12.4 Identifying the Nature of the License

In developing the revenue standard, the FASB and IASB committed to developing a single, comprehensive framework to apply to all types of revenue-generating transactions, including licenses of IP.9

As discussed in paragraph BC403 of ASU 2014-09, applying a single framework to licenses of IP proved to be challenging because “licenses vary significantly and include a wide array of different features and economic characteristics, which lead to significant differences in the rights provided by a license.” The boards acknowledged that in some situations, a customer may be unable to control the license at the time of transfer because of the nature of the underlying IP and the entity’s potential continuing involvement with the IP. However, this is not always the case. Therefore, the boards recognized that in a manner consistent with the standard’s general revenue recognition model, control of some licenses may be transferred at a point in time while control of other licenses may be transferred over time.

ASC 606-10

55-58 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:

A right to access the entity’s intellectual property throughout the license period (or its remaining economic life, if shorter)
A right to use the entity’s intellectual property as it exists at the point in time at which the license is granted.

55-58A 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 paragraph 606-10-25-27(a)). An entity should apply paragraphs 606-10-25-31 through 25-37 to select an appropriate method to measure its progress toward complete satisfaction of that performance obligation to provide access to its intellectual property.

55-58B 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 paragraph 606-10-25-30 to determine the point in time at which the license transfers to the customer.

In determining whether to recognize revenue from a license of IP over time or at a point in time, an entity needs to determine the nature of the licensing arrangement. The nature of the arrangement is determined on the basis of the entity’s promise to the customer and whether that promise (1) provides access to the IP throughout the license term (i.e., “right to access”) or (2) provides a right to use the IP as it exists at the point in time when control of the license is transferred to the customer (i.e., “right to use”). Revenue from a license that grants a right to access an entity’s IP is recognized over time since the customer simultaneously receives and consumes the benefits of the entity’s IP throughout the license periods (i.e., meets the requirement in ASC 606-10-25-27(a)). Revenue from a license that grants a right to use an entity’s IP is recognized at the point in time when control of the license is transferred to the customer. An entity’s determination of when control of a license has been transferred to a customer should be based, in part, on the indicators in ASC 606-10-25-30. However, control of a license cannot be transferred to a customer before the customer is able to use and benefit from the license (i.e., the license term has commenced). For further discussion, see Section 12.5.

To help an entity determine whether a license is a right to access or right to use the entity’s IP, the revenue standard provides guidance on assessing the nature of a license of IP. An entity’s ongoing activities, or lack of activities, may significantly affect the utility of the license (i.e., the functionality or value of the IP to the customer). These activities may be explicitly or implicitly promised by the entity and may include supporting or maintaining its IP for the duration of the customer’s license period. Further, the obligation to maintain or support the IP may need to be identified as a separate promise under the contract (insofar as the activities transfer additional goods or services to the customer). To assist in the evaluation of whether the license provides the customer with a right to access or right to use the entity’s IP, the revenue standard distinguishes between two types of IP: (1) functional and (2) symbolic.

ASC 606-10

55-59 To determine whether the entity’s promise [is] to provide a right to access its intellectual property or a right to use its intellectual property, the entity should consider the nature of the intellectual property to which the customer will have rights. Intellectual property is either:

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.
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.

In the original guidance issued in ASU 2014-09, the FASB and IASB decided that the determination of whether a license grants the customer a right to access or right to use the entity’s IP should hinge on whether the licensor’s ongoing activities are expected to significantly affect the underlying IP. Stakeholders identified significant implementation questions, which focused mainly on (1) the nature of the licensor’s activities that affect the IP and (2) how entities should evaluate the impact of such activities on the IP (e.g., the effect on the IP’s form and functionality, value, or both). Those questions were discussed by the TRG, and the TRG acknowledged that different interpretations may arise between what constitutes a right-to-access and a right-to-use license. As a result, the FASB decided to clarify the guidance on identifying the nature of a license. As indicated in ASC 606-10-55-59 (as amended by ASU 2016-10), the Board decided that the assessment of whether a license provides the customer with a right to access or a right to use the entity’s IP should be based on whether the underlying IP is functional or symbolic. Refer to Sections 12.4.1 and 12.4.2 for additional information on functional and symbolic IP.

