Licensing establishes a customer’s rights to the intellectual property of an entity. Licenses of intellectual property may include, but are not limited to, licenses of any of the following:
- Software (other than software subject to a hosting arrangement1) and technology
- Motion pictures, music, and other forms of media and entertainment
- Patents, trademarks, and copyrights.
In addition to a promise to grant a license (or licenses) to a customer, an entity may also promise to transfer other goods or services to the customer. Those promises may be explicitly stated in the contract or implied by an entity’s customary business practices, published policies, or specific statements. As with other types of contracts, when a contract with a customer includes a promise to grant a license (or licenses) in addition to other promised goods or services, an entity applies IFRS 15 22 – 30 to identify each of the performance obligations in the contract.
If the promise to grant a license is not distinct from other promised goods or services in the contract in accordance with IFRS 15 26 – 30, an entity should account for the promise to grant a license and those other promised goods or services together as a single performance obligation. Examples of licenses that are not distinct from other goods or services promised in the contract include the following:
- A license that forms a component of a tangible good and that is integral to the functionality of the good
- A license that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a license, the customer to access content).
When a single performance obligation includes a license (or licenses) of intellectual property and one or more other goods or services, the entity considers the nature of the combined good or service for which the customer has contracted (including whether the license that is part of the single performance obligation provides the customer with a right to use or a right to access intellectual property (see below) in determining whether that combined good or service is satisfied over time or at a point in time in accordance with IFRS 15 35 – 37 and IFRS 15 38 and, if over time, in selecting an appropriate method for measuring progress in accordance with IFRS 15 39 – 45.
In evaluating whether a license transfers to a customer at a point in time or over time an entity should consider whether the nature of the entity’s promise in granting the license to a customer is to provide the customer with either:
- A right to access the entity’s intellectual property throughout the license period (or its remaining economic life, if shorter)
- A right to use the entity’s intellectual property as it exists at the point in time at which the license is granted.
An entity should account for a promise to provide a customer with a right to access the entity’s intellectual property as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance of providing access to its intellectual property as the performance occurs (see IFRS 15 35(a)). An entity should apply IFRS 15 39 – 45 to select an appropriate method to measure its progress toward complete satisfaction of that performance obligation to provide access to its intellectual property.
An entity’s promise to provide a customer with the right to use its intellectual property is satisfied at a point in time. The entity should apply IFRS 15 38 to determine the point in time at which the license transfers to the customer.
Notwithstanding the previous two sections above, revenue cannot be recognized from a license of intellectual property before both:
- An entity provides (or otherwise makes available) a copy of the intellectual property to the customer.
- The beginning of the period during which the customer is able to use and benefit from its right to access or its right to use the intellectual property. That is, 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.