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intellectual property is satisfied over time ‘because the customer simultaneously
receives and consumes the benefit from the entity’s performance as the performance
occurs’, including the related activities undertaken by entity. [IFRS 15.B60, BC414]. This
conclusion is based on the determination that when a licence is subject to change (and
the customer is exposed to the positive or negative effects of that change), the customer
is not able to fully gain control over the licence of intellectual property at any given
point in time, but rather gains control over the licence period. Entities need to apply the
general requirements in paragraphs 39-45 of IFRS 15 to determine the appropriate
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method to measure progress (see 8.2 above), in addition to paragraph B61 of IFRS 15
(i.e. the use and benefit requirement), discussed in 9.3.3 below.
The standard includes the following example of a right-to-access licence.
[IFRS 15.IE297-IE302].
Example 28.75: Access to intellectual property
An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in
three of its comic strips to a customer for a four-year term. There are main characters involved in each of the
comic strips. However, newly created characters appear regularly and the images of the characters evolve
over time. The customer, an operator of cruise ships, can use the entity’s characters in various ways, such as
in shows or parades, within reasonable guidelines. The contract requires the customer to use the latest images
of the characters.
In exchange for granting the licence, the entity receives a fixed payment of CU1 million in each year of the
four-year term.
In accordance with paragraph 27 of IFRS 15, the entity assesses the goods and services promised to the
customer to determine which goods and services are distinct. The entity concludes that it has no other
performance obligations other than the promise to grant a licence. That is, the additional activities associated
with the licence do not directly transfer a good or service to the customer because they are part of the entity’s
promise to grant a licence.
The entity assesses the nature of the entity’s promise to transfer the licence in accordance with paragraph B58
of IFRS 15. In assessing the criteria the entity considers the following:
(a) the customer reasonably expects (arising from the entity’s customary business practices) that the entity will
undertake activities that will significantly affect the intellectual property to which the customer has rights
(i.e. the characters). This is because the entity’s activities (i.e. development of the characters) change the
form of the intellectual property to which the customer has rights. In addition, the ability of the customer to
obtain benefit from the intellectual property to which the customer has rights is substantially derived from,
or dependent upon, the entity’s ongoing activities (i.e. the publishing of the comic strip);
(b) the rights granted by the licence directly expose the customer to any positive or negative effects of the
entity’s activities because the contract requires the customer to use the latest characters; and
(c) even though the customer may benefit from those activities through the rights granted by the licence,
they do not transfer a good or service to the customer as those activities occur.
Consequently, the entity concludes that the criteria in paragraph B58 of IFRS 15 are met and that the nature
of the entity’s promise to transfer the licence is to provide the customer with access to the entity’s intellectual
property as it exists throughout the licence period. Consequently, the entity accounts for the promised licence
as a performance obligation satisfied over time (i.e. the criterion in paragraph 35(a) of IFRS 15 is met).
The entity applies paragraphs 39-45 of IFRS 15 to identify the method that best depicts its performance in
the licence. Because the contract provides the customer with unlimited use of the licensed characters for a
fixed term, the entity determines that a time-based method would be the most appropriate measure of progress
towards complete satisfaction of the performance obligation.
9.3.1.A
Is a licence that provides a right to access intellectual property a series of
distinct goods or services that would be accounted for as a single
performance obligation?
Step 2 of the model requires an entity to identify the performance obligations in a
contract. This includes determining whether multiple distinct goods or services would
be accounted for as a single performance obligation under the series requirement
(see 5.2.2 above). It is likely that many licences that provide a right to access intellectual
property may be a series of distinct goods or services that are substantially the same and
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have the same pattern of transfer to the customer (e.g. a series of distinct periods of
access to intellectual property, such as monthly access or quarterly access).
A TRG agenda paper included an example of a licence that provides a right to access
intellectual property that is accounted for as a series of distinct goods or services.121 In
the example, a franchisor grants a licence of intellectual property to a franchisee
allowing the franchisee to use its trade name and sell its product for a period of 10 years.
