are not capable of being distinct). Accordingly, the
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entity’s promises to grant the licence and to manufacture the drug are accounted for as a
single performance obligation, as follows. [IFRS 15.IE281-IE284].
Example 28.74: Identifying a distinct licence (licence is not 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 A – Licence is not distinct
In this case, no other entity can manufacture this drug because of the highly specialised nature of the
manufacturing process. As a result, the licence cannot be purchased separately from the manufacturing services.
The entity assesses the goods and services promised to the customer to determine which goods and services
are distinct in accordance with paragraph 27 of IFRS 15. The entity determines that the customer cannot
benefit from the licence without the manufacturing service; therefore, the criterion in paragraph 27(a) of
IFRS 15 is not met. Consequently, the licence and the manufacturing service are not distinct and the entity
accounts for the licence and the manufacturing service as a single performance obligation.
The entity applies paragraphs 31–38 of IFRS 15 to determine whether the performance obligation (i.e. the bundle
of the licence and the manufacturing services) is a performance obligation satisfied at a point in time or over time.
Example 28.74 above illustrates the importance of applying the licensing application
guidance when determining the nature of an entity’s promise in granting a licence that is
combined into a single performance obligation with other promised goods or services.
That is because the conclusion of whether a non-distinct licence provides the customer
with a right to use intellectual property or a right to access intellectual property may have
a significant effect on the timing of revenue recognition for the single combined
performance obligation. In Example 28.74, the entity needs to determine the nature of its
promise in granting the licence within the single performance obligation (comprising the
licence and the manufacturing service) to appropriately apply the general principle of
recognising revenue when (or as) it satisfies its performance obligation to the customer. If
the licence in this example provided a right to use the entity’s intellectual property that
on its own would be recognised at the point in time in which control of the licence is
transferred to the customer, it is likely that the combined performance obligation would
only be fully satisfied at the end of the fifth year, when the manufacturing service is
complete. In contrast, if the licence provided a right to access the entity’s intellectual
property, the combined performance obligation would not be fully satisfied until the end
of the 10-year licence period and it is likely this would extend the period of revenue
recognition beyond the date when the manufacturing service is complete.
ASC 606 explicitly states that an entity considers the nature of its promise in granting a
licence when applying the general revenue recognition model to a single performance
obligation that includes a licence and other goods or services (i.e. when applying the
general requirements, consistent with those in paragraphs 31-45 of IFRS 15, to assess
whether the performance obligations are satisfied at a point in time or over time).
Consequently, when the licence is not the predominant item in a single performance
obligation, this may result in a US GAAP preparer considering the nature of its promise
in granting a licence in a greater number of circumstances than an IFRS preparer.
[IFRS 15.BC414Y]. 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.
2234 Chapter 28
9.3
Transfer of control of licensed intellectual property
When determining whether a licence of intellectual property transfers to a customer
(and revenue is recognised) over time or at a point in time, the standard states that an
entity provides a customer with either:
• a right to access the entity’s intellectual property throughout the licence period for
which revenue is recognised over the licence period; or
• a right to use the entity’s intellectual property as it exists at the point in time the
licence is granted, for which revenue is re
cognised at the point in time, the
customer can first use and benefit from the licensed intellectual property.
On the timing of revenue recognition for right-to-access and right-to-use licences, the
standard states that, if the criteria in paragraph B58 of IFRS 15 are met, ‘an entity shall
account for the promise to grant a licence as a performance obligation satisfied over
time because the customer will simultaneously receive and consume the benefit from
the entity’s performance of providing access to its intellectual property as the
performance occurs (see paragraph 35(a)). An entity shall apply paragraphs 39–45 to
select an appropriate method to measure its progress towards complete satisfaction of
that performance obligation to provide access.’ [IFRS 15.B60].
If, instead, the criteria in paragraph B58 of IFRS 15 are not met, the standard explains
that ‘the nature of an entity’s promise is to provide a right to use the entity’s intellectual
property as that intellectual property exists (in terms of form and functionality) at the
point in time at which the licence is granted to the customer.’ As a result, the customer
will be able to direct the use of, and obtain substantially all of the remaining benefits
from, the licence at the point in time at which the licence transfers. Therefore, an entity
is required to account for the promise to provide a right to use the entity’s intellectual
property as a performance obligation satisfied at a point in time. [IFRS 15.B61].
An entity applies paragraph 38 of IFRS 15 to determine the point in time at which the
licence transfers to the customer. However, ‘revenue cannot be recognised for a licence
that provides a right to use the entity’s intellectual property before the beginning of the
period during which the customer is able to use and benefit from the licence. For
example, if a software licence period begins before an entity provides (or otherwise
makes available) to the customer a code that enables the customer to immediately use
the software, the entity would not recognise revenue before that code has been
provided (or otherwise made available).’ [IFRS 15.B61].
9.3.1
Right to access
The Board concluded that a licence that provides an entity with the right to access
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 444
