(a) For a license of IP that is not a separate performance obligation, does an entity need to determine the nature of the license as a right to access the entity's IP or a right to use the entity's IP (that is, determine whether the license is satisfied over time or at a point in time)? (Issue 1)

(b) For the nature of a license to be a right to access the entity's intellectual property as it exists throughout the license period, (a) do the contractual or expected activities of the licensor have to change the form and/or functionality of the underlying IP or (b) do significant changes in the value of the IP alone constitute a change to the IP? (Issue 2)

(c) If a customer is not required to use the most recent version of the underlying IP, do the licensor's activities directly expose the customer to positive or negative effects of the IP to which the customer has rights? (Issue 2a)

(d) Are activities that transfer a good or service that is not separable from the license of IP considered in determining the nature of the license? (Issue 2b)

(e) Can restrictions in a contract for a license of IP affect the determination of whether that contract contains one or multiple licenses when applying Step 2 (identify performance obligations) of the new revenue standard? (Issue 3)

(a) Software licenses are commonly sold with post-contract customer support (PCS), other services (for example, hosting, customization or implementation services), and/or hardware

(b) Franchise licenses are frequently sold with consulting or training services and/or equipment

(c) Bio-technology and pharmaceutical licenses are often sold with research and development services and/or a promise to manufacture the drug for the customer.

606-10-25-27 [35] An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:

a. The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs (see paragraphs 606-10-55-5 [B3] through 55-6 [B4]).

b. The entity's performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (see paragraph 606-10-55-7 [B5]). [Emphasis added.]

c. The entity's performance does not create an asset with an alternative use to the entity (see paragraph 606-10-25-28 [36]), and the entity has an enforceable right to payment for performance completed to date (see paragraph 606-10-25-29 [37]).

606-10-25-33 [41] Appropriate methods of measuring progress include output methods and input methods. Paragraphs 606-10-55-16 [B14] through 55-21 [B19] provide guidance for using output methods and input methods to measure an entity's progress toward complete satisfaction of a performance obligation. In determining the appropriate method for measuring progress, an entity shall consider the nature of the good or service that the entity promised to transfer to the customer. [Emphasis added.]

BC407. If the customer cannot benefit from the license on its own, and/or the license cannot be separated from other promises in the contract, the license would not be distinct and, thus, would be combined with those other promises (see paragraph 606-10-25-22 [30]). The entity would then determine when the single performance obligation is satisfied on the basis of when the good or service (that is, the output) is transferred to the customer. The Boards noted that in some cases, the combined good or service transferred to the customer may have a license as its primary or dominant component. When the output that is transferred is a license, or when the license is distinct, the entity would apply the criteria in paragraph 606-10-55-60 [B58] to determine whether the promised license provides the customer with access to the entity's intellectual property or a right to use the entity's intellectual property.
[Emphasis added.]

(a). Determine whether a combined performance obligation that includes a license is satisfied over time or at a point in time. This is because it may be necessary to determine whether the entity's performance creates or enhances an asset that the customer controls as the entity performs. Paragraph 606-10-55-63 [B61] stipulates that the customer does not obtain control of a license of IP at a point in time if that license provides access to the entity's IP over time, but the customer does obtain control of a license at a point in time if it transfers a right to use the entity's intellectual property. Therefore, an entity may need to determine the nature of the license in order to conclude whether the customer controls an asset as the entity performs.

(b). Measure progress towards complete satisfaction of a combined performance obligation that is satisfied over time and includes a license. Paragraph 606-10-25-33 [41] stipulates that, in selecting the appropriate measure of progress towards complete satisfaction of a performance obligation, an entity should consider the nature of the good or service that the entity promised to transfer to the customer. If an entity does not consider the nature of the license, it might recognize revenue differently than it would if it considered the nature of the license. For example, this might be the case for:

(i) A license that would be recognized over time if it were distinct when it is combined with a relatively insignificant or short-duration service component (for example, a ten-year license combined with a service component that will be completed in the first year of that ten-year license term); or

(ii) Where the measure of progress that would be applied to the service component (for example, an input method) is different from the measure of progress that would be applied to the license if it were satisfied over time (for example, a time-based method).

