Transfer of control licensed intellectual property

How to recognise revenue relating to IP under IFRS 15 or how to transfer of control licensed intellectual property?

Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The most well-known types are copyrights, patents, trademarks, and trade secrets. Early precursors to some types of intellectual property existed in societies such as Ancient Rome, but the modern concept of intellectual property developed in England in the 17th and 18th centuries. The term “intellectual property” began to be used in the 19th century, though it was not until the late 20th century that intellectual property became commonplace in the majority of the world’s legal systems.

Right to access / Right to use

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:

  • right to access the entity’s intellectual property

A right to access the entity’s intellectual property throughout the licence period for which revenue is recognised over the licence period

Or Transfer of control licensed intellectual property

  • A right to use the entity’s intellectual property

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 recognised at the point in time the customer can first use and benefit from the licensed intellectual property

The standard provides application guidance on the timing of revenue recognition for right-to-access and right-to-use licences in IFRS 15 B60 – B61. Transfer of control licensed intellectual property


Right to access

The Board concluded that a licence that provides an entity with the right to access intellectual property1 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 (as per IFRS 15 BC 414).

Licence subject to change

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.

General requirement

Entities need to apply the general requirements in IFRS 15 39 – 45 to determine the appropriate method to measure progress (see Measuring progress over time) in addition to IFRS 15 B61 (i.e., the use and benefit requirement), which is discussed below in ‘Use and benefit requirement‘. The standard includes Example 58 — Access to intellectual property (IFRS 15.IE297-IE302) of a right-to-access licence. Transfer of control licensed intellectual property


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. 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 Transfer of control licensed intellectual propertyindicate that right to use does not start until 30 days after the agreement is finalised.

Customer perspective

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 IFRS 15 38 to determine the point in time that control of the licence transfers to the customer (see Revenue recognition at a point in time) in addition to IFRS 15 B61 (i.e., the use and benefit requirement), which is discussed below. Transfer of control licensed intellectual property

The standard includes Example 59 — Right to use intellectual property (IFRS 15 IE303-IE306) of a right-to-use licence. Transfer of control licensed intellectual property


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 (as per IFRS 15 BC 414). See below for licence renewals. Transfer of control licensed intellectual property

Example Use and benefit requirement

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. Transfer of control licensed intellectual property


Licence renewals

As discussed in use and benefit requirement 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 IFRS 15 B61 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.

Judgement needed

Therefore, TRG discussed the application of IFRS 15 B61 within the context of renewals or extensions of existing licences (IFRS BC 414S). 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 2.


IASB Clarification

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 has also considered the wider implications of amending IFRS 15. Transfer of control licensed intellectual property

Renewed contract

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 IFRS 15 18–21 (IFRS 15 BC 414T).

See also: The IFRS Foundation

Transfer of control licensed intellectual property

Transfer of control licensed intellectual property Transfer of control licensed intellectual property

Transfer of control licensed intellectual property Transfer of control licensed intellectual property

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