Licensing provides rights to a customer

LicensingLicensing 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:


  1. Software (other than software subject to a hosting arrangement1) and technology
  2. Motion pictures, music, and other forms of media and entertainment
  3. Franchises Licensing
  4. Patents, trademarks, and copyrights. Licensing

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: Licensing

  1. A license that forms a component of a tangible good and that is integral to the functionality of the good
  2. 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: Licensing

  1. A right to access the entity’s intellectual property throughout the license period (or its remaining economic life, if shorter)Cloud computing
  2. 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. Licensing

Notwithstanding the previous two sections above, revenue cannot be recognized from a license of intellectual property before both:

  1. An entity provides (or otherwise makes available) a copy of the intellectual property to the customer.
  2. 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.

Cases to learn recognising license as a distinct item for IFRS 15

License is distinct from service

Facts: Software Co. enters into a contract with its customer for on-premise data analytics software and cloud data storage. The on-premise software utilizes the customer’s data stored on the cloud to provide data analysis. The on-premise software can also utilize data stored on the customer’s premises or data stored by other vendors.

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Is the software license distinct? Plan to sell a factory Highly probable Plan to sell a factory Highly probableLicensing

Analysis: Yes. Software Co. would likely conclude that the on-premise software license is distinct from the cloud data storage service. The cloud data storage could be provided by other vendors and is capable of being distinct. The software license and cloud data storage service are not highly interrelated or interdependent because a customer could gain substantially all of the benefits of the on-premise software when data is stored on the customer’s premises or with another vendor.

Alternatively, if Software Co.’s on-premise software and cloud data storage function together in such a manner that the customer gains significant functionality that would not be available without the cloud data storage service, Software Co. might conclude that the license is not distinct from the storage service.

Hybrid cloud arrangements will require an understanding of the standalone functionality of each promised good or service in the arrangement and the degree to which each promised good or service affects the other in determining whether a license is distinct.

License bundled with other goods and services

Facts: Software Co. contracts with a customer for a perpetual software license, installation services, unspecified software updates, and technical support for two years. The installation services include significant customization of the software to interface with customer data sources. The updates and technical support are not critical to maintaining the ongoing utility of the software.

Is the software license distinct?

Analysis: No. Software Co. concludes that the software license is not distinct from the installation services because the installation services significantly customize the software. As such, the software license and the installation services are inputs into a combined output, which is a promise to deliver customized software. Software Co. should assess whether the promise is satisfied at a point in time (once the software is completed) or over time (as the customization is performed), which will depend on the contract-specific facts and circumstances.

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In this case, Software Co. concludes that the updates and support are distinct and should be recognized over time using an appropriate measure of progress.

License restrictions – contract with multiple licenses

Facts: On December 15, 20X6, Software Co. enters into a contract with a customer that permits the customer to embed the vendor’s software in the customer’s consumer products for five years beginning on January 1, 20X7. During the first year of the license period, the customer is permitted to embed the vendor’s software only in products sold in the United States. Beginning January 1, 20X8, the customer is permitted to embed the vendor’s software in products sold in Europe.

There are no other promised goods or services in the contract. Software Co. provides a copy of the software to the customer on December 31, 20X6.

What is the impact of the contractual provisions that restrict the use of software in this arrangement?

Analysis: Software Co. concludes that the contract includes two distinct licenses: (1) a right to use the software in the United States and (2) a right to use the software in Europe because each license is capable of being distinct and the promise to transfer each license is distinct within the context of the contract.

Therefore, Software Co. should allocate the transaction price to each of the distinct licenses based on their relative standalone selling prices

Software Co. should recognize revenue when the customer has the ability to use and benefit from its right to use the software. This is the later of the date the license period commences and the date the license is transferred. For the license to use the software in the United States, Software Co. would recognize the revenue allocated to the license on January 1, 20X7. For the license to use the software in Europe, Software Co. would recognize the revenue allocated to the license on January 1, 20X8.

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Licensing 

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