As discussed in 5.2.2.C, if the nature of an entity’s promise is to provide a single service
for a period of time, the evaluation of whether goods or services are distinct and
substantially the same considers whether each time increment of access to the
intellectual property (e.g. hour, day) is distinct and substantially the same. In this
example, the nature of the franchisor’s promise is to provide a right to access the
intellectual property throughout the licence period. Each time increment is distinct
because the customer benefits from the right to access each day on its own (i.e. each
time increment is capable of being distinct). In addition, each day is separately
identifiable (i.e. each time increment is distinct in the context of the contract) because:
there is no integration service provided between the days of access provided; no day
modifies or customises another; and the days of access are not highly interdependent
or highly interrelated. In addition, each distinct daily service is substantially the same
because the customer receives access to the intellectual property each day.
If a licence meets the criteria to be accounted for as a series of distinct goods or services,
an entity needs to consider whether any variable consideration in the contract
(e.g. royalties, milestone payments) should be allocated to the distinct periods of access,
if certain allocation criteria are met. See 7.3 above for a discussion of the variable
consideration allocation exception and 9.5 below for a discussion of the accounting for
sales-based or usage-based royalties.
9.3.2
Right to use
In contrast, when the licence represents a right to use the intellectual property as it
exists at a specific point in time, the customer gains control over that intellectual
property at the beginning of the period for which it has the right to use the intellectual
property. [IFRS 15.B61]. This timing may
differ from when the licence was granted. For
example, an entity may provide a customer with the right to use intellectual property,
but indicate that right to use does not start until 30 days after the agreement is finalised.
For the purpose of determining when control transfers for the right-to-use licence, the
Board was clear that the assessment is from the customer’s perspective (i.e. when the
customer can use the licensed intellectual property), rather than the entity’s perspective
(i.e. when the entity transfers the licence). Entities need to apply the general
requirements in paragraph 38 of IFRS 15 to determine the point in time that control of
the licence transfers to the customer (see 8.3 above) in addition to paragraph B61 of
IFRS 15 (i.e. the use and benefit requirement), discussed in 9.3.3 below.
The standard includes the following example of a right-to-use licence. [IFRS 15.IE303-IE306].
Example 28.76: Right to use intellectual property
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted
orchestra. The customer, a consumer products company, has the right to use the recorded symphony in all
commercials, including television, radio and online advertisements for two years in Country A. In exchange
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for providing the licence, the entity receives fixed consideration of CU10,000 per month. The contract does
not include any other goods or services to be provided by the entity. The contract is non-cancellable.
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 concludes that its only performance
obligation is to grant the licence. The entity determines that the term of the licence (two years), its
geographical scope (the customer’s right to use the recording only in Country A), and the defined permitted
use for the recording (in commercials) are all attributes of the promised licence in the contract.
In accordance with paragraph B58 of IFRS 15, the entity assesses the nature of the entity’s promise to grant
the licence. The entity does not have any contractual or implied obligations to change the licensed recording.
The licensed recording has significant stand-alone functionality (i.e. the ability to be played) and, therefore,
the ability of the customer to obtain the benefits of the recording is not substantially derived from the entity’s
ongoing activities. The entity therefore determines that the contract does not require, and the customer does
not reasonably expect, the entity to undertake activities that significantly affect the licensed recording (i.e. the
criterion in paragraph B58(a) is not met). Consequently, the entity concludes that the nature of its promise in
transferring the licence is to provide the customer with a right to use the entity’s intellectual property as it
exists at the point in time that it is granted. Therefore, the promise to grant the licence is a performance
obligation satisfied at a point in time. The entity recognises all of the revenue at the point in time when the
customer can direct the use of, and obtain substantially all of the remaining benefits from, the licensed
intellectual property.
Because of the length of time between the entity’s performance (at the beginning of the period) and the
customer’s monthly payments over two years (which are non-cancellable), the entity considers the
requirements in paragraphs 60-65 of IFRS 15 to determine whether a significant financing component exists.
9.3.3
Use and benefit requirement
IFRS 15 states that revenue from a right-to-use licence cannot be recognised before the
beginning of the period during which ‘the customer is able to use and benefit from the
licence’. [IFRS 15.B61]. The IASB explained in the Basis for Conclusions that if the
customer cannot use and benefit from the licensed intellectual property then, by
definition, it does not control the licence. [IFRS 15.BC414]. See 9.4 below for discussion on
licence renewals.
