Licences of intellectual property

Learning objectives

• Determine whether a distinct licence provides a right to access (revenue over time) or a right to use (revenue at a point in time), depending on whether the entity undertakes activities that significantly affect the intellectual property.L3, L4
• Apply the exception for sales-based or usage-based royalties: revenue is recognised when the later of the sale or usage and the satisfaction of the obligation occurs.L3, L4

Normative references

• IFRS 15 §B52A licence establishes a customer's rights to the intellectual property of the entity. The paragraph illustrates the types of intellectual property concerned (software and technology, motion pictures and other media, franchises, patents, trademarks, copyrights, etc.).
• IFRS 15 §B53A promise to grant a licence may be accompanied by other promised goods or services; the entity then applies paragraphs 22 to 30 to identify each of the performance obligations in the contract.
• IFRS 15 §B54If the promise to grant a licence is not distinct from other promised goods or services in accordance with paragraphs 26 to 30, the entity accounts for the licence and those other goods or services together as a single performance obligation. The standard gives as examples a licence that forms a component of a tangible good, or a licence that the customer can benefit from only in conjunction with a related service (for example, online access).
• IFRS 15 §B55If the licence is not distinct, the entity applies paragraphs 31 to 38 to determine whether the combined performance obligation (which includes the licence) is satisfied over time or at a point in time and, if it is satisfied over time, paragraphs 39 to 45 to select a method of measuring progress.
• IFRS 15 §B56When the licence is distinct, the entity determines the nature of its promise to establish whether it is satisfied over time or at a point in time: it is either a right to access the intellectual property as it exists throughout the licence period, or a right to use the intellectual property as it exists at the point in time at which the licence is granted.
• IFRS 15 §B58The promise is to provide a right to access if all three criteria are met: (a) the contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property; (b) the rights granted directly expose the customer to any positive or negative effects of those activities; (c) those activities do not, in themselves, result in the transfer of a good or service to the customer.
• IFRS 15 §B59In assessing whether the customer can reasonably expect the entity to undertake activities affecting the intellectual property, the entity considers in particular its customary business practices, published policies or specific statements; a shared economic interest (for example, a sales-based royalty) may also be an indicator, but is not determinative.
• IFRS 15 §B59AThe entity's activities significantly affect the intellectual property when they are expected to change its form or functionality, or when the customer's ability to obtain benefit from the intellectual property is substantially derived from, or dependent upon, those activities (for example, for a brand). When the intellectual property has significant stand-alone functionality, a substantial portion of its benefit is derived from that functionality, so that it is not significantly affected unless the activities change that functionality.
• IFRS 15 §B60If the criteria in B58 are met, the promise to grant a licence is a performance obligation satisfied over time, because the customer simultaneously receives and consumes the benefit of the access provided as the entity performs; the entity selects an appropriate method of measuring progress (paragraphs 39 to 45).
• IFRS 15 §B61If the criteria in B58 are not met, the promise is to provide a right to use the intellectual property as it exists when the licence is granted; the obligation is satisfied at a point in time determined in accordance with paragraph 38. Revenue cannot be recognised before the beginning of the period during which the customer is able to use and benefit from the licence.
• IFRS 15 §B62In classifying a licence as a right to access or a right to use, the entity disregards: (a) restrictions of time, geographical region or use, which define the attributes of the licence; (b) guarantees it provides that it has a valid patent and its commitment to defend it, which are not a performance obligation.
• IFRS 15 §B63As an exception to the requirements on variable consideration, a sales-based or usage-based royalty promised in exchange for a licence of intellectual property is recognised as revenue only when the later of the following events occurs: (a) the subsequent sale or usage occurs; (b) the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
• IFRS 15 §B63AThe exception in B63 applies when the royalty relates only to a licence of intellectual property, or when the licence is the predominant item to which the royalty relates (for example, when the entity has a reasonable expectation that the customer would ascribe significantly more value to the licence than to the other goods or services to which the royalty relates).
• IFRS 15 §B63BWhen the condition in B63A is met, revenue from the royalty is recognised wholly in accordance with B63; when it is not, the general requirements on variable consideration (paragraphs 50 to 59) apply to the entire royalty.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