Connecting the Dots

In some instances, identifying the nature of a license is straightforward and the outcome of whether the license provides the customer with a right to access or a right to use the entity’s IP is readily apparent. However, in other situations, this assessment is more complicated and requires significant consideration and judgment. Specifically, this may be the case when the entity promises to provide multiple nonlicense goods and services in addition to the license, or when the license is subject to various restrictions. As discussed above, there are many factors that influence the recognition of revenue from a license of IP. Therefore, it would not be appropriate to assume that certain types of licenses should always be accounted for in a similar manner.

12.4.1 Functional IP

IP may have significant stand-alone functionality. For example, some IP can be aired or viewed (e.g., a song or a movie) or can perform a task. The functionality (i.e., ongoing utility) of this IP is not affected by the entity’s activities (or lack of activities) that do not transfer an additional good or service to the customer. That is, the customer controls the functionality provided by the license to IP when control of the IP is transferred to the customer. Any activities the entity undertakes to maintain or enhance the IP are likely to be identified as a separate promise under the contract. A license in these circumstances can be referred to as a license to functional IP. Examples of licenses to functional IP could include software, drug compounds and formulas, and completed media content (such as films, television shows, or music).

ASC 606-10

55-62 A license to functional intellectual property grants a right to use the entity’s intellectual property as it exists at the point in time at which the license is granted unless both of the following criteria are met:

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.
The customer is contractually or practically required to use the updated intellectual property resulting from the activities in criterion (a).

If both of those criteria are met, then the license grants a right to access the entity’s intellectual property.

55-63 Because functional intellectual property has significant standalone functionality, an entity’s activities that do not substantively change that functionality do not significantly affect the utility of the intellectual property to which the customer has rights. Therefore, the entity’s promise to the customer in granting a license to functional intellectual property does not include supporting or maintaining the intellectual property. Consequently, if a license to functional intellectual property is a separate performance obligation (see paragraph 606-10-55-55) and does not meet the criteria in paragraph 606-10-55-62, it is satisfied at a point in time (see paragraphs 606-10-55-58B through 55-58C).

Generally, the nature of a license to functional IP that is distinct will provide a customer with the right to use an entity’s IP (i.e., point-in-time revenue recognition) unless (1) the entity’s ongoing activities that will not transfer promised goods to the customer (i.e., those not deemed to be additional promised goods to the customer) will significantly change the utility of the license and (2) the customer is contractually or practically required to use the updated IP once available. If these criteria are met, the nature of the license is a right to access the entity’s IP (i.e., a license for which revenue is recognized over time). As discussed in paragraph BC58 of ASU 2016-10, the FASB expected that at the time of issuance of ASU 2016-10, the criteria in ASC 606-10-55-62 “will be met only infrequently, if at all.” That is because additional goods or services provided to the customer (e.g., updates and customization services) are typically promised goods or services that would not meet the criterion in ASC 606-10-55-62(a).

The following examples in ASC 606 illustrate the identification of functional IP:

ASC 606-10

Example 54 — Right to Use Intellectual Property

55-362 Using the same facts as in Case A in Example 11 (see paragraphs 606-10-55-141 through 55-145), the entity identifies four performance obligations in a contract:

The software license
Installation services
Software updates
Technical support.

55-363 The entity assesses the nature of its promise to transfer the software license. The entity first concludes that the software to which the customer obtains rights as a result of the license is functional intellectual property. This is because the software has significant standalone functionality from which the customer can derive substantial benefit regardless of the entity’s ongoing business activities.

