9.5 Determining the nature of a license

Rights provided through licenses of intellectual property can vary significantly due to the different features and underlying economic characteristics of licensing arrangements. Recognition of revenue related to a license of IP differs depending on the nature of the reporting entity’s promise in granting the license. The revenue standard identifies two types of licenses of IP: a right to access IP and a right to use IP.

Licenses that provide a right to access a reporting entity’s IP are performance obligations satisfied over time, and therefore revenue is recognized over time. Licenses that provide a right to use a reporting entity’s IP are performance obligations satisfied at a point in time. Revenue cannot be recognized before the beginning of the period the customer is able to use and benefit from its right to access or its right to use a reporting entity’s IP. This is typically the beginning of the stated license period, assuming the customer has the ability to use and benefit from the IP at that time.

To assist reporting entities in determining whether a license provides a right to access IP or a right to use IP, the revenue standard defines two categories of licenses: functional and symbolic.

1. Functional intellectual property. Intellectual property that has significant standalone functionality (for example, the ability to process a transaction, perform a function or task, or be played or aired). Functional intellectual property derives a substantial portion of its utility (that is, its ability to provide benefit or value) from its significant standalone functionality.
2. Symbolic intellectual property. Intellectual property that is not functional intellectual property (that is, intellectual property that does not have significant standalone functionality). Because symbolic intellectual property does not have significant standalone functionality, substantially all of the utility of symbolic intellectual property is derived from its association with the entity’s past or ongoing activities, including its ordinary business activities.

9.5.1 Functional IP

Intellectual property that has significant standalone functionality is functional IP. Functional IP includes software, drug formulas or compounds, and completed media content. Patents underlying highly functional items (such as a specialized manufacturing process that the customer can use as a result of the patent) are also classified as functional IP. Functional IP is a right to use IP because the IP has standalone functionality and the customer can use the IP as it exists at a point in time. Management should refer to the guidance on transfer of control to determine the point in time at which control of the license transfers. Refer to RR 6 for discussion of the indicators of transfer of control.

The guidance provides an exception to point in time recognition if the criteria in ASC 606-10-55-62 are met.

1. The functionality of the intellectual property to which the customer has rights is expected to substantively change during the license period as a result of activities of the entity that do not transfer a promised good or service to the customer (see paragraphs 606-10-25-16 through 25-18). Additional promised goods or services (for example, intellectual property upgrade rights or rights to use or access additional intellectual property) are not considered in assessing this criterion.
2. The customer is contractually or practically required to use the updated intellectual property resulting from criterion (a).

We believe it will be unusual for the above criteria to be met because changes to IP typically transfer a good or service to the customer. An example is a distinct license to software (functional IP) that will substantively change as a result of updates to the software during the license period. The updates to the software license are an additional good or service transferred to the customer; therefore, the criteria above are not met and the software license is a right to use IP. The reporting entity would also need to assess whether the software license and the subsequent updates are distinct in this example; that is, revenue would likely be recognized over time if the license and updates are combined into a single performance obligation.

Examples 54, 59, and 61A of the revenue standard (ASC 606-10-55-362 through ASC 606-10-55-363B, ASC 606-10-55-389 through ASC 606-10-55-392D, and ASC 606-10-55-399A through ASC 606-10-55-399J) illustrate arrangements that are licenses to functional IP.

9.5.2 Symbolic IP

Intellectual property that is not functional IP is symbolic IP. Symbolic IP includes brands, logos, team names, and franchise rights. Symbolic IP is a right to access IP because of the reporting entity’s obligation to support or maintain the IP over time. Revenue from a license to symbolic IP is recognized over the license period, or the remaining economic life of the IP, if shorter. Management should select an appropriate measure of progress to determine the pattern of recognition of a license to symbolic IP. We believe a straight-line approach will often be an appropriate method for recognizing revenue because the benefit to the customer often transfers ratably throughout a license period. There might be circumstances where the nature of the IP or the related activities indicate that another method of progress better reflects the transfer to the customer. Refer to RR 6.4 for discussion of measures of progress.

Examples 57, 58, and 61 of the revenue standard (ASC 606-10-55-375 through ASC 606-10-55-388 and ASC 606-10-55-395 through ASC 606-10-55-399) illustrate arrangements that are licenses to symbolic IP.

9.5.3 Examples of determining the nature of a license

CartoonCo is the creator of a new animated television show. It grants a three-year license to Retailer for use of the characters on consumer products. Retailer is required to use the latest image of the characters from the television show. There are no other goods or services provided to Retailer in the arrangement. When entering into the license agreement, Retailer reasonably expects CartoonCo will continue to produce the show, develop the characters, and perform marketing to enhance awareness of the characters. Retailer may start selling consumer products with the characters once the show first airs on television.

The intellectual property underlying the license in this example is symbolic IP because the character images do not have significant standalone functionality. The license is therefore a right to access IP and CartoonCo would recognize revenue over time. Revenue recognition would commence when the show first airs because this is when the customer is able to benefit from the license.

SoftwareCo provides a fixed-term software license to TechCo. The terms of the arrangement allow TechCo to download the software by using a unique digital key provided by SoftwareCo. TechCo can use the software on its own server. The software is functional when it transfers to TechCo. TechCo also purchases post-contract customer support (PCS) with the software license. There is no expectation for SoftwareCo to undertake any activities other than the PCS. The license and PCS are distinct as TechCo can benefit from the license on its own and the license is separable from the PCS.

The IP underlying the license in this example is functional IP because the software has significant standalone functionality. The criteria in ASC 606-10-55-62, which provide the exception for functional IP, are not met because changes to the IP (PCS) transfer a good or service to the customer. The license is therefore a right to use IP. SoftwareCo would recognize revenue at a point in time when TechCo is able to use and benefit from the license (no earlier than the beginning of the license term). PCS is a separate performance obligation in this arrangement and does not impact the assessment of the nature of the license.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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