How to recognize revenue from licensing and royalty agreements

Licensing and royalty arrangements are common in industries such as software, media, technology, pharmaceuticals, and entertainment. These contracts allow a customer to access or use intellectual property (IP) over time or at a point in time in exchange for fixed or variable payments. Under IFRS 15 and ASC 606, revenue recognition for licenses depends on the nature of the IP, the type of license granted, and the structure of royalty payments. Distinguishing between right to use and right to access licenses is central to applying the correct recognition pattern.

Licenses must be classified based on the nature of the intellectual property.

A license to IP must be evaluated to determine if the company provides the customer with:

• A right to use the IP (static IP)

• A right to access the IP (dynamic or evolving IP)

This distinction drives the timing of revenue recognition:

Type of License	Customer Rights	Revenue Recognition
Right to use	Access to IP as it exists at contract start	Point in time
Right to access	Access to updates or evolving IP over time	Over time

Examples:

• Right to use: Perpetual software license, movie distribution rights

• Right to access: SaaS platforms, live sports broadcasting rights

Right-to-use licenses are recognized at a point in time.

If the license:

• Grants access to a static version of IP

• Does not require the licensor to continue activities that affect the IP’s value

Then revenue is recognized when the customer gains control of the license. This usually occurs at delivery or activation.

Example:

A media company grants a film studio the exclusive right to distribute a completed movie.

Dr. Accounts receivable        500,000  
    Cr. Revenue                           500,000

Revenue is recognized immediately because no future activity by the licensor affects the value of the movie.

Right-to-access licenses require over-time recognition.

If the license:

• Involves continuous or future updates (e.g., software patches, dynamic data)

• Relies on the licensor’s ongoing activities to maintain or enhance the IP's utility

Then revenue is recognized over the license period, often on a straight-line basis or based on usage patterns.

Example:

A SaaS provider grants annual access to an evolving analytics platform.

Dr. Contract asset                 1,200,000  
    Cr. Deferred revenue                   1,200,000

Then recognize monthly revenue:

Dr. Deferred revenue                100,000  
    Cr. Revenue                               100,000

Sales- and usage-based royalties are recognized only when earned.

If a license includes variable consideration tied to customer sales or usage, both IFRS 15 and ASC 606 require that revenue be recognized only when the subsequent sale or usage occurs, regardless of when the license is granted.

This royalty exception rule applies when:

• The consideration is based on sales or usage

• The contract includes a license to IP

Example:

A biotech firm licenses a patented drug and receives 5% of the licensee’s sales.

Revenue is not recognized upfront, but only when sales occur:

Dr. Accounts receivable         250,000  
    Cr. Revenue                             250,000

Only the royalty for the actual reporting period is booked.

Upfront fees in licensing contracts require careful treatment.

Many licensing contracts include:

• Upfront payments for access to IP

• Milestone payments for development phases

• Guaranteed minimum royalties

These elements must be analyzed separately to determine:

• Whether the fee relates to a distinct performance obligation

• If it represents a prepayment for future use or access

• Whether it should be deferred and recognized over time

Payment Type	Recognition
Upfront fee	Deferred unless it relates to a point-in-time license
Minimum guarantee	Recognized as the license is satisfied
Milestone-based	Recognized when the milestone is met
Sales-based royalty	Recognized only when sales occur

Disclosure must explain the licensing model and timing assumptions.

Licensing contracts often require detailed notes in financial statements, including:

• Nature of licensed IP and type of license (use vs access)

• Revenue recognition methods and timing

• Variable consideration and royalty mechanisms

• Significant judgments (e.g., renewals, control transfer)

This is especially important for industries with highly material licensing revenue (e.g., software, biotech, streaming services).

Licensing revenue may also include bundled elements requiring separation.

Licenses are often sold with:

• Installation or integration services

• Customer training

• Ongoing technical support

These must be analyzed for separate performance obligations. Revenue is then allocated based on standalone selling prices.

Example:

A technology firm licenses software and provides 2 years of support:

• License (right to use): $90,000 → Recognized upfront

• Support service: $10,000 → Recognized over time

Licensing and royalty accounting under IFRS 15 and ASC 606 demands careful distinction between static vs dynamic IP, fixed vs variable fees, and distinct obligations within the contract. Accurate classification ensures that revenue is recognized in a way that reflects the economic substance of IP arrangements, providing faithful financial reporting across industries that rely heavily on intangible assets.

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