IFRS 15 Licence Revenue Recognition: Right to Access vs Right to Use

What is a licence under IFRS 15, and what does the licensing guidance actually cover?

What is inside and outside the guidance

Local FAQs

Does a sub-licence granted by a distributor fall inside IFRS 15.B52? If the distributor grants rights over IP to an end customer, yes, but the prior question is whether the distributor is principal or agent in that transaction. That is decided under IFRS 15.B34 to B38 and covered in the principal versus agent article, not here.

Is a right to receive future unspecified upgrades a licence? No. It is a stand-ready service, listed in IFRS 15.26(e) as "providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis)". It is usually a separate performance obligation recognised over time and should not be folded into the licence.

Potential risks

Scoping the whole arrangement into Appendix B and skipping IFRS 15.22 to 30 entirely. It produces the right answer occasionally and an unauditable file always, because there is no documented performance obligation analysis to test.

Recording the licence at the contract's stated licence fee. IFRS 15.76 requires allocation on relative stand-alone selling prices, and a contractually stated price "may be (but shall not be presumed to be) the stand-alone selling price" under IFRS 15.77. Licence contracts price the licence line for tax and negotiating reasons far more often than for economic ones.

Is the licence distinct from the other promises in the contract?

Working the gate: a short decision record

Local FAQs

Does a licence bundled with hardware always fail the gate? No. IFRS 15.B54(a) requires the licence to be "integral to the functionality of the good". A licence for optional analytics software shipped alongside a sensor, which the customer could buy separately and run on its own servers, is capable of being distinct and is likely to be separately identifiable.

If the licence is not distinct, can it still be a right to access? The label has no accounting effect. IFRS 15.B55 routes the combined obligation to IFRS 15.31 to 38. Calling the combined obligation a right to access in the disclosure note is imprecise and invites a challenge.

Potential risks

A distinctness conclusion supported only by the statement that the licence is "sold separately in other contracts". That evidences IFRS 15.27(a) only. IFRS 15.27(b) and the IFRS 15.29 factors are a separate assessment and must be documented separately, and this exact gap was one of the recurring faults in the first two years of IFRS 15 files.

A franchise agreement split into six performance obligations because the contract has six priced schedules. Pricing is not the test. Training that only makes sense in the context of operating the licensed system is likely to be highly interrelated with the licence under IFRS 15.29(c).

Right to access or right to use: what is the IFRS 15 test?

Criterion (a): activities that significantly affect the intellectual property

Two limbs. Either the contract requires the activities, or the customer reasonably expects them. A contractual commitment to spend a stated percentage of licensee sales on advertising satisfies the first limb outright. The second limb is an evidential question answered by IFRS 15.B59, and the meaning of "significantly affect" is answered by IFRS 15.B59A. Both are worked in the next unit.

The important negative: activities that affect the licensor's business but not the licensed IP do not count. A pharmaceutical group running trials on a different compound is undertaking activities, but not activities that significantly affect the IP to which this customer has rights.

Criterion (b): the rights must directly expose the customer

Criterion (b) is the one practitioners forget exists. It asks whether the rights granted by the licence expose the customer to the positive or negative effects of the activities. If the customer holds a snapshot of the IP as at the grant date, and later improvements are licensed separately or require a new agreement, the customer is not exposed and criterion (b) fails even though criterion (a) is met.

Software makes the point cleanly. A vendor releases version 12, licenses it perpetually, and continues to develop version 13. The vendor is undertaking activities that significantly affect the product line. The licensee holding a version 12 perpetual licence is not exposed to them, because the licence does not carry version 13. Criterion (b) fails. If the same licence granted rights to all future versions, criterion (b) would be met, and the analysis would turn instead on criterion (c) and whether the upgrade stream is a separate performance obligation.

Criterion (c): the activities must not transfer a good or service

Criterion (c) is the criterion that fails most often and is challenged least often. It cross-refers to IFRS 15.25, so the question is whether the activities are themselves a transfer to the customer. A brand owner's advertising campaign transfers nothing to the licensee, so criterion (c) is satisfied. A licensor's contracted development programme, delivered to the licensee under a services schedule with its own fee, plainly transfers a service, so criterion (c) fails for those activities.

The consequence is counter-intuitive and worth stating plainly. The more the licensor does for the licensee under a contract, the more likely it is that those activities are separate performance obligations, and therefore the less likely the licence is to be a right to access. Activity alone does not create over-time recognition. Activity that changes the IP without delivering anything does.