(a) Interpretation A: For activities to significantly affect the IP to which the customer has rights, those activities must be expected to change the form and/or functionality of that IP. Changes that solely affect the value of the IP do not significantly affect the IP to which the customer has rights.

(b) Interpretation B: For activities to significantly affect the IP to which the customer has rights, those activities only need to significantly affect (that is, change) the value of the IP to the customer. Those activities also could significantly affect the form and/or functionality of the IP, but changes to form and/or functionality are not required to meet the criterion.

(c) Interpretation C: This interpretation is the same as Interpretation B, except that the notion of "significantly affects the intellectual property"is a high threshold.

(a) A software provider's ongoing marketing activities may significantly affect the value of the licensed software to which a customer has rights, especially in scenarios where the customer integrates the licensed software in its products sold to its customers. For example, ongoing marketing of an operating system for a handheld computer device by the licensor may increase demand for the customer's handheld computer device that includes that software.

(b) A biotechnology entity's continued research and development (R&D) of a particular set of IP for use in treating a particular disease (one "indication”) may significantly affect the value of the customer's rights to that same IP because it is possible that the continued R&D will lead to approval of the same IP for another indication. The R&D directed by the biotechnology entity at one indication may advance the prospects for approval of the IP for use in the licensed indication or may affect the perception of the IP in the marketplace, impacting the marketability of the customer's planned drug product using the IP.

(c) A media company's continued production and related promotion of new seasons of a television show may prompt viewers to watch old seasons of the show licensed to the media company's customers, which likely would increase the value of the licensed IP (that is, the older seasons) to those customers (for example, increased viewership might result in greater advertising revenue).

(a) In Examples 57 and 58, the IP to which the customer has rights is expected to change. In Example 58, new characters in a comic strip are developed and the existing characters' images "evolve”, and the customer only has rights to the most recent form/version of the IP (the customer must use the latest images and characters). Therefore, the customer does not have the ability to direct the use of, or obtain substantially all the remaining benefits from, the license at the point in time at which it first obtains rights to access the licensor's IP because the customer is not expected to have rights to access that IP (in its present form and/or with its current functionality) throughout the license term. That "original"IP will be replaced throughout the license term because the customer will no longer have rights to use the original IP.

(b) In Examples 54 and 59, the licenses are transferred at a point in time because the IP is not expected to change during the license period.

(i) Example 59 states the "entity does not have any contractual or implied obligations to change the licensed recording. Thus, the intellectual property to which the customer has rights is static. Consequently, the entity concludes that the nature of its promise in transferring the license is to provide the customer with a right to use the entity's intellectual property as it exists at the point in time it is granted."[Emphasis added.]

(ii) Example 54 states "the entity concludes that because the software is functional when it transfers to the customer, the customer does not reasonably expect the entity to undertake activities that significantly affect the intellectual property to which the license relates. This is because at the point in time that the license is transferred to the customer, the intellectual property will not change throughout the license period."[Emphasis added.] This example, therefore, appears to conclude that the criterion in 606-10-55-60(a) [B58(a)] is not met expressly because the IP to which the customer has rights will not change during the license term.

(a) Paragraph 606-10-55-58 [B56] makes explicit reference to the entity's intellectual property as it exists either "throughout the license period" or "at the point in time at which the license is granted. "To those stakeholders, the notion of the entity's intellectual property as it exists throughout the license period suggests that the IP itself, not just the value of the IP, must change or be expected to change.

(b) Paragraphs 606-10-55-59 [B57] through 55-61 [B59] each explicitly refer to activities that significantly affect the intellectual property to which the customer has rights. Those holding Interpretation A think that it is important that those paragraphs refer to significantly affecting the intellectual property rather than, for example, the license or the contract. A change in the benefits that the customer can derive from its rights would seem, to those stakeholders, to reflect a significant effect on the contract, not on the underlying IP.

(c) Paragraph 606-10-55-63 [B61] states that a customer obtains control at a point in time over a license that grants the customer rights to use the entity's IP as it "exists (in terms of form and functionality) at the point in time at which the license is granted."This paragraph suggests that unless the form and/or functionality of the underlying IP to which the customer has rights is expected to change, then the customer obtains control over the license when rights to that unchanging IP are granted.

