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9.6 Restrictions of time, geography or use
Publication date: 31 Mar 2024
us Revenue guide
Many licenses include restrictions of time, geographical region, or use. For example, a license could stipulate that the intellectual property can only be used for a specified term or can only be used to sell products in a specified geographical region. The revenue standard requires reporting entities to first assess whether a contract includes multiple licenses that represent separate performance obligations or a single license with contractual restrictions.
Some contractual provisions might indicate that the reporting entity has promised to transfer multiple distinct licenses to the customer. For example, a contract could include a distinct license that is a right to use IP in Geography A and a separate distinct license that is a right to use IP in Geography B. Management should allocate revenue to the distinct licenses in the contract if it concludes there are multiple distinct licenses; however, the timing of revenue recognition is not affected if the customer can use and benefit from both licenses at the same time (that is, the distinct licenses are coterminous). On the other hand, the timing of revenue recognition would be affected if, for example, the term of the license to use IP in Geography B does not commence until a future date.
Contractual restrictions of time, geography, or use within a single license are attributes of that license. Restrictions in a single license therefore do not impact whether the license is a right to access or a right to use IP or the number of promised goods or services.
The revenue standard includes Examples 61A and 61B (ASC 606-10-55-399A through ASC 606-10-55-399O), which illustrate the accounting impact of license restrictions. Significant judgment may be required to assess whether a contractual provision in a license creates an obligation to transfer multiple licenses (and therefore separate performance obligations) or whether the provision is a restriction that represents an attribute of a single license.
Example RR 9-7 and Example RR 9-8 illustrate the impact of restrictions in a license to IP.
EXAMPLE RR 9-7
License restrictions – restrictions are an attribute of the license
License restrictions – restrictions are an attribute of the license
Producer licenses to CableCo the right to broadcast a television series. The license stipulates that CableCo must show the episodes of the television series in sequential order. Producer transfers all of the content of the television series to CableCo at the same time. The contract does not include any other goods or services.
What is the impact of the contractual provisions that restrict the use of the IP in this arrangement?
Analysis
The contract includes a single license. The requirement that CableCo show the episodes in sequential order is an attribute of the license. This restriction does not impact the accounting for the license, including the assessment of whether the license is a right to access or a right to use IP. The license is a right to use IP and, therefore, Producer would recognize revenue when control of the license transfers to CableCo and CableCo has the ability to use and benefit from the license (that is, when CableCo is first able to broadcast the television series).
EXAMPLE RR 9-8
License restrictions – contract includes multiple licenses
License restrictions – contract includes multiple licenses
Pharma licenses to Customer its patent rights to an approved drug compound for eight years beginning on January 1, 20X1. Customer can only utilize the IP to sell products in the United States for the first year of the license. Customer can utilize the IP to sell products in Europe beginning on January 1, 20X2. The contract does not include any other goods or services.
Pharma concludes that the contract includes two distinct licenses: a right to use the IP in the United States and a right to use the IP in Europe.
What is the impact of the contractual provisions that restrict the use of IP in this arrangement?
Analysis
Pharma should allocate the transaction price to the two separate performance obligations because it has concluded that there are two distinct licenses. The allocation should be based on relative standalone selling prices and revenue should be recognized when the customer has the ability to use and benefit from its right to use the IP. The revenue allocated to the license to use the IP in the United States would be recognized on January 1, 20X1. The revenue allocated to the license to use the IP in Europe would be recognized on January 1, 20X2.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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