Licenses For Intellectual Property
Entities often buy or sell licenses of intellectual property (“IP”)—items such as patents, software, music, and scientific compounds. These contracts are common in industries such as technology, entertainment and media, pharmaceuticals and life sciences, and retail and consumer.
ASC 606 Revenue from Contracts with Customers (ASC 606) provides accounting guidance for the licensing of IP. In this article, we review that guidance and provide practical examples of its application. The accounting for sales- and usage-based royalties from IP licenses represents an important departure from the primary guidance on IP licensing and is not addressed in this article. For more information, please see the RevenueHub article Sales- and Usage-Based Royalties.
To properly account for IP licenses under ASC 606, entities must analyze the following: (1) whether the transaction represents a sale or licensing of IP; (2) whether the IP is a distinct performance obligation; (3) the nature of the license—functional or symbolic; and (4) the timing of recognition based on the nature of the license.
Source: Brigham Young University