Local FAQs

Can a licence change classification during its term? The nature of the promise is determined at contract inception, consistent with IFRS 15.33 assessing performance obligations at inception. A later change usually indicates a contract modification, dealt with under IFRS 15.18 to 21 and covered in the contract modifications article, not a reclassification.

If the licence is exclusive, does that make it a right to access? No. Exclusivity is a restriction of use within IFRS 15.B62(a) and is disregarded. Exclusivity may be relevant evidence for criterion (b), because an exclusive licensee is often more directly exposed to the licensor's brand activity, but it decides nothing on its own.

Potential risks

Concluding right to access on the strength of the licence being a multi-year term. Term length is a restriction of time and is expressly disregarded by IFRS 15.B62(a).

Treating criterion (a) as satisfied by any licensor activity. IFRS 15.B58(a) requires activities that significantly affect the IP to which the customer has rights, and IFRS 15.B59A sets a specific threshold for "significantly affect".

When do the licensor's activities significantly affect the intellectual property?

Applying IFRS 15.B59A to the common licence types

Local FAQs

How much brand spend is enough for IFRS 15.B59A(b)? There is no threshold in the standard. The question is qualitative: is the licensee's ability to obtain benefit substantially derived from or dependent upon what the licensor does. A dormant brand the licensor has not supported for years, licensed for a nostalgic product run, may well fail limb (b) despite being a brand.

Does a promise to defend the trademark count as activity under IFRS 15.B58(a)? No. IFRS 15.B62(b) requires guarantees that the entity has a valid patent and will defend it to be disregarded, because "the act of defending a patent protects the value of the entity's intellectual property assets and provides assurance to the customer that the licence transferred meets the specifications of the licence promised in the contract".

Potential risks

Citing the existence of a royalty as the reason for over-time recognition. IFRS 15.B59 marks it "not determinative", and a conclusion built on it will not hold on review.

Ignoring the stand-alone functionality sentence in IFRS 15.B59A when the licensed IP is software or a compound. If the conclusion is right to access for one of the three named categories, the file must explain which activities significantly change form or functionality, and how the licence exposes the customer to them.

Right to access: how does over-time recognition actually work?

Selecting the measure of progress

IFRS 15.39 requires a single method for each performance obligation that depicts the transfer of control. For a right-to-access licence the performance is providing access, and access is provided evenly across the term unless something about the arrangement says otherwise. That is why a time-based output measure is the usual answer. It is still an answer that must be reached.

Facts that displace straight-line do exist. A brand licence for a sports property where the licensor's activity, and the licensee's ability to exploit the brand, is heavily concentrated in a tournament season is not evenly consumed. A franchise licence where the franchisor's material system-building work is front-loaded into the first year may not be either. The counter-argument is that access itself is continuous, and IFRS 15.B60 frames the performance as providing access rather than performing the underlying activities. Both readings are defensible on the right facts, and the choice must be disclosed under IFRS 15.124(a) and (b).

The term problem

Straight-line needs a denominator. For a fixed-term licence that is the contractual term. For a perpetual right-to-access licence, which is rare but does occur in brand arrangements, there is no contractual term and the entity must estimate the period over which access is provided. For a licence with a customer renewal option, the option is assessed under IFRS 15.B40: it is a performance obligation only if it gives a material right the customer would not receive without entering the contract. If it does, part of the consideration is allocated to that option and released when the option is exercised or lapses. If it does not, the initial term is the denominator and the renewal is a new contract. This interacts with the timing rule in unit 14.

Local FAQs

Does a right-to-access licence create a contract asset or a contract liability? Either, depending on billing. Annual fees in advance produce a contract liability under IFRS 15.106 which unwinds across the year. Fees payable in arrears produce a contract asset under IFRS 15.107 if the right to consideration is conditional on something other than the passage of time. The mechanics are in the contract assets and liabilities article.

Can the licensor stop recognising revenue if it stops the supporting activity? Not directly. Ceasing the activity does not reverse recognition, but it may indicate a contract modification, an impairment of a contract asset under IFRS 15.107, or a variable consideration reassessment under IFRS 15.59.

Potential risks

Recognising the full fixed licence fee on signature because the licence "has been granted". Granting the right is not satisfaction of an over-time obligation. Where the criteria in IFRS 15.B58 are met, satisfaction occurs across the term.

Using an input measure based on the licensor's marketing spend. That measures the licensor's activity, not the customer's consumption of access, and it makes revenue swing with a budget the customer does not see.

