Licences of intellectual property

Licences of intellectual property – The determination of whether a licence is distinct may require judgement. In some software arrangements, a software licence will be distinct because it is the only promise in the contract. In other Licences of intellectual property arrangements, the customer will be able to benefit from the licence on its own or with readily available resources and it will be separately identifiable from the other goods or services in the contract (i.e., the other goods or services are also distinct).

An example of a distinct licence is a software package that can be used on its own without customisation or modification and future upgrades are not necessary for the customer to retain continued functionality of the software for a reasonable period of time after the initial free maintenance period. Licences of intellectual property

Licences that an entity determines are not distinct are combined with other promised goods or services in the contract until a separate performance obligation is identified. In some contracts, the customer can benefit from the licence only with another good or service that is promised (explicitly or implicitly) in the contract.

For example, a software licence may be embedded in a software-enabled tangible good and the software significantly influences the features and functionality of the tangible good. The customer cannot benefit from the software licence on its own, nor is it separable from the tangible good. Licences of intellectual property

Certain types of software, such as antivirus software, require frequent upgrades to keep the software current in order for it to be beneficial to the customer. Under IFRS 15, an entity may conclude that such software licences are not capable of being distinct because the customer cannot obtain the benefit from the software without also obtaining the subsequent upgrades. In these situations, the software licence, together with the unspecified upgrades, will form a single distinct performance obligation. Licences of intellectual property

Entities may also enter into arrangements with customers that involve significant production, modification or customisation of licenced software. Under IFRS 15, entities may conclude that the software licence is not distinct within the context of the contract. That is, the software licence and professional services are generally highly interrelated and significant integration and modification is required. Therefore, the licence and services together are a single performance obligation.

Determining the nature of the entity’s promise

Entities are required to classify IP as either functional or symbolic as part of their determination of whether to recognize the revenue associated with the license of that IP at a point in time or over time.

Functional IP Licences of intellectual property
Functional IP has significant standalone functionality and derives a substantial portion of its utility (i.e., the IP’s ability to provide benefit or value) from its standalone functionality. To provide the customer utility from the IP, the licensor is not required to continue to support or maintain the IP as part of its promise. Examples of functional IP include software licenses and patents. Revenue from functional IP generally is recognized at a point in time. Licences of intellectual property

A software license is typically considered to be functional IP because the software has standalone functionality. That is, the customer can derive substantial benefit from the software on its own, and its functionality is not expected to change substantively as a result of the licensor’s ongoing activities that do not transfer a good or service to the customer.

A technology entity may promise to continue to support or maintain the software, with unspecified updates and upgrades, but these activities are generally separate promises in the contract and, therefore, do not significantly affect the functionality of the software promised to the customer. In making this assessment, entities don’t consider whether a license is perpetual or for a specified term.

Symbolic IP 
Symbolic IP does not have significant standalone functionality because its utility is derived from the licensor’s ongoing or past support (e.g., activities that support the value of a brand name). Examples of symbolic IP include brands and trade names. Revenue from symbolic IP is recognized over time.

Licences of intellectual property provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit

Leave a comment