(d) Paragraph 606-10-55-64 [B62] states that a "promise to defend a patent right"should not be considered in determining the nature of a license. It further states that such a promise "is not a performance obligation because the act of defending a patent protects the value of the entity's intellectual property assets and provides assurance to the customer that the license transferred meets the specifications of the license promised in the contract."BC411 includes a similar notion that such activities should not affect the nature of the license and refers to a promise to "defend and maintain"the IP. To some stakeholders that hold Interpretation A, those paragraphs support the notion that activities intended simply to protect (or that affect) the value of an entity's IP that is being licensed (the protection of which clearly affects the customer) are not activities that should be considered in determining the nature of a license.

(e) BC409 states that when the customer expects the licensor to undertake activities that will significantly affect the IP to which the customer has rights and, thus, expose the customer to positive or negative effects, the customer "will be using the most recent form of the intellectual property throughout the license period. "This excerpt supports the view that what the licensor should be evaluating in the criterion in paragraph 606-10-55-60(a) [B58(a)] is whether the licensor's expected activities will change the form or functionality of the underlying IP.

(a) (BC408 states that "the Boards decided to specify criteria in paragraph 606-10-55-60 [B58] for determining if the intellectual property will change and, thus, if a license provides a customer with the right to access the entity's intellectual property."Those that support Interpretation B think paragraph 606-10-55-60 [B58] defines what it means for IP to change, and observe that that paragraph does not state the form or functionality of the IP itself must change. Instead, the paragraph states "the entity will undertake activities that significantly affect the intellectual property"and that those activities "directly expose the customer to any positive or negative effects of the entity's activities as those activities occur."Those that support Interpretation B point to activities referenced in certain examples in the new revenue standard.

(b) Example 61 states that the criteria in paragraph 606-10-55-60 [B58] have been met without any indication that the form or functionality of the IP to which the customer has rights (that is, the team name or the logo) will change during the one-year license term. Despite no indication of change in the form or functionality of the IP, the conclusion in the example is that the expected activities of the licensor (that is, to continue to play games and provide a competitive team) "in effect, change the intellectual property to which the customer has rights."

(c) Example 56 (Case B) states that the pharmaceutical license is satisfied at a point in time because the entity is not expected to undertake any activities "to support the drug,"and that, consequently,the entity is not reasonably expected to undertake activities that would significantly affect the IP to which the customer has rights. While the example is not specific as to what would constitute activities "to support the drug,"some think activities that support a drug are more frequently promotional or other similar activities than activities that would change the IP (that is, the drug compound) itself. Promotional or other similar activities generally would be viewed as affecting the value of the licensed IP, but not changing the underlying IP itself in terms of form or functionality.

(a) Changes to the IP include not only changes to the form and/or functionality of the IP, but also changes in the value of the IP; and

(b) If the criteria in paragraph 606-10-55-60 [B58] are met, then the IP to which the customer has rights is "dynamic"and, therefore, expected to change throughout the license period.

(a) What types of IP should result in over time recognition for licenses of that IP – supporters of Interpretation C think that the notion of "dynamic"IP was intended to capture those types of IP for which their value is derived from and, therefore, dependent upon and heavily influenced by, the entity's ongoing activities (for example, logos, trade names, or brands); and

(b) Unlike the way many stakeholders view either of the other two interpretations, this interpretation would result in many licenses being recognized over time, but many others being recognized at a point in time, which some stakeholders view as the essence of the Boards' decision.

In developing the criteria, the Boards observed that the main factor that results in the intellectual property changing is when the contract requires, or the customer reasonably expects, that the entity undertakes activities that do not directly transfer goods or services to a customer (that is, they do not meet the definition of a performance obligation). (Emphasis added.)

606-10-25-33 [41] Appropriate methods of measuring progress include output methods and input methods. Paragraphs 606-1055-16 [B14] through 55-21 [B19] provide guidance for using output methods and input methods to measure an entity's progress toward complete satisfaction of a performance obligation. In determining the appropriate method for measuring progress, an entity shall consider the nature of the good or service that the entity promised to transfer to the customer.

606-10-55-56 [B54] If the promise to grant a license is not distinct from other promised goods or services in the contract in accordance with paragraphs 606-10-25-18 [26] through 25-22 [30], an entity should account for the promise to grant a license and those other promised goods or services together as a single performance obligation. Examples of licenses that are not distinct from other goods or services promised in the contract include the following:

a. A license that forms a component of a tangible good and that is integral to the functionality of the good

b. A license that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a license, the customer to access content).