Right to use: point in time, and the timing floor in IFRS 15.B61

Two conditions, both required

A right-to-use licence is recognised at the later of the point control transfers under IFRS 15.38 and the beginning of the period during which the customer can use and benefit. In most contracts those coincide. Where they do not, the floor binds. The two common patterns:

Local FAQs

Does a right-to-use licence with a five-year term get spread over five years? No. The term is a restriction of time, disregarded by IFRS 15.B62(a). A five-year term licence that fails the IFRS 15.B58 criteria is recognised at the start of the five years, not across them. This is the answer practitioners most often refuse to believe and it is unambiguous in the text.

What if the customer pays over five years? Payment terms do not change the recognition pattern. They may create a receivable or contract asset, and if the timing gives either party a significant benefit of financing, IFRS 15.60 to 65 require the consideration to be adjusted for the time value of money.

Does a term licence need a new IFRS 15.B58 assessment each year? No. The assessment is made at contract inception. Each renewal is a separate matter, dealt with in unit 14.

Potential risks

Recognising a forward-dated renewal in the year it was signed. This is the most common single error in software licence revenue and it is a direct breach of the last two sentences of IFRS 15.B61.

Recognising at invoice date. IFRS 15.38(a) treats a present right to payment as an indicator of control, not as the trigger. The floor in IFRS 15.B61 is not an indicator, it is a prohibition.

Do restrictions on time, geography or use change the nature of the licence?

Why the distinction between attributes and satisfaction matters

The logic is worth internalising because it generalises. An attribute describes what the customer bought. Satisfaction describes when the seller delivered it. A three-year, Europe-only, 250-seat licence and a perpetual, worldwide, unlimited licence are different products with different prices. They are not different accounting patterns. The customer of the first product receives its whole product, restrictions included, at the moment the licence transfers. The restriction is baked into what was delivered, not into how it was delivered.

Compare this with a right-to-access licence, where what the customer receives genuinely accrues across the term because the object of the promise keeps changing. The difference is not duration. It is whether there is anything left for the licensor to do to the IP that the licence carries.

What is and is not a restriction under IFRS 15.B62(a)

Local FAQs

Does a licence that terminates if the licensee breaches quality standards become a right to access? No. Quality standards are a restriction of use. The right question is whether the licensor's quality control activity significantly affects the IP under IFRS 15.B59A, which for a brand it often does. Reach the answer through IFRS 15.B58, not through the termination clause.

Does an annual fee mean the licence is annual? No. Payment structure is not a restriction and not a classification factor. A perpetual right-to-use licence paid in five instalments is recognised at one point in time, with the balance sitting as a receivable or contract asset.

Potential risks

Revenue policy notes that describe term licences as recognised "over the licence period" without saying why. Under IFRS 15.123 the entity must explain the judgements that significantly affect the timing of revenue. A note that gives the pattern without the paragraph is a disclosure deficiency as well as an audit risk.

Splitting a single licence into annual "sub-licences" to justify spreading. That is not what IFRS 15.27 identifies as distinct promises and it will not survive a reading of IFRS 15.B62(a).

How does the sales-based and usage-based royalty exception work?

Why it is an exception rather than an application

The Board wrote a rule that overrides its own principle, which is unusual, and the reason is worth understanding because it explains the boundary in IFRS 15.B63A.

Under the general model, variable consideration is estimated at inception, included subject to the constraint, allocated across performance obligations under IFRS 15.73 to 86, and trued up under IFRS 15.59 and 87 to 90. Applied to a royalty on a right-to-use licence, that would mean estimating the licensee's sales for the next fifteen years, capitalising the constrained portion into day-one revenue, and remeasuring every quarter. The number would be enormous, almost entirely judgemental, and would swamp the reported revenue of pharmaceutical and technology licensors. The Board concluded that the resulting information would not be useful and that a bright-line was preferable to a principle here.

Because it is an exception, it is construed narrowly. Two consequences follow. First, only sales-based and usage-based royalties qualify. A fixed fee, a minimum guarantee, a milestone tied to regulatory approval and a payment tied to time all fall outside it and go back to the general model. Second, IFRS 15.B63A adds a relatedness test, so a royalty that is really the price of something other than IP does not get the benefit of the exception.

When gate (b) is the binding one

Practitioners often assume gate (a) always binds, because the sale is the last thing to happen. That is true for a right-to-use licence granted on day one. It is not true in two situations.

Sales before the licence transfers. A licensee may pre-sell product, or sell inventory in a territory before the licence for that territory commences. The royalty on those sales is not recognised until the licence performance obligation is satisfied.