14 questions

• Mélodia grants a hotel chain a distinct licence over its music catalogue, limited to France, to a three-year term and to playback in common areas. True or false: these restrictions of time, geographical region and use are not taken into account in determining whether the licence provides a right to access or a right to use.L3
• Brevalis grants a distinct licence to use a process patent; it guarantees to the licensee that the patent is valid and undertakes to defend it against infringement. True or false: this commitment to defend the patent is enough to make the licence a right to access, with revenue recognised over time.L3
• Codexa grants a customer a distinct three-year licence over design software with significant stand-alone functionality, for a fixed price of EUR 360,000. Codexa has planned no updates and the customer expects no activities from it on the software (case data). The contract is signed on 15 December 20X1, the code is delivered on 20 December 20X1 and the licence period starts on 1 January 20X2. When does Codexa recognise the revenue of EUR 360,000?L3
• Fournil d'Or, a bakery chain, grants a franchisee the right to operate under its brand for five years and in a single region, in exchange for a fixed initial fee. As it customarily does, Fournil d'Or will continue to run advertising campaigns, develop its recipes and manage the brand image. The value of the brand to the franchisee substantially depends on these activities, which directly expose it to their effects without transferring any good or service to it (case data). The licence is distinct. How is the initial fee recognised?L3
• Ludivers grants a distinct licence over a video game character. To conclude that its promise is to provide a right to access the intellectual property, which conditions must be met?L3
• Thermio sells connected thermostats. Each device embeds firmware that Thermio licenses to the customer; without this firmware, the thermostat performs no function, and the customer can only benefit from the licence through the device (case data). How does Thermio identify the performance obligations?L3
• On 1 January 20X1, the publisher Mirabelle grants a foreign publisher a licence to translate and publish a novel, analysed as a right to use transferred at that date (conclusion given by the case). In return, the foreign publisher only pays a royalty of {royalty_rate} of its sales of the novel. Its 20X1 sales amount to {sales_20x1} and it forecasts sales of {forecast_sales_20x2} in 20X2. Calculate the royalty revenue recognised by Mirabelle in 20X1.L3
• The Kerval studio grants a download platform a four-year licence over its catalogue of recordings, transferred at the start of 20X1 and analysed as a right to use (conclusion given by the case). The platform's only consideration is {fee_per_download} per track downloaded by its subscribers. In 20X1, {downloads_20x1} downloads took place; the platform estimates the total number of downloads over the four years at {expected_downloads_total}. What revenue does Kerval recognise in 20X1?L3
• The Solvane laboratory grants a manufacturer a five-year licence over a formulation patent, analysed as a right to use (conclusion given by the case). The licence period starts on 1 March 20X1, the date from which the manufacturer can exploit the patent. The consideration comprises a fixed amount of {fixed_fee}, payable on signature, and a royalty of {royalty_rate} of the sales of products manufactured under the licence. The manufacturer's sales reach {sales_20x1} in 20X1 and are estimated at {expected_sales_later} over the following years. Determine the royalty revenue and the total revenue recognised by Solvane in 20X1.L4
• Ludocraft grants a games studio a licence to exploit its graphics engine, analysed as a right to use (conclusion given by the case); the engine is made available to the studio on 1 July 20X1, the start of the licence period. The studio pays a flat fee of {fixed_fee} and {fee_per_copy} for each copy sold of a game developed with the engine. It sells {copies_20x1} copies in the second half of 20X1 and projects {projected_copies_20x2} for 20X2. Calculate the royalty portion and Ludocraft's total revenue for 20X1.L4
• The Aquilon studio grants a toy manufacturer a distinct licence over the characters of its animated series and also provides it with graphic designs for its packaging. The only consideration is a royalty of 6% of toy sales, which pays for both the licence and the designs. Aquilon reasonably expects the manufacturer to ascribe significantly more value to the licence than to the designs (case data). How does Aquilon account for the royalty?L4
• Mécanova sells packaging lines to a manufacturer and, as an ancillary item, grants it a licence to use a calibration patent. The consideration is an amount per unit packaged on the lines, which pays for both the machines and the licence. Mécanova reasonably expects the customer to ascribe significantly more value to the machines than to the licence (case data). Which requirements apply to this usage-based consideration?L4
• The Pélican studio grants Jouéco, for five years and for France and Belgium only, a distinct licence allowing it to reproduce a cartoon character on plush toys. The contract does not mention Pélican's future activities; however, as for all its characters, Pélican produces new episodes featuring the character every year, publishes its broadcasting schedule and promotes it. The popularity of the plush toys largely depends on these episodes, which transfer no good or service to Jouéco (case data). The consideration is a royalty of 7% of plush toy sales. Write a memo analysing the nature of the licence and the pattern of recognition of the royalty.L4
• Optima grants a distributor a three-year licence over data analysis software. The software only works while connected to Optima's hosted platform, which continuously feeds it with data; the customer can therefore only benefit from the licence together with this online access service, which only Optima provides (case data). How does Optima analyse the contract?L4