606-10-55-57 [B55] If the license is not distinct, an entity should apply paragraphs 606-10-25-23 [31] through 25-30 [38] to determine whether the performance obligation (which includes the promised license) is a performance obligation that is satisfied over time or satisfied at a point in time.

606-10-55-58 [B56] If the promise to grant the license is distinct from the other promised goods or services in the contract and, therefore, the promise to grant the license is a separate performance obligation, an entity should determine whether the license transfers to a customer either at a point in time or over time. In making this determination, an entity should consider whether the nature of the entity's promise in granting the license to a customer is to provide the customer with either:

a. A right to access the entity's intellectual property as it exists throughout the license period

b. A right to use the entity's intellectual property as it exists at the point in time at which the license is granted.

606-10-55-59 [B57] To determine whether an entity's promise to grant a license provides a customer with either a right to access an entity's intellectual property or a right to use an entity's intellectual property, an entity should consider 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. A customer cannot 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 if the intellectual property to which the customer has rights changes throughout the license period. The intellectual property will change (and thus affect the entity's assessment of when the customer controls the license) when the entity continues to be involved with its intellectual property and the entity undertakes activities that significantly affect the intellectual property to which the customer has rights. In these cases, the license provides the customer with a right to access the entity's intellectual property (see paragraph 606-10-55-60). In contrast, a customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is granted if the intellectual property to which the customer has rights will not change (see paragraph 606-10-55-63). In those cases, any activities undertaken by the entity merely change its own asset (that is, the underlying intellectual property), which may affect the entity's ability to provide future licenses; however, those activities would not affect the determination of what the license provides or what the customer controls.

606-10-55-60 [B58] The nature of an entity's promise in granting a license is a promise to provide a right to access the entity's intellectual property if all of the following criteria are met:

a. The contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights (see paragraph 606-10-55-61 [B59]).

b. The rights granted by the license directly expose the customer to any positive or negative effects of the entity's activities identified in paragraph 606-10-55-60(a) [B58(a)].

c. Those activities do not result in the transfer of a good or a service to the customer as those activities occur (see paragraph 606-10-25-17 [25]).

606-10-55-61 [B59] Factors that may indicate that a customer could reasonably expect that an entity will undertake activities that significantly affect the intellectual property include the entity's customary business practices, published policies, or specific statements. Although not determinative, the existence of a shared economic interest (for example, a sales-based royalty) between the entity and the customer related to the intellectual property to which the customer has rights may also indicate that the customer could reasonably expect that the entity will undertake such activities.

606-10-55-62 [B60] If the criteria in paragraph 606-10-55-60 [B58] are met, an entity should account for the promise to grant a license as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity's performance of providing access to its intellectual property as the performance occurs (see paragraph 606-10-25-27(a) [35(a)]). An entity should apply paragraphs 606-10-25-31 [39] through 25-37 [45] to select an appropriate method to measure its progress toward complete satisfaction of that performance obligation to provide access.

606-10-55-63 [B61] If the criteria in paragraph 606-10-55-60 are not met, the nature of an entity's promise is to provide a right to use the entity's intellectual property as that intellectual property exists (in terms of form and functionality) at the point in time at which the license is granted to the customer. This means that the customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license transfers. An entity should account for the promise to provide a right to use the entity's intellectual property as a performance obligation satisfied at a point in time. An entity should apply paragraph 606-10-25-30 to determine the point in time at which the license transfers to the customer. However, revenue cannot be recognized for a license 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 license. For example, if a software license period begins before an entity provides (or otherwise makes available) to the customer a code that enables the customer to immediately use the software, the entity would not recognize revenue before that code has been provided (or otherwise made available).

606-10-55-64 [B62] An entity should disregard the following factors when determining whether a license provides a right to access the entity's intellectual property or a right to use the entity's intellectual property:

a. Restrictions of time, geographical region, or use—Those restrictions define the attributes of the promised license, rather than define whether the entity satisfies its performance obligation at a point in time or over time.

b. Guarantees provided by the entity that it has a valid patent to intellectual property and that it will defend that patent from unauthorized use—A promise to defend a patent right is not a performance obligation because the act of defending a patent protects the value of the entity's intellectual property assets and provides assurance to the customer that the license transferred meets the specifications of the license promised in the contract.