55-363A The entity further concludes that while the functionality of the underlying software is expected to change during the license period as a result of the entity’s continued development efforts, the functionality of the software to which the customer has rights (that is, the customer’s instance of the software) will change only as a result of the entity’s promise to provide when-and-if available software updates. Because the entity’s promise to provide software updates represents an additional promised service in the contract, the entity’s activities to fulfill that promised service are not considered in evaluating the criteria in paragraph 606-10-55-62. The entity further notes that the customer has the right to install, or not install, software updates when they are provided such that the criterion in 606-10-55-62(b) would not be met even if the entity’s activities to develop and provide software updates had met the criterion in paragraph 606-10-55-62(a).

55-363B Therefore, the entity concludes that it has provided the customer with a right to use its software as it exists at the point in time the license is granted and the entity accounts for the software license performance obligation as a performance obligation satisfied at a point in time. The entity recognizes revenue on the software license performance obligation in accordance with paragraphs 606-10-55-58B through 55-58C.

Example 56 — Identifying a Distinct License

55-367 An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10 years and also promises to manufacture the drug for the customer for 5 years, while the customer develops its own manufacturing capability. The drug is a mature product; therefore, there is no expectation that the entity will undertake activities to change the drug (for example, to alter its chemical composition). There are no other promised goods or services in the contract.

Case B — License Is Distinct

55-371 In this case, the manufacturing process used to produce the drug is not unique or specialized, and several other entities also can manufacture the drug for the customer.

55-373 The entity assesses the nature of its promise to grant the license. The entity concludes that the patented drug formula is functional intellectual property (that is, it has significant standalone functionality in the form of its ability to treat a disease or condition). There is no expectation that the entity will undertake activities to change the functionality of the drug formula during the license period. Because the intellectual property has significant standalone functionality, any other activities the entity might undertake (for example, promotional activities like advertising or activities to develop other drug products) would not significantly affect the utility of the licensed intellectual property. Consequently, the nature of the entity’s promise in transferring the license is to provide a right to use the entity’s functional intellectual property, and it accounts for the license as a performance obligation satisfied at a point in time. The entity recognizes revenue for the license performance obligation in accordance with paragraphs 606-10-55-58B through 55-58C.

Example 59 — Right to Use Intellectual Property

Case A — Initial License

55-389 An entity, a music record label, licenses to a customer a recording of a classical symphony by a noted orchestra. The customer, a consumer products company, has the right to use the recorded symphony in all commercials, including television, radio, and online advertisements for two years in Country A starting on January 1, 20X1. In exchange for providing the license, the entity receives fixed consideration of $10,000 per month. The contract does not include any other goods or services to be provided by the entity. The contract is noncancellable.

55-391 In determining that the promised license provides the customer with a right to use its intellectual property as it exists at the point in time at which the license is granted, the entity considers the following:

The classical symphony recording has significant standalone functionality because the recording can be played in its present, completed form without the entity’s further involvement. The customer can derive substantial benefit from that functionality regardless of the entity’s further activities or actions. Therefore, the nature of the licensed intellectual property is functional.
The contract does not require, and the customer does not reasonably expect, that the entity will undertake activities to change the licensed recording.

Therefore, the criteria in paragraph 606-10-55-62 are not met.

Example 61A — Right to Use Intellectual Property

55-399A An entity, a television production company, licenses all of the existing episodes of a television show (which consists of the first four seasons) to a customer. The show is presently in its fifth season, and the television production company is producing episodes for that fifth season at the time the contract is entered into, as well as promoting the show to attract further viewership. The Season 5 episodes in production are still subject to change before airing.

Case A — License Is the Only Promise in the Contract

55-399B The customer obtains the right to broadcast the existing episodes, in sequential order, for a period of two years. The show has been successful through the first four seasons, and the customer is both aware that Season 5 already is in production and aware of the entity’s continued promotion of the show. The customer will make fixed monthly payments of an equal amount throughout the two-year license period.

55-399C The entity assesses the goods and services promised to the customer. The entity’s activities to produce Season 5 and its continued promotion of the show do not transfer a promised good or service to the customer. Therefore, the entity concludes that there are no other promised goods or services in the contract other than the license to broadcast the existing episodes in the television series. The contractual requirement to broadcast the episodes in sequential order is an attribute of the license (that is, a restriction on how the customer may use the license); therefore, the only performance obligation in this contract is the single license to the completed Seasons 1–4.

