Under IFRS 15, determining whether a company’s promise to grant a license provides a customer with either a right to access IP or a right to use IP depends on whether a customer can direct the use of, and obtain substantially all of the remaining benefits from, a license at the point in time at which the license is granted.
The nature of a company’s promise in granting a license is a promise to provide a right to access IP if all of the following criteria are met:
- the contract requires, or the customer reasonably expects, that the company will undertake activities that significantly affect the intellectual property to which the customer has rights;
- the rights granted by the license directly expose the customer to any positive or negative effects of the company’s activities; and
- those activities do not result in the transfer of a good or a service to the customer as those activities occur
All other licenses are treated as a right to use. Revenue from licenses entertainment and media industry
Many licenses within the entertainment and media industry (E&M industry) include provisions that specify the licensee’s rights with respect to the use of the IP (e.g., use for a specified term or in a specified geography). IFRS 15 requires companies to distinguish between:
- contractual provisions that define the attributes of a license of IP, and
- provisions that represent additional promised goods or services to the customer.
Contractual provisions that are attributes of a single promised license define the scope of a customer’s rights to IP and do not affect the number of performance obligations or whether a performance obligation is satisfied at a point in time or over time. Revenue from licenses entertainment and media industry
A company must first establish whether a license is distinct from other goods and services in the arrangement before determining the pattern of revenue recognition for the license. In some cases, the identification of distinct licenses may be challenging, especially when trying to differentiate between contractual provisions that
- define the attributes of a single promised license, and
- those that transfer control of additional rights to the customer.
Under IFRS, the determination of whether a promise to grant a license provides a right to access IP or a right to use IP is based on whether the IP is significantly affected by the company’s activities.
Revenue related to certain types of licenses may be accelerated, whereas others could be deferred compared to the current treatment. For example, licenses of symbolic IP such as franchise rights, which may have been recognized at a point in time under existing guidance, will now be recognized over time. Further, functional IP related to software and media content may now be recognized at a point in time.
Media and information-based software
Content licensing arrangements for the publishing sub-sector
Data files with periodic updates
Completed media content including:
Example: License of a sports team brand Revenue from licenses entertainment and media industry
The case: Licensor licenses the brand name of a defunct sports team (e.g., Brooklyn Dodgers) to use in its production of memorabilia.
What is the nature of the brand name license?
Analysis: The license is symbolic IP. The licensed IP (the brand name) is symbolic because it has no stand alone functionality (e.g., the brand name cannot process a transaction, perform a function or task). As a result, revenue would be recognized over time. However, under IFRS, the licensor may recognize revenue at a point in time if the licensor will no longer undertake activities that significantly affect the IP (i.e., the brand name).