Right-to-access licences. Where the licence is satisfied over time, gate (b) is only partially cleared as the term runs. The standard's answer is in the words "(or partially satisfied)". Once the entity has begun satisfying the obligation, gate (b) is cleared for the royalties arising in that period, so in practice the royalty on a right-to-access licence is recognised as the underlying sales occur, in step with the ongoing satisfaction of the obligation. That is why franchisors recognise sales-based royalties in the period of franchisee sales rather than deferring them.

Local FAQs

Does IFRS 15.B63 apply to a royalty on something that is not a licence of IP? No. A usage-based fee for a service, for example a per-transaction processing charge, is ordinary variable consideration under IFRS 15.50 to 59. Note though that where consideration is allocated to a series of distinct services under IFRS 15.22(b), IFRS 15.85 may allow the variable amount to be allocated to the period it relates to, which often produces a similar profile by a different route.

Can a licensor recognise a royalty receivable before the sale occurs? No revenue, no. If cash has been received, it sits as a contract liability under IFRS 15.106 until the sale occurs.

Does the exception apply to a royalty on a licence that is not distinct? This is the subject of unit 10 and the answer requires care. IFRS 15.B63(b) refers to "the performance obligation to which some or all of the royalty has been allocated", which can be a combined obligation that includes a licence. The IFRS 15.B63A predominance test is what decides whether the exception is available.

Potential risks

Accruing estimated future royalties on a stable, predictable licence because the constraint in IFRS 15.56 would be cleared. IFRS 15.58 removes the arrangement from IFRS 15.56 entirely.

Applying IFRS 15.B63 to a bundled arrangement without performing the IFRS 15.B63A predominance test. If the licence is not predominant, IFRS 15.B63B sends the whole royalty into the general model, which produces a completely different income statement.

Treating a guaranteed minimum as a royalty. It is fixed consideration and outside IFRS 15.B63. See unit 10.

Functional and symbolic IP: is that the IFRS 15 test?

What ASC 606 does

ASC 606-10-55-59 splits licensed intellectual property into two categories. Functional intellectual property has significant stand-alone functionality, and the examples given are software, biological compounds or drug formulas, and completed media content. Symbolic intellectual property does not have significant stand-alone functionality, and substantially all of its utility comes from the licensor's past or ongoing activities. Brands, trade names, logos and franchise rights are the archetypes.

ASC 606 then routes the categories: a licence of functional intellectual property is satisfied at a point in time unless the entity is expected to undertake activities that significantly change the form or functionality of the IP and the customer is contractually or practically required to use the updated IP; a licence of symbolic intellectual property is satisfied over time, because the customer's benefit is derived from the licensor's continuing support. The categorisation is the first step in ASC 606 and it does most of the work.

What IFRS 15 does instead

IFRS 15 has no categorisation step. It goes straight to the three criteria in IFRS 15.B58 and applies them to every licence, whatever the IP is. The stand-alone functionality language does appear, but in a different role. IFRS 15.B59A uses it to close off limb (b) of the significance test: where the IP has significant stand-alone functionality, "the ability of the customer to obtain benefit from that intellectual property would not be significantly affected by the entity's activities unless those activities significantly change its form or functionality". It narrows the analysis rather than deciding it.

Where the two can diverge

Because ASC 606 categorises first, an entity applying US GAAP that concludes IP is symbolic gets over-time recognition without separately proving that the rights directly expose the customer to the licensor's activities. Under IFRS 15 that exposure is a standalone criterion in IFRS 15.B58(b) which must be met. In the overwhelming majority of brand licences it is met, so the outcomes converge. But the IFRS analysis has one more hurdle and it is the hurdle a reviewer should be checking.

The mirror case is functional IP where the licensor commits to significantly change form or functionality. ASC 606 adds an explicit condition that the customer is contractually or practically required to use the updated IP. IFRS 15 does not phrase it that way; it asks in IFRS 15.B58(b) whether the rights granted directly expose the customer to the effects. The two questions are close enough that they rarely part company, and a difference would be a reportable GAAP difference rather than a footnote. The broader IFRS 15 and ASC 606 comparison is set out in the IFRS 15 versus ASC 606 deep dive.

Local FAQs

Is a dual reporter likely to get different answers? Rarely on outcome, occasionally on documentation. The IASB and the FASB reached the same substantive answers for the common cases and diverged on the route, which is why the licensing guidance is one of the areas most often listed as converged in substance but not in wording.

Can the labels be used in the accounting policy note? Using them as descriptive language is defensible if the note also identifies the IFRS 15 reasoning. Using them as the only explanation is not, because IFRS 15.123 requires the judgements applied in this standard to be explained.

