Paragraphs IFRS 15.B52-B63 outline the complexities and challenges related to determining the distinctiveness of a license, satisfying related performance obligations, and the factors influencing these aspects. Typical examples of intellectual property subject to these requirements are as follows:
- Software and technology.
- Motion pictures, music, and other forms of media and entertainment.
- Franchises.
- Patents, trademarks, and copyrights.
The primary challenges in this area involve determining whether a licence of intellectual property constitutes a distinct good or service, and if so, when the related performance obligation is satisfied – either over time or at a point in time.
A licence is usually capable of being distinct. However, there are instances when a customer benefits solely from the combined output of an entity, in which case the licence is part of a broader performance obligation. IFRS 15.B54 provides examples of such non-distinct licences:
- A licence that is an integral part of a tangible good and is crucial for the good’s functionality (for example, an operating system installed in a smartphone).
- A licence that the customer can only benefit from in conjunction with a related service.
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If a licence is distinct, it offers a customer (IFRS 15.B56):
- A right to access the entity’s intellectual property as it exists throughout the licence period, or
- A right to use the entity’s intellectual property as it exists when the licence is granted.
If the license provides the right to access the intellectual property throughout the license period, the related performance obligation is satisfied over time. This is the case when the customer will effectively be using the most recent version of the intellectual property during the license period and the following criteria (IFRS 15.B58) are met:
- The contract necessitates, or the customer reasonably expects, that the entity will undertake significant activities affecting the intellectual property to which the customer has rights (refer to IFRS 15.B59 -B59A for further discussion).
- The rights granted by the licence expose the customer to any positive or negative effects of the aforementioned entity’s activities.
- These activities do not result in the transfer of a good or a service to the customer as those activities occur (e.g., software updates treated as distinct services).
Furthermore, IFRS 15.BC410 clarifies that the assessment of these criteria is independent of other performance obligations in the contract. For instance, if software updates are regarded as a distinct service, they should not factor into determining when and how control of the software is transferred to the customer.
Examples 54, 55, 56, 58, 59 accompanying IFRS 15 discuss intellectual property licensing.
It’s worth mentioning that payment terms are not included in IFRS 15.B58. This is because the IASB views payment terms as not indicative of whether the licence gives the customer a right to access or use the intellectual property. Therefore, they are not a determinant of when the performance obligation is satisfied (IFRS 15.BC412(d)).
If the criteria from IFRS 15.B58 are not met, the performance obligation is satisfied at the point when the licence is granted to the customer. However, revenue cannot be recognised before the period during which the customer can use and benefit from the licence (IFRS 15.B61 and IFRS 15.BC414).
It could be beneficial to understand the difference between functional and symbolic intellectual property as outlined in US GAAP, referred to in paragraph IFRS 15.BC414M. Functional intellectual property, characterised by its significant stand-alone functionality and the substantial utility derived from this attribute, typically leads to a customer acquiring a licence for usage rights. This holds unless the intellectual property’s functionality is expected to materially change during the licence period due to the entity’s activities that do not transfer a good or service to the customer, and where the customer must use the updated intellectual. In contrast, symbolic intellectual property, lacking significant stand-alone functionality, derives its utility primarily from its association with the entity’s activities, past or ongoing. Here, the customer is granted a licence for the right to access intellectual property.
Licence that is not distinct
If a licence is not distinct, entities should determine whether it is the primary or dominant component of the performance obligation (IFRS 15.BC407). If it is, the specific provisions relating to licensing of intellectual property should be applied. If the licence is not a primary or dominant component, the general criteria for satisfying performance obligations apply. IFRS 15 does not include specific criteria for determining if a licence is a primary or dominant component of the performance obligation. However, an example of this is discussed in IFRS 15.BC414X.
More about IFRS 15
See other pages relating to IFRS 15:
Identifying a Contract
Performance Obligations and Timing of Revenue Recognition
Contract Modifications
Transaction Price
Principal vs Agent, or Reporting Revenue Gross vs Net
Revenue from Licensing of Intellectual Property
Revenue from Customers’ Unexercised Rights (Breakage)
Customer Loyalty Programmes and Other Options for Additional Goods or Services
Warranties
Contract Assets and Contract Liabilities
Contract Costs
Disclosure