Revenue Recognition for Licensing Arrangements

✦ Licensing arrangements grant customers rights to intellectual property (IP) such as software, patents, trademarks, music, or film content.

✦ Under ASC 606, revenue from licenses is recognized either at a point in time or over time, based on whether the license is functional or symbolic.

✦ Functional IP (software, completed media content) typically results in point-in-time recognition, while symbolic IP (trademarks, brands) is usually recognized over time.

✦ Proper evaluation ensures accurate timing and amount of revenue recognition for licenses.

1. Types of Licenses and IP under ASC 606

✦ Licensing arrangements typically involve two categories of IP:

 • Functional IP — Has standalone functionality (e.g., software, films, completed media content).

 • Symbolic IP — Requires ongoing support or association with the licensor (e.g., brands, trademarks, sports team logos).

✦ Type of IP significantly affects timing of revenue recognition.

2. Recognition Criteria — Functional vs. Symbolic IP

✦ Functional IP licenses generally meet the criteria to recognize revenue at a point in time when the customer obtains control, if:

 • The customer can benefit immediately without ongoing activities by licensor.

 • The IP is completed and functional upon transfer.

✦ Symbolic IP licenses usually require recognition over time, reflecting the licensor's ongoing obligation to support or maintain the IP.

3. Point-in-Time Revenue Recognition (Functional IP)

✦ Recognize revenue upon license transfer if:

 • Customer obtains right to use IP immediately.

 • Licensor has no obligation to update or maintain the IP.

Example:

A software license provided without significant upgrades.

Entry upon delivery:

debit Accounts Receivable – $100,000

 credit License Revenue – $100,000

4. Over-Time Revenue Recognition (Symbolic IP)

✦ Recognize revenue over the license term for symbolic IP because the licensor typically maintains or supports the IP’s value.

✦ Revenue is typically recognized straight-line over contract duration.

Example:

Licensing rights to use a trademark for 3 years for $300,000.

Annual entry:

debit Accounts Receivable – $100,000

 credit License Revenue – $100,000

5. Determining Standalone Selling Price (SSP)

✦ Licenses bundled with other goods or services must allocate revenue based on SSP under ASC 606-10-32.

✦ SSP can be determined by:

 • Adjusted market assessment.

 • Expected cost plus a margin.

 • Residual approach (only if other methods aren’t applicable).

6. Sales-Based and Usage-Based Royalties

✦ Revenue from sales-based or usage-based royalties is recognized only when subsequent sale or usage occurs.

✦ Revenue is not recognized upfront at license inception.

Entry for royalties (periodically):

debit Royalty Receivable – $20,000

 credit Royalty Revenue – $20,000

7. Disclosure Requirements

✦ Disclose:

 • Nature and terms of licensing arrangements.

 • Timing and method of revenue recognition (point-in-time vs. over time).

 • Amount of licensing revenue recognized and deferred.

 • Royalty arrangements and revenue recognized.

 • Significant judgments and assumptions in applying ASC 606.

8. IFRS Comparison (IFRS 15)

Topic	US GAAP (ASC 606)	IFRS 15
Functional vs. symbolic IP	Clearly differentiated	Same principles
Revenue timing	Point-in-time or over time	Same
Sales-based royalties	Recognized when sales occur	Same
Disclosure	Comprehensive disclosures required	Similar

9. Common Errors

✦ Misclassifying functional IP as symbolic, or vice versa.

✦ Recognizing revenue upfront when over-time recognition is required.

✦ Incorrectly estimating or allocating standalone selling price.

✦ Recognizing royalties prematurely instead of upon sale or usage.

✦ Insufficient disclosure of licensing terms, revenue patterns, or key judgments.