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A license arrangement establishes a customer’s rights related to a reporting entity’s intellectual property (IP) and the obligations of the reporting entity to provide those rights. Licenses are common in the following industries:
  • Technology – software and patents
  • Entertainment and media – motion pictures, music, and copyrights
  • Pharmaceuticals and life sciences – drug compounds, patents, and trademarks
  • Retail and consumer – trade names and franchises
Licenses come in a variety of forms, and can be term-based or perpetual, as well as exclusive or nonexclusive. Consideration received for licenses can also vary significantly from fixed to variable and from upfront (or lump sum) to over time in installments.
Management should assess each arrangement where licenses are sold with other goods or services to conclude whether the license is distinct and therefore a separate performance obligation. Management will need to determine whether a license provides a right to access IP or a right to use IP, since this will determine when revenue is recognized. Revenue recognition will also be affected if a license arrangement includes sales- or usage-based royalties.
Note about ongoing standard setting
As of the content cutoff date of this publication, the EITF has an active project related to the application of the revenue standard to licensing arrangements; specifically, the EITF is addressing (1) certain aspects of accounting for renewals and other license modifications and (2) the accounting for the revocation of licensing rights. Financial statement preparers and other users of this publication are encouraged to monitor the status of the project.
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