55-399D To determine whether the promised license provides the customer with a right to use its intellectual property or a right to access its intellectual property, the entity evaluates the intellectual property that is the subject of the license. The existing episodes have substantial standalone functionality at the point in time they are transferred to the customer because the episodes can be aired, in the form transferred, without any further participation by the entity. Therefore, the customer can derive substantial benefit from the completed episodes, which have significant utility to the customer without any further activities of the entity. The entity further observes that the existing episodes are complete and not subject to change. Thus, there is no expectation that the functionality of the intellectual property to which the customer has rights will change (that is, the criteria in paragraph 606-10-55-62 are not met). Therefore, the entity concludes that the license provides the customer with a right to use its functional intellectual property.

55-399E Consequently, in accordance with paragraph 606-10-55-58B, the license is a performance obligation satisfied at a point in time. In accordance with paragraphs 606-10-55-58B through 55-58C, the entity recognizes revenue for the license on the date that the customer is first permitted to air the licensed content, assuming the content is made available to the customer on or before that date. The date the customer is first permitted to air the licensed content is the beginning of the period during which the customer is able to use and benefit from its right to use the intellectual property. Because of the length of time between the entity’s performance (at the beginning of the period) and the customer’s annual payments over two years (which are noncancellable), the entity considers the guidance in paragraphs 606-10-32-15 through 32-20 to determine whether a significant financing component exists.

Case B — Contract Includes Two Promises

55-399F Consistent with Case A, the contract provides the customer with the right to broadcast the existing episodes, in sequential order, over a period of two years. The contract also grants the customer the right to broadcast the episodes being produced for Season 5 once all of those episodes are completed.

55-399G The entity assesses the goods and services promised to the customer. The entity concludes that there are two promised goods or services in the contract:

The license to the existing episodes (see paragraph 606-10-55-399C)
The license to the episodes comprising Season 5, when all of those episodes are completed.

55-399H The entity then evaluates whether the license to the existing content is distinct from the license to the Season 5 episodes when they are completed. The entity concludes that the two licenses are distinct from each other and, therefore, separate performance obligations. This conclusion is based on the following analysis:

Each license is capable of being distinct because the customer can benefit from its right to air the existing completed episodes on their own and can benefit from the right to air the episodes comprising Season 5, when they are all completed, on their own and together with the right to air the existing completed content.
Each of the two promises to transfer a license in the contract also is separately identifiable; they do not, together, constitute a single overall promise to the customer. The existing episodes do not modify or customize the Season 5 episodes in production, and the existing episodes do not, together with the pending Season 5 episodes, result in a combined functionality or changed content. The right to air the existing content and the right to air the Season 5 content, when available, are not highly interdependent or highly interrelated because the entity’s ability to fulfill its promise to transfer either license is unaffected by its promise to transfer the other. In addition, whether the customer or another licensee had rights to air the future episodes would not be expected to significantly affect the customer’s license to air the existing, completed episodes (for example, viewers’ desire to watch existing episodes from Seasons 1–4 on the customer’s network generally would not be significantly affected by whether the customer, or another network, had the right to broadcast the episodes that will comprise Season 5).

55-399I The entity assesses the nature of the two separate performance obligations (that is, the license to the existing, completed episodes of the series and the license to episodes that will comprise Season 5 when completed). To determine whether the licenses provide the customer with rights to use the entity’s intellectual property or rights to access the entity’s intellectual property, the entity considers the following:

The licensed intellectual property (that is, the completed episodes in Seasons 1–4 and the episodes in Season 5, when completed) has significant standalone functionality separate from the entity’s ongoing business activities, such as in producing additional intellectual property (for example, future seasons) or in promoting the show, and completed episodes can be aired without the entity’s further involvement.
There is no expectation that the entity will substantively change any of the content once it is made available to the customer for broadcast (that is, the criteria in paragraph 606-10-55-62 are not met).
The activities expected to be undertaken by the entity to produce Season 5 and transfer the right to air those episodes constitute an additional promised good (license) in the contract and, therefore, do not affect the nature of the entity’s promise in granting the license to Seasons 1–4.

