FASB Issues Guidance on Licensing and Performance Obligationsby
The Financial Accounting Standards Board (FASB) recently issued final guidance on accounting for licenses of intellectual property and identifying performance obligations in its new revenue recognition standard.
Accounting Standards Update (ASU) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which was issued on April 14, addresses questions pertaining to licensing and identifying performance obligations that were brought up to and discussed by the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG).
“One of the objectives of the TRG is to inform the [FASB and the International Accounting Standards Board] about potential implementation issues that could arise when organizations implement the new revenue guidance,” the ASU states. “The TRG also assists stakeholders in understanding specific aspects of the new revenue guidance.”
Licenses of Intellectual Property
The new guidance clarifies how to determine whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time).
For functional intellectual property (software, biological compounds or drug formulas, and completed media content, such as films, TV shows, or music), “the nature of the entity’s promise is to provide a right to use the entity’s intellectual property as that intellectual property exists at the point in time the license is granted unless the entity is expected to undertake activities (that do not transfer a promised good or service to the customer) that will change the functionality of the intellectual property to which the customer has rights,” the ASU states. “An entity’s promise to provide a customer with a right to use the entity’s intellectual property is satisfied at the point in time the customer is able to use and benefit from the license because the entity’s promise in granting the license is solely to make the underlying intellectual property available for the customer’s use and benefit.”
For symbolic intellectual property (brands, team or trade names, logos, and franchise rights), “the nature of the entity’s promise to the customer is both to a) grant the customer rights to use and benefit from the entity’s intellectual property and make that underlying intellectual property available for the customer’s use and benefit, and b) support or maintain the intellectual property during the license period (or over the remaining economic life of the intellectual property, if shorter),” the ASU states. “Consequently, a license to symbolic intellectual property is satisfied over time.”
ASU No. 2016-10 also includes implementation guidance on when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property.
Identifying Performance Obligations
The amendments in ASU No. 2016-10 are expected to reduce the cost and complexity of identifying promised goods or services. The following guidance was added:
- An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
- An entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.
The revenue recognition standard includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. The ASU improves the guidance by:
- Emphasizing that an entity determines whether the nature of its promise in the contract is to transfer each of the goods or services, or whether the promise is to transfer a combined item or items to which the promised goods and/or services are inputs.
- Revising the related factors and examples to align with the improved articulation of the separately identifiable principle.
The amendments affect the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which hasn’t yet taken effect. The effective date and transition requirements for the amendments are the same as those in ASU No. 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of the revenue recognition standard by one year.