BC407. If the customer cannot benefit from the license on its own, and/or the license cannot be separated from other promises in the contract, the license would not be distinct and, thus, would be combined with those other promises (see paragraph 606-10-25-22 [30]). The entity would then determine when the single performance obligation is satisfied on the basis of when the good or service (that is, the output) is transferred to the customer. The Boards noted that in some cases, the combined good or service transferred to the customer may have a license as its primary or dominant component. When the output that is transferred is a license, or when the license is distinct, the entity would apply the criteria in paragraph 606-10-55-60 [B58] to determine whether the promised license provides the customer with access to the entity's intellectual property or a right to use the entity's intellectual property. Developing the Criteria for Licenses That Provide a Right to Access

BC408. As noted in paragraph BC404, the Boards decided to specify criteria in paragraph 606-10-55-60 [B58] for determining if the intellectual property will change and, thus, if a license provides a customer with a right to access the entity's intellectual property. If those criteria are not met, the license provides the customer with a right to use an entity's intellectual property as that intellectual property exists (in the form and with the functionality) at the point in time when the license transfers to the customer. To ensure that all licenses are accounted for as either a right of access or a right to use, the Boards decided to specify criteria for only one type of license. In determining for which type of license they should develop criteria, the Boards observed that it was easier to determine when the intellectual property to which the customer has rights was changing (that is, was dynamic), rather than when it was static.

BC409. In developing the criteria, the Boards observed that the main factor that results in the intellectual property changing is when the contract requires, or the customer reasonably expects, that the entity undertakes activities that do not directly transfer goods or services to a customer (that is, they do not meet the definition of a performance obligation). The activities may be part of an entity's ongoing and ordinary activities and customary business practices. However, the Boards noted that it was not enough that the entity undertook activities, but also that those activities affected the intellectual property to which the customer has rights and, thus, exposes the customer to positive or negative effects. In those cases, the customer essentially will be using the most recent form of the intellectual property throughout the license period. The Boards observed that when the activities do not affect the customer, the entity is merely changing its own asset, which, although it may affect the entity's ability to provide future licenses, would not affect the determination of what the license provides or what the customer controls.

BC410. The Boards noted that the assessment of the criteria would not be affected by other promises in the contract to transfer goods or services (that is, performance obligations) that are separate from the license. This is because the nature and pattern of transfer of each (separate) performance obligation in a contract would not affect the timing of other promised goods or services in the contract and, thus, would not affect the identification of the rights provided by the license. This is because, by definition, a performance obligation is separate from the other promises in the contract. Consider a contract to provide a car and ongoing maintenance services—that is, two distinct goods or services (and thus two separate performance obligations). In this case, it seems counterintuitive to include the promise to provide a (separate) maintenance service when determining the nature and timing of the entity's performance related to the transfer of the car. A similar example can be drawn from a contract that includes a software license and a promise to provide a service of updating the customer's software (sometimes included in a contract as post-contract support), in which the post-contract support is identified as a distinct good or service. This is because the entity would not consider the post-contract support when determining when control of the software transfers to the customer. In other words, a promise to transfer separate updates to the license would not be considered in the assessment of the criteria in paragraph 606-10-55-60 [B58] and, furthermore, would be specifically excluded by criterion (c) in that paragraph.

BC411. The Boards also noted that an entity would exclude the factors specified in paragraph 606-10-55-64 [B62] for the following reasons:

a. Restrictions of time, geographical region, or use that define the attributes of the asset conveyed in a license—An entity would not consider restrictions of time, geographical region, or use because they define attributes of the rights transferred rather than the nature of the underlying intellectual property and the rights provided by the license. Consider, for example, a term license that permits the customer to show a movie in its theatre six times over the next two years. The restrictions in that example determine the nature of the asset that the entity has obtained (that is, six showings of the movie), rather than the nature of the underlying intellectual property (that is, the underlying movie).

b. Guarantees provided by the entity that it has a valid patent to intellectual property and that it will defend and maintain that patent—Guarantees that the entity has a valid patent would not be included in the assessment of the criteria for determining the rights provided in a license because those promises are part of the entity's representation that the intellectual property is legal and valid (this notion was previously included in the 2011 Exposure Draft).