55-399J Therefore, the entity concludes that both the license to the existing episodes in the series and the license to the episodes that will comprise Season 5 provide the customer with the right to use its functional intellectual property as it exists at the point in time the license is granted. As a result, the entity recognizes the portion of the transaction price allocated to each license at a point in time in accordance with paragraphs 606-10-55-58B through 55-58C. That is, the entity recognizes the revenue attributable to each license on the date that the customer is first permitted to first air the content included in each performance obligation. That date is the beginning of the period during which the customer is able to use and benefit from its right to use the licensed intellectual property.

Generally, the nature of a license to functional IP that is distinct will provide an entity’s customer with the right to use the entity’s IP, which results in the entity’s recognition of revenue at the point in time at which control of the license is transferred to the customer. However, there are situations in which an entity grants a license to functional IP that is transferred at contract inception but also promises to provide ongoing services that are not distinct from the license (i.e., the license and ongoing services are combined into a single performance obligation).

It is not acceptable for an entity to recognize revenue at the point in time at which a license to functional IP is granted when the revenue is related to a single performance obligation to (1) grant the license and (2) perform ongoing substantive services that are not distinct from the license. ASC 606-10-55-57 states:

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 in accordance with paragraphs 606-10-55-59 through 55-60 and 606-10-55-62 through 55-64A) in determining whether that combined good or service is satisfied over time or at a point in time in accordance with paragraphs 606-10-25-23 through 25-30 and, if over time, in selecting an appropriate method for measuring progress in accordance with paragraphs 606-10-25-31 through 25-37.

Although a license to functional IP provides the customer with a right to use the entity’s IP as it exists at a point in time, the presence of an ongoing substantive service that is not distinct from the license indicates that the customer cannot continue to benefit from the license without the ongoing service. In addition, the entity’s performance obligation is not fully satisfied upon transfer of the license because the entity has promised to provide an ongoing substantive service that is not separable from the license. That is, the license to the functional IP and the ongoing service are inputs into a combined item. Therefore, the nature of the entity’s performance obligation involves continuing to provide the customer with an ongoing service over time. Because the entity does not fully satisfy its performance obligation upon transferring the license to the customer, it is not appropriate to recognize revenue for the single performance obligation at that point in time.

12.4.2 Symbolic IP

Some forms of IP may not have stand-alone functionality when transferred to a customer. The utility of these forms of IP is significantly derived from the entity’s past or ongoing activities undertaken to maintain or support the IP, and such activities do not transfer additional goods or services to the customer. That is, the value of the IP is largely dependent on the entity’s ongoing support or maintenance of that IP. In addition, the customer is contractually or practically required to use the updated IP. Licenses to IP whose value is derived from an entity’s ongoing activities may include brands, teams, trade names, logos, and franchise rights. For example, a license to a sports team’s name is directly affected by the team’s performance and its continued association with the league in which it plays. If the team ceases to play games, the value of the IP would most likely decline significantly. Further, a customer could not choose to use the form of the IP that existed when the team was still playing games. Rather, the customer has to use the most current form of the IP. These types of IP are referred to as symbolic IP.

ASC 606-10

55-60 A customer’s ability to derive benefit from a license to symbolic intellectual property depends on the entity continuing to support or maintain the intellectual property. Therefore, a license to symbolic intellectual property grants the customer a right to access the entity’s intellectual property, which is satisfied over time (see paragraphs 606-10-55-58A and 606-10-55-58C) as the entity fulfills its promise to both:

Grant the customer rights to use and benefit from the entity’s intellectual property
Support or maintain the intellectual property. An entity generally supports or maintains symbolic intellectual property by continuing to undertake those activities from which the utility of the intellectual property is derived and/or refraining from activities or other actions that would significantly degrade the utility of the intellectual property.
Subparagraph superseded by Accounting Standards Update No. 2016-10.