Consider an example where an entity provides a customer with a right to use its
software, but the customer requires a code before the software will function, which the
entity will not provide until 30 days after the agreement is finalised. In this example, it
is likely that the entity would conclude that control of the licence does not transfer until
30 days after the agreement is finalised because that is when the customer has the right
to use and can benefit from the software.
9.4 Licence
renewals
As discussed at 9.3.3 above, IFRS 15 states that 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. [IFRS 15.B61].
Some stakeholders questioned whether paragraph B61 of IFRS 15 applies to the renewal
of an existing licence or whether the entity could recognise revenue for the renewal when
the parties agree to the renewal. Therefore, the TRG discussed the application of
paragraph B61 of IFRS 15 within the context of renewals or extensions of existing licences.
[IFRS 15.BC414S]. The discussion at the TRG indicated that this is an area in which judgement
is needed and, therefore, this topic was further discussed by the IASB.122
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The IASB decided that a clarification about the application of the contract modification
requirements specifically for renewals of licensing arrangements was not necessary. The
Board noted that, although some diversity may arise, IFRS 15 provides a more extensive
framework for applying judgement than IAS 18. In addition, in making its decision, the
Board also considered the wider implications of amending IFRS 15 before its effective date.
Therefore, when an entity and a customer enter into a contract to renew (or extend the
period of) an existing licence, the entity needs to evaluate whether the renewal or
extension should be treated as a new licence or as a modification of the existing
contract. A modification would be accounted for in accordance with the contract
modifications requirements in paragraphs 18-21 of IFRS 15. [IFRS 15.BC414T].
Under ASC 606, revenue related to the renewal of a licence of intellectual property may
not be recognised earlier than the beginning of the renewal period. This is the case even
if the entity provides a copy of the intellectual property in advance or the customer has
a copy of the intellectual property from another transaction. The FASB also provided
an additional example to illustrate this point.
IFRS 15 does not include similar requirements. Therefore, the IASB noted in the Basis
for Conclusions that entities that report under IFRS might recognise revenue for
contract renewals or extensions earlier than those that report under US GAAP.
[IFRS 15.BC414U].
9.5
Sales-based or usage-based royalties on licences of intellectual
property
The standard provides application guidance on the recognition of revenue for sales-
based or usage-based royalties on licences of intellectual property, which differs from
the requirements that apply to other revenue from licences. IFRS 15 requires that sales-
based or usage-based r
oyalties received in exchange for licences of intellectual property
are recognised at the later of when: [IFRS 15.B63]
(1) the subsequent sale or usage occurs; and
(2) the performance obligation to which some or all of the sales-based or usage-based
royalty has been allocated is satisfied (or partially satisfied).
That is, an entity recognises the royalties as revenue for such arrangements when (or as)
the customer’s subsequent sales or usage occurs, unless that pattern of recognition
accelerates revenue recognition ahead of the entity’s satisfaction of the performance
obligation to which the royalty solely or partially relates, based on an appropriate
measure of progress (see 8.2 above). [IFRS 15.BC421I].
The Board explained in the Basis for Conclusions that for a licence of intellectual
property for which the consideration is based on the customer’s subsequent sales or
usage, an entity does not recognise any revenue for the variable amounts until the
uncertainty is resolved (i.e. when a customer’s subsequent sales or usage occurs).
[IFRS 15.BC219].
The IASB also explained in the Basis for Conclusions that the application guidance in
paragraphs B63-B63B of IFRS 15 addresses the recognition of sales-based or usage-
based royalties received in exchange for a licence of intellectual property, rather than
when such amounts are included in the transaction price of the contract. [IFRS 15.BC421I].
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As a result, this exception is a recognition constraint and the constraint on variable
consideration (see 6.2.3 above) does not apply.
The Board explained that it added the royalty recognition constraint because both users
and preparers of financial statements indicated that it would not be useful for entities to
recognise a minimum amount of revenue for sales-based or usage-based royalties
received in exchange for licences of intellectual property (following the requirements
in the general model on estimating the transaction price), because that approach would
inevitably require the entity to report significant adjustments to the amount of revenue
recognised throughout the life of the contract as a result of changes in circumstances
that are not related to the entity’s performance. The Board observed that this would not