Potential risks

Importing the ASC 606 condition that the customer must be required to use the updated IP as if it were an IFRS 15 requirement. It is not in IFRS 15.B58. The IFRS question is exposure to the effects of the activities.

Assuming that because the ASC 606 answer is point in time, the IFRS 15 answer must be too, without working IFRS 15.B58. On unusual facts the routes can separate and the file needs to show the IFRS test was run.

Upfront fees, milestones and guaranteed minimums: which rule applies to which?

Mapping the streams

Sales-based milestones

A payment triggered by cumulative licensee sales passing a threshold is not a royalty in the ordinary sense; it is a lump sum. But it is consideration whose amount and timing depend on the customer's subsequent sales, and the substance of IFRS 15.B63 is that revenue linked to subsequent sales of licensed IP is recognised when those sales occur. In practice, sales-based milestones are generally accounted for under IFRS 15.B63 where the milestone is determined by reference to sales of the licensed product and IFRS 15.B63A is satisfied. The consequence is that the milestone is recognised when the threshold is reached, not estimated and accrued in advance under IFRS 15.56.

The distinction to hold on to: a milestone that turns on the licensee achieving a sales outcome sits with IFRS 15.B63. A milestone that turns on a regulatory or development event, such as a first patient dosed, a trial readout or a marketing authorisation, does not, because it is not driven by sale or usage of the IP. It is ordinary variable consideration and the constraint applies.

Guaranteed minimum royalties

A licence with a stated minimum, say 8% of net sales subject to a minimum of 2,000,000 over the term, contains two different animals in one clause. The 2,000,000 is fixed: the licensor will receive it whatever the licensee sells. The excess over 2,000,000 is a sales-based royalty.

The consequences follow from that split:

The minimum is included in the transaction price at inception under IFRS 15.47, because it is not variable. It is allocated under IFRS 15.73 and 76 to 80 alongside the other fixed consideration and recognised on the pattern of the performance obligation it is allocated to.

For a right-to-use licence, that means at a point in time. The whole guaranteed minimum is recognised when the licence transfers, subject to the IFRS 15.B61 floor. This surprises people, and it should not: the minimum is simply a fixed licence fee that has been labelled as a royalty floor.

For a right-to-access licence, that means over the term under IFRS 15.B60, using the measure of progress selected under IFRS 15.39 to 45.

Only the excess follows IFRS 15.B63. Royalties earned above the guarantee are recognised as the underlying sales occur, but only once cumulative royalties exceed the guaranteed amount already recognised, so there is no double count.

Local FAQs

Is an upfront fee always allocated to the licence? No. It is allocated across all performance obligations on relative stand-alone selling prices under IFRS 15.76, unless the criteria in IFRS 15.85 for allocating a variable amount entirely to one obligation are met, or the discount allocation rules in IFRS 15.81 to 83 apply. Labelling a payment as a "licence fee" in the contract does not allocate it. The mechanics are covered in the transaction price allocation article.

Can a milestone be allocated entirely to the licence? Yes, if both criteria in IFRS 15.85 are met: the terms of the variable payment relate specifically to the entity's efforts to satisfy that obligation or to a specific outcome from satisfying it, and allocating it entirely to that obligation is consistent with the allocation objective in IFRS 15.73. A regulatory approval milestone for the licensed compound usually meets both.

What if the milestone is achieved after the licence obligation is already satisfied? IFRS 15.88 applies: "Amounts allocated to a satisfied performance obligation shall be recognised as revenue, or as a reduction of revenue, in the period in which the transaction price changes." The milestone goes straight to revenue when the constraint releases.

Potential risks

Deferring a guaranteed minimum over the licence term on a right-to-use licence. It is fixed consideration on a point-in-time obligation and belongs at the transfer date.

Recognising a regulatory milestone when the licensor's internal probability assessment reaches 70%. IFRS 15.56 requires "highly probable" that a significant reversal will not occur, which is a higher hurdle applied to the reversal, not to the event.

Treating a sales-based milestone as an ordinary milestone and accruing it under the constraint. Where IFRS 15.B63A is met, IFRS 15.B63 governs and no accrual is permitted before the sales occur.

Worked example A: a brand licence with ongoing marketing support

The facts

Brandco owns a well-known homeware brand. On 1 January 20X1 it licenses the brand to Maker Ltd for four years, for use on kitchen textiles sold in the United Kingdom. Maker Ltd pays a fixed annual fee of 1,200,000 in advance on 1 January each year, 4,800,000 in total. There is no royalty. The contract obliges Brandco to spend at least 2% of Maker Ltd's net sales