606-10-55-362 Using the same facts as in Case A in Example 11 (see paragraphs 606-10-55-141 [IE49] through 55-145 [IE53]), the entity identifies four performance obligations in a contract:

a. The software license

b. Installation services

c. Software updates

d. Technical support.

606-10-55-363 The entity assesses the nature of its promise to transfer the software license in accordance with paragraph 60610-55-60 [B58]. The entity observes that the software is functional at the time that the license transfers tothe customer, and the customer can direct the use of, and obtain substantially all of the remaining benefits from, the software when the license transfers to the customer. Furthermore, the entity concludes that because the software is functional when it transfers to the customer, the customer does not reasonably expect the entity to undertake activities that significantly affect the intellectual property to which the license relates. This is because at the point in time that the license is transferred to the customer, the intellectual property will not change throughout the license period. The entity does not consider in its assessment of the criteria in paragraph 606-10-55-60 [B58] the promise to provide software updates because they represent a separate performance obligation. Therefore, the entity concludes that none of the criteria in paragraph 606-10-55-60 [B58] are met and that the nature of the entity's promise in transferring the license is to provide a right to use the entity's intellectual property as it exists at a point in time—that is, the intellectual property to which the customer has rights is static. Consequently, the entity accounts for the license as a performance obligation satisfied at a point in time.

606-10-55-367 [IE281] An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore, the entity will not undertake any activities to support the drug, which is consistent with its customary business practices.

606-10-55-368 [IE282] In this case, no other entity can manufacture this drug because of the highly specialized nature of the manufacturing process. As a result, the license cannot be purchased separately from the manufacturing services.

606-10-55-369 [IE283] The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19 [27]. The entity determines that the customer cannot benefit from the license without the manufacturing service; therefore, the criterion in paragraph 606-10-25-19(a) [27(a)] is not met. Consequently, the license and the manufacturing service are not distinct, and the entity accounts for the license and the manufacturing service as a single performance obligation.

606-10-55-370 [IE284] The entity applies paragraphs 606-10-25-23 [31] through 25-30 [38] to determine whether the performance obligation (that is, the bundle of the license and the manufacturing services) is a performance obligation satisfied at a point in time or over time.

606-10-55-371 [IE285] In this case, the manufacturing process used to produce the drug is not unique or specialized, and several other entities can also manufacture the drug for the customer.

606-10-55-372 [IE286] The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19 [27]. Because the manufacturing process can be provided by other entities, the entity concludes that the customer can benefit from the license on its own (that is, without the manufacturing service) and that the license is separately identifiable from the manufacturing process (that is, the criteria in paragraph 606-10-25-19 are met). Consequently, the entity concludes that the license and the manufacturing service are distinct and the entity has two performance obligations:

a. License of patent rights

b. Manufacturing service.

606-10-55-373 [IE287] The entity assesses, in accordance with paragraph 606-10-55-60 [B58], the nature of the entity's promise to grant the license. The drug is a mature product (that is, it has been approved, is currently being manufactured, and has been sold commercially for the last several years). For these types of mature products, the entity's customary business practices are not to undertake any activities to support the drug.Consequently, the entity concludes that the criteria in paragraph 606-10-55-60 [B58] are not met because the contract does not require, and the customer does not reasonably expect, the entity to undertake activities that significantly affect the intellectual property to which the customer has rights. In its assessment of the criteria in paragraph 606-10-55-60 [B58], the entity does not take into consideration the separate performance obligation of promising to provide a manufacturing service. Consequently, the nature of the entity's promise in transferring the license is to provide a right to use the entity's intellectual property in the form and the functionality with which it exists at the point in time that it is granted to the customer. Consequently, the entity accounts for the license as a performance obligation satisfied at a point in time.

606-10-55-374 [IE288] The entity applies paragraphs 606-10-25-23 [31] through 25-30 [38] to determine whether the manufacturing service is a performance obligation satisfied at a point in time or over time.

606-10-55-375 [IE289] An entity enters into a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity's trade name and sell the entity's products for 10 years. In addition to the license, the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting the license, the entity receives a sales-based royalty of 5 percent of the customer's monthly sales. The fixed consideration for the equipment is $150,000 payable when the equipment is delivered.

