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Other considerations for licenses might include license renewals (refer to RR 9.7.1), guarantees (refer to RR 9.7.2), payment terms and significant financing components (refer to RR 9.7.3), and proceeds from a patent infringement settlement (refer to RR 9.7.4).

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 periodor 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.
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, including certain aspects of accounting for renewals and other license modifications. Financial statement preparers and other users of this publication are encouraged to monitor the status of the project.

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.

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