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9.7 Other considerations–licenses
Publication date: 31 Mar 2024
us Revenue guide
9.7.1 License renewals
The revenue standard specifies that revenue from the renewal or extension of a license cannot be recognized until the beginning of the renewal period, because that is when a customer can use and benefit from the license renewal. Example 59, Case B of the revenue standard (ASC 606-10-55-392A through ASC 606-10-55-392D) illustrates the accounting for the renewal of a license.
Excerpt from ASC 606-10-55-58C
…an entity would not recognize revenue before the beginning of the license period even if the entity provides (or otherwise makes available) a copy of the intellectual property before the start of the license period or the customer has a copy of the intellectual property from another transaction. For example, an entity would recognize revenue from a license renewal no earlier than the beginning of the renewal period.
Management should also consider whether a renewal right offered at contract inception provides a material right. Refer to RR 7 for guidance on material rights.
9.7.1.1 License modification that includes a renewal and other changes
Determining the accounting for a modification that includes a renewal of existing rights along with other changes, such as adding new rights, can require judgment. Management should first consider whether the existing rights are solely being renewed or being substantively changed. If the existing license rights are being changed (for example, attributes are being modified other than extension of time or the functionality of the underlying IP has changed), management might conclude the modification does not include a renewal of existing rights and therefore, the renewals guidance in RR 9.7.1 is not applicable.
If a modification includes the renewal of existing rights, the reporting entity should generally apply the guidance in ASC 606-10-55-58C to that element of the contract. As a result, consideration allocated to the renewed license rights would be deferred until the renewal period begins.
However, if the modification is considered the termination of an existing contract and creation of a new contract in accordance with ASC 606-10-25-13(a) (for example, because the pricing of additional goods or services is not at standalone selling prices), an acceptable alternative may be to account for the license rights in the modified contract as a new license as opposed to a renewal of existing rights. Under this alternative, a reporting entity may conclude it is appropriate to recognize revenue immediately for new licenses granted as a result of the modification. Refer to RR 2.9 for guidance on modifications.
Modifications can be structured as either (1) an amendment to the original agreement or (2) a cancellation of the original agreement and execution of a new agreement. As discussed in Question RR 2-5, the accounting should not be based solely on the form of the modification and should be based on the substance of the arrangement.
9.7.2 Guarantees
Guarantees to defend a patent are disregarded in the assessment of whether a license is a right to use or a right to access IP. Maintaining a valid patent and defending that patent from unauthorized use are important aspects in supporting a reporting entity’s IP. However, the guarantee to do so is not a performance obligation or an activity for purposes of assessing the nature of a license. Rather, it represents assurance that the customer is utilizing a license with the contractually agreed-upon specifications.
9.7.3 Payment terms and significant financing components
Licenses are often long-term arrangements and payment schedules between a licensee and licensor may not coincide with the pattern of revenue recognition. Payments made over a period of time do not necessarily indicate that the license provides a right to access the IP.
Management will need to consider whether a significant financing component exists when the time between recognition of revenue and cash receipt (other than sales- or usage-based royalties) is expected to exceed one year. For example, consider a license that provides a right to use intellectual property for which revenue is recognized when control transfers to the licensee, but payment for the license is made over a five-year period. Alternatively, consider a license that provides a right to access IP for which payment is made upfront. Management needs to consider whether the intent of the payment terms within a contract is to provide a financing, and therefore whether a significant financing component exists. See RR 4.4 for further discussion of accounting for a significant financing component.
9.7.4 Proceeds from a patent infringement settlement
Parties to patent infringement disputes often enter into license agreements in connection with settling their disputes. For example, a reporting entity alleging that another party has sold product using its technology (intellectual property) may agree to settle the dispute by granting the party a license to its intellectual property prospectively and releasing the party from any claims of infringement in exchange for cash or noncash consideration. The license to IP is in the scope of the revenue standard if licensing IP is part of the reporting entity’s ordinary business activities.
To determine the accounting for settlement proceeds, management will need to identify all of the components of the litigation settlement. In addition to a prospective license to IP, the settlement may include other components, such as royalties related to past sales, recovery of legal fees, or damages (punitive or otherwise). If the settlement includes both components in the scope of the revenue standard and components in the scope of other standards, the reporting entity should generally allocate consideration received to the various components on a relative standalone selling price basis (refer to RR 2.2.3). Determining the standalone selling price for certain non-revenue components (for example, damages) may be challenging; determining the standalone selling price of such components utilizing a residual approach might be appropriate if the criteria described in RR 5.3.3 are met.
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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