606-10-55-376 [IE290] The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19 [27]. The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake activities such as analyzing the customer's changing preferences and implementing product improvements, pricing strategies, marketing campaigns, and operational efficiencies to support the franchise name. However, the entity concludes that these activities do not directly transfer goods or services to the customer because they are part of the entity's promise to grant a license and, in effect, change the intellectual property to which the customer has rights.

606-10-55-377 [IE291] The entity determines that it has two promises to transfer goods or services: a promise to grant a license and a promise to transfer equipment. In addition, the entity concludes that the promise to grant the license and the promise to transfer the equipment are distinct. This is because the customer can benefit from each promise (that is, the promise of the license and the promise of the equipment) on their own or together with other resources that are readily available (see paragraph 606-10-25-19(a)) [27(a)]. (That is, the customer can benefit from the license together with the equipment that is delivered before the opening of the franchise, and the equipment can be used in the franchise or sold for an amount other than scrap value.) The entity also determines that the franchise license and equipment are separately identifiable in accordance with the criterion in paragraph 606-10-25-19(b) [27(b)], because none of the factors in paragraph 606-10-25-21 [29] are present. Consequently, the entity has two performance obligations:

a. The franchise license

b. The equipment.

606-10-55-378 [IE292] The entity determines that the transaction price includes fixed consideration of $150,000 and variable consideration (5 percent of customer sales).

606-10-55-379 [IE293] The entity applies paragraph 606-10-32-40 [85] to determine whether the variable consideration should be allocated entirely to the performance obligation to transfer the franchise license. The entity concludes that the variable consideration (that is, the sales-based royalty) should be allocated entirely to the franchise license because the variable consideration relates entirely to the entity's promise to grant the franchise license. In addition, the entity observes that allocating $150,000 to the equipment and the sales-based royalty to the franchise license would be consistent with an allocation based on the entity's relative standalone selling prices in similar contracts. That is, the standalone selling price of the equipment is $150,000 and the entity regularly licenses franchises in exchange for 5 percent of customer sales. Consequently, the entity concludes that the variable consideration (that is, the sales-based royalty) should be allocated entirely to the performance obligation to grant the franchise license.

606-10-55-380 [IE294] The entity assesses, in accordance with paragraph 606-10-55-60 [B58], the nature of the entity's promise to grant the franchise license. The entity concludes that the criteria in paragraph 606-10-55-60 [B58] are met and the nature of the entity's promise is to provide access to the entity's intellectual property in its current form throughout the license period. This is because:

a. The entity concludes that the customer would reasonably expect that the entity will undertake activities that will affect the intellectual property to which the customer has rights. This is on the basis of the entity's customary business practice to undertake activities such as analyzing the customer's changing preferences and implementing product improvements, pricing strategies, marketing campaigns, and operational efficiencies. In addition, the entity observes that because part of its compensation is dependent on the success of the franchisee (as evidenced through the sales-based royalty), the entity has a shared economic interest with the customer that indicates that the customer will expect the entity to undertake those activities to maximize earnings.

b. The entity also observes that the franchise license requires the customer to implement any changes that result from those activities and thus exposes the customer to any positive or negative effects of those activities.

c. The entity also observes that even though the customer may benefit from the activities through the rights granted by the license, they do not transfer a good or service to the customer as those activities occur.

606-10-55-381 [IE295] Because the criteria in paragraph 606-10-55-60 [B58] are met, the entity concludes that the promise to transfer the license is a performance obligation satisfied over time in accordance with paragraph 606-10-25-27(a) [35(a)].

606-10-55-382 [IE296] The entity also concludes that because the consideration is in the form of a sales-based royalty, the entity applies paragraph 606-10-55-65 [B63] and, after the transfer of the franchise license, the entity recognizes revenue as and when those sales occur.

606-10-55-383 [IE297] 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.

606-10-55-384 [IE298] In exchange for granting the license, the entity receives a fixed payment of $1 million in each year of the 4-year term.