A symbolic license contains the characteristics of a right-to-access license (i.e., a license for which revenue is recognized over time) since the customer is simultaneously receiving the IP and benefiting from it throughout the license period. An entity’s ongoing activities (including actions that would significantly degrade the IP’s utility) will continue to support or maintain (or significantly degrade) the IP’s utility to the customer.

Connecting the Dots

As noted in paragraphs BC62 through BC65 of ASU 2016-10, ASC 606 contains no guidance requiring the entity to promise or expect to provide ongoing activities to maintain or support the IP. That is, if the customer has acquired a license to symbolic IP, the license is a right to access IP regardless of whether the entity expects to undertake activities to maintain the IP. An example of this may be the right to a license to a retired sports team’s name or logo. By contrast, under IFRS 15, an entity’s determination of whether a license is a right-to-use rather than a right-to-access license is based on whether the underlying IP is significantly affected by the entity’s ongoing activities. While this is a difference between U.S. GAAP and IFRS Accounting Standards, the FASB decided that the amendments in ASU 2016-10 would improve the operability of the licensing guidance. For more discussion on differences between U.S. GAAP and IFRS Accounting Standards, refer to Appendix A.

As noted in paragraph BC72 of ASU 2016-10, many right-to-access licenses “may constitute a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer in accordance with paragraph 606-10-25-14(b) (for example, a series of distinct periods [month, quarter, year] of access).” See Section 5.3.3 for a discussion about the application of the series guidance.

A right-to-access license is transferred to the customer (and thus, revenue is recognized) over the shorter of the contractual term or the remaining economic life of the IP. Therefore, if an entity provides a customer with a perpetual license to symbolic IP, the entity will need to estimate the remaining economic life of the IP to determine the appropriate period over which to recognize revenue.

The following examples in ASC 606 illustrate the identification of symbolic IP:

ASC 606-10

Example 57 — Franchise Rights

55-375 An entity enters into a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the license, the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting the license, the entity receives a fixed fee of $1 million, as well as a sales-based royalty of 5 percent of the customer’s sales for the term of the license. The fixed consideration for the equipment is $150,000 payable when the equipment is delivered.

Identifying Performance Obligations

55-376 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake activities such as analyzing the consumers’ changing preferences and implementing product improvements, pricing strategies, marketing campaigns, and operational efficiencies to support the franchise name. However, the entity concludes that these activities do not directly transfer goods or services to the customer.

Licensing

55-380 The entity assesses the nature of the entity’s promise to grant the franchise license. The entity concludes that the nature of its promise is to provide a right to access the entity’s symbolic intellectual property. The trade name and logo have limited standalone functionality; the utility of the products developed by the entity is derived largely from the products’ association with the franchise brand. Substantially all of the utility inherent in the trade name, logo, and product rights granted under the license stems from the entity’s past and ongoing activities of establishing, building, and maintaining the franchise brand. The utility of the license is its association with the franchise brand and the related demand for its products.

Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.

Example 58 — Access to Intellectual Property

55-383 An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of its comic strips to a customer for a four-year term. There are main characters involved in each of the comic strips. However, newly created characters appear and disappear regularly and the images of the characters evolve over time. The customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades, within reasonable guidelines.

55-384 In exchange for granting the license, the entity receives a fixed payment of $1 million in each year of the 4-year term.

55-385 The entity concludes that it has made no other promises to the customer other than the promise to grant a license. That is, the additional activities associated with the license do not directly transfer a good or service to the customer. Therefore, the entity concludes that its only performance obligation is to transfer the license.

55-386 The entity assesses the nature of its promise to transfer the license and concludes that the nature of its promise is to grant the customer the right to access the entity’s symbolic intellectual property. The entity determines that the licensed intellectual property (that is, the character names and images) is symbolic because it has no standalone functionality (the names and images cannot process a transaction, perform a function or task, or be played or aired separate from significant additional production that would, for example, use the images to create a movie or a show) and the utility of those names and images is derived from the entity’s past and ongoing activities such as producing the weekly comic strip that includes the characters.

Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.

55-387 Because the nature of the entity’s promise in granting the license is to provide the customer with a right to access the entity’s intellectual property, in accordance with paragraph 606-10-55-58A, the entity accounts for the promised license as a performance obligation satisfied over time.

55-388 The entity recognizes the fixed consideration allocable to the license performance obligation in accordance with paragraphs 606-10-55-58A and 606-10-55-58C. The entity considers paragraphs 606-10-25-31 through 25-37 in identifying the method that best depicts its performance in the license. Because the contract provides the customer with unlimited use of the licensed characters for a fixed term, the entity determines that a time-based method would be the most appropriate measure of progress toward complete satisfaction of the performance obligation.

Example 61 — Access to Intellectual Property

55-395 An entity, a well-known sports team, licenses the use of its name and logo to a customer. The customer, an apparel designer, has the right to use the sports team’s name and logo on items including t-shirts, caps, mugs, and towels for one year. In exchange for providing the license, the entity will receive fixed consideration of $2 million and a royalty of 5 percent of the sales price of any items using the team name or logo. The customer expects that the entity will continue to play games and provide a competitive team.

55-396 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity concludes that the only good or service promised to the customer in the contract is the license. The additional activities associated with the license (that is, continuing to play games and provide a competitive team) do not directly transfer a good or service to the customer. Therefore, there is one performance obligation in the contract.

55-397 To determine whether the entity’s promise in granting the license provides the customer with a right to access the entity’s intellectual property or a right to use the entity’s intellectual property, the entity assesses the nature of the intellectual property to which the customer obtains rights. The entity concludes that the intellectual property to which the customer obtains rights is symbolic intellectual property. The utility of the team name and logo to the customer is derived from the entity’s past and ongoing activities of playing games and providing a competitive team (that is, those activities effectively give value to the intellectual property). Absent those activities, the team name and logo would have little or no utility to the customer because they have no standalone functionality (that is, no ability to perform or fulfill a task separate from their role as symbols of the entity’s past and ongoing activities).

Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.

55-398 Consequently, the entity’s promise in granting the license provides the customer with the right to access the entity’s intellectual property throughout the license period and, in accordance with paragraph 606-10-55-58A, the entity accounts for the promised license as a performance obligation satisfied over time.

55-399 The entity recognizes the fixed consideration allocable to the license performance obligation in accordance with paragraphs 606-10-55-58A and 606-10-55-58C. This includes applying paragraphs 606-10- 25-31 through 25-37 to identify the method that best depicts the entity’s performance in satisfying the license. For the consideration that is in the form of a sales-based royalty, paragraph 606-10-55-65 applies because the sales-based royalty relates solely to the license that is the only performance obligation in the contract. The entity concludes that recognizing revenue from the sales-based royalty when the customer’s subsequent sales of items using the team name or logo occur is consistent with the guidance in paragraph 606-10-55-65(b). That is, the entity concludes that ratable recognition of the fixed consideration of $2 million plus recognition of the royalty fees as the customer’s subsequent sales occur reasonably depict the entity’s progress toward complete satisfaction of the license performance obligation.

Connecting the Dots

Airlines with large loyalty programs frequently enter into agreements with a co-branded credit card partner in which mileage credits and other consideration (e.g., award travel, upgrades, bag fee waivers, lounge access) are sold to a financial institution. The mileage credits are then issued to the financial institution’s credit card customers, who are also airline loyalty members, as they make purchases on their co-branded credit card. In these arrangements, the financial institution will typically make an up-front payment to the airline for advance purchases of mileage credit and future services to be provided under the co-branded contract. The “advance services” include the financial institution’s receiving direct access to the airline’s customer list. When viewed from the airline’s perspective, these co-branded agreements include two customers: the financial institution and the credit card holder. The credit card holder is included as a customer because of the mileage credits the holder will earn under its loyalty agreement.

