Contractual restrictions in license arrangements

Many licenses within the entertainment and media industry (E&M industry) include contractual provisions that restrict the licensee’s use of the IP. For example, a license to a film for a two-year period may contain a contractual provision that prohibits the licensee from running the film more than five times over that two-year period. Judgment is required in determining whether contractual restrictions of time, geography, or use:

  1. affect the number of promised goods or services in a contract; or
  2. define attributes of a single promised license.

Contractual restrictions in license arrangements

IFRS 15 requires a company to determine whether the additional rights are an attribute of the license and if not, to apply the guidance for identifying performance obligations. Significant judgment will be required to assess whether a contractual provision in a license creates an obligation to transfer multiple licenses (and therefore separate performance obligations) or whether the provision is a restriction that represents an attribute of a single license.

The following examples illustrate the impact of restrictions in a license to IP. Contractual restrictions in license arrangements

Example: Contractual restrictions in license arrangements – restrictions are an attribute of the license

The case: A studio licenses rights that permit a cable channel to exhibit a film up to five times during a two-year term.

What is the impact of the contractual provisions that restrict the use of IP in this arrangement?

Analysis: Since the licensor transfers control of all the licensed rights at inception, the contractual restrictions in this arrangement are considered attributes of the license. Such restrictions are not indicative of multiple performance obligations.

In contrast, if the studio licensed five separate films to be exhibited over the same two-year period, but the films were not all available at inception, the transfer of the rights to each film would likely be separate performance obligations.

A company would need to evaluate each performance obligation separately to assess the timing of recognition. License revenue should not be recognized until the licensee can benefit from the rights that have been transferred.

Example: Contractual restrictions in license arrangements – distinguishing multiple licenses from attributes of a single license

Facts: Producer licenses to Cable Co. the right to broadcast a television series domestically for years 1-3 (January 1, 20X0- December 31, 20X2) for an upfront license fee. For years 4 and 5 (January 1, 20X3- December 31, 20X4), Cable Co. is provided with the right to broadcast the television series internationally.

What is the impact of the contractual provisions that restrict the use of IP in this arrangement?

Analysis: Producer determines, based on analyzing the specific provisions of the arrangement, its promise is to deliver multiple licenses, including a domestic license and an international license, as the arrangement requires Producer to transfer control of additional rights (right to broadcast internationally) to Cable Co. at the beginning of year 4.

Producer should allocate the transaction price (i.e., the upfront fee) to the two separate performance obligations because it has concluded that there are two distinct licenses. The allocation should be based on relative stand alone selling prices, and revenue should be recognized when the customer has the ability to use and benefit from its right to use the IP. The revenue allocated to the license to use the IP domestically would be recognized on January 1, 20X0.

The revenue allocated to the license to use the IP internationally would be recognized on January 1, 20X3.

The television series represents functional IP. Each license would be recognized at a point in time assuming Producer does not undertake activities that significantly affect the IP.

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