606-10-55-385 [IE299] In accordance with paragraph 606-10-25-19 [27], 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 license. That is, the additional activities associated with the license do not directly transfer a good or service to the customer because they are part of the entity's promise to grant a license and, in effect, change the intellectual property to which the customer has rights. 606-10-55-386 [IE300] The entity assesses the nature of the entity's promise to transfer the license in accordance with paragraph 606-10-55-60 [B58]. 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 affect the intellectual property to which the customer has rights (that is, the characters). Those activities include development of the characters and the publishing of a weekly comic strip that includes the characters.

b. The rights granted by the license 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.

c. Even though the customer may benefit from those activities through the rights granted by the license, they do not transfer a good or service to the customer as those activities occur.

606-10-55-387 [IE301] Consequently, the entity concludes that the criteria in paragraph 606-10-55-60 [B58] are met and that the nature of the entity's promise to transfer the license is to provide the customer with access to the entity's intellectual property as it exists throughout the license period. Consequently, the entity accounts for the promised license as a performance obligation satisfied over time (that is, the criterion in paragraph 606-10-25-27(a) [35(a)] is met).

606-10-55-388 [IE302] The entity applies paragraphs 606-10-25-31[39] through 25-37 [45] to identify the method that best depicts its performance in the license. 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 toward complete satisfaction of the performance obligation.

606-10-55-389 [IE303] 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 for providing the license, the entity receives fixed consideration of $10,000 per month. The contract does not include any other goods or services to be provided by the entity. The contract is noncancellable.

606-10-55-390 [IE304] The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-1025-19 [27]. The entity concludes that its only performance obligation is to grant the license.

606-10-55-391 [IE305] In accordance with paragraph 606-10-55-60 [B58], the entity assesses the nature of the entity's promise to grant the license. The entity does not have any contractual or implied obligations to change the licensed recording. Thus, the intellectual property to which the customer has rights is static. Consequently, the entity concludes that the nature of its promise in transferring the license 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 license is a performance obligation satisfied at a point in time. The entity recognizes 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.

606-10-55-392 [IE306] 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 noncancellable), the entity considers the guidance in paragraphs 606-10-32-15 [60] through 32-20 [65] to determine whether a significant financing component exists.

606-10-55-395 [IE309] An entity, a well-known sports team, licenses the use of its name and logo to a customer. The customer, an apparel designer, has the right to use the sports team's name and logo on items including t-shirts, caps, mugs, and towels for one year. In exchange for providing the license, the entity will receive fixed consideration of $2 million and a royalty of 5 percent of the sales price of any items using the team name or logo. The customer expects that the entity will continue to play games and provide a competitive team.

606-10-55-396 [IE310] The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19 [27]. The entity concludes that its only performance obligation is to transfer the license. That is, the additional activities associated with the license do not directly transfer a good or service to the customer because they are part of the entity's promise to grant the license and, in effect, change the intellectual property to which the customer has rights.

606-10-55-397 [IE311] The entity assesses the nature of the entity's promise to transfer the license in accordance with paragraph 606-10-55-60 [B58]. In assessing the criteria, the entity considers the following:

a. The entity concludes that the customer would reasonably expect that the entity will undertake activities that will affect the intellectual property (that is, the team name and logo) to which the customer has rights. This is on the basis of the entity's customary business practice to undertake activities such as continuing to play and providing a competitive team. In addition, the entity observes that because some of its consideration is dependent on the success of the customer (through the sales-based royalty), the entity has a shared economic interest with the customer, which indicates that the customer will expect the entity to undertake those activities to maximize earnings.

b. The entity observes that the rights granted by the license (that is, the use of the team's name and logo) directly expose the customer to any positive or negative effects of the entity's activities.

c. The entity also observes that even though the customer may benefit from the activities through the rights granted by the license, they do not transfer a good or service to the customer as those activities occur.

606-10-55-398 [IE312] The entity concludes that the criteria in paragraph 606-10-55-60 [B58] are met and the nature of the entity's promise to grant the license is to provide the customer with access to the entity's intellectual property as it exists throughout the license period. Consequently, the entity accounts for the promised license as a performance obligation satisfied over time (that is, the criterion in paragraph 606-10-25-27(a) [35(a)] is met).

606-10-55-399 [IE313] The entity then applies paragraphs 606-10-25-31 [39] through 25-37 [45] to determine a measure of progress that will depict the entity's performance for the fixed consideration. For the consideration that is in the form of a sales-based royalty, paragraph 606-10-55-65 [B63] applies; therefore, the entity recognizes revenue as and when the sales of items using the team name or logo occur.