Considerations related to the application of ASC 606 to these arrangements are discussed below.

Performance Obligations

Airline entities with these arrangements will need to carefully evaluate the terms of the agreements to properly identify and evaluate the promised goods or services that will be transferred to the customer(s). The significant performance obligations in a co-branded agreement might include (1) the airline’s sale of the mileage credits to the financial institution and (2) the right transferred by the airline to the financial institution that allows the financial institution to access the airline’s customer list and brand. Use of the airline’s brand and access to the airline’s customer list would typically be combined as a separate performance obligation since the financial institution would use both in its marketing efforts directed at the airline’s customers to increase its credit card business. For example, from the perspective of the financial institution, access to only the airline’s brand would have minimal value without access to the airline’s customer list since the ability to target a common demographic of airline loyalty members is valuable to a financial institution. Further, access to the customer list without the brand would have limited value since the airline customers are induced to enter into an agreement with the financial institution by means of offers provided through the airline brand. Therefore, the combined right to access an airline’s brand and customer list would generally be considered “highly interdependent or highly interrelated” under ASC 606-10-25-21(c). In addition, in the airline industry, it would be uncommon for an airline to separately sell the right to access its brand and customer list outside of a co-branded agreement.

For a discussion about identifying performance obligations in other co-branded credit card arrangements, see Section 5.3.2.3.2.

Allocation of Transaction Price and Revenue Recognition

In accordance with ASC 606-10-55-54, the right to access the airline’s customer list and brand is generally viewed as a right of the financial institution to access the airline’s IP. ASC 606-10-55-58 distinguishes between (1) functional IP (the right to use an entity’s IP, which promise is fulfilled at a point in time) and (2) symbolic IP (the right to access an entity’s IP, which promise is fulfilled over time). The right to access the airline’s customer list and brand over a contractual period represents symbolic IP since the use of the brand and customer list is beneficial to the financial institution as a result of the financial institution’s continued association with the airline.

As noted above, the other significant performance obligation in a co-branded arrangement represents the sale of the mileage credits to the financial institution. The financial institution will typically transfer the mileage credits to its own customers as the co-branded credits cards are used. The airline’s performance obligation would then be satisfied at a point in time upon the redemption of miles by credit card holders. Thus, the two performance obligations in a co-branded arrangement have different revenue recognition patterns since the performance obligation to provide mileage credits is satisfied at a point in time (when the mileage credits are redeemed by credit card holders) while the performance obligation to give the financial institution the right to access the airline’s brand and customer list is satisfied over the period of the co-branded agreement. Recognition of the transaction price allocated to the mileage credits would be deferred until the later of when (1) the miles are used or (2) the miles expire (if applicable). In contrast, the transaction price allocated to the right to access the airline brand and customer list would be recognized over the period of the co-branded arrangement.

Further, the transaction price allocated to the symbolic IP in a co-branded arrangement is variable since most of the payments from the financial institution to the airline are dependent on the successful acquisition of new credit card holders and subsequent use of the card by the cardholders (which results in the payment of fees from the financial institution to the airline). Therefore, the airline would recognize revenue in accordance with the sales- or usage-based royalty guidance in ASC 606-10-55-65.

12.4.3 Additional Flowchart for Determining the Nature of a License

The flowchart below, which is reproduced from ASC 606-10-55-63A, provides an overview of the decision-making process for determining the nature of an entity’s license of IP to a customer (i.e., for determining whether a license of IP is a right to use or right to access an entity’s IP). Note, however, that the flowchart does not include all of the guidance an entity is required to consider and is not intended to be a substitute for the guidance discussed above.

ASC 606-10

Footnotes

In January 2021, the FASB issued ASU 2021-02, which allows a franchisor that is not a PBE (a “private-company franchisor”) to use a practical expedient when identifying performance obligations in its contracts with customers (i.e., franchisees) under ASC 606. See Section 5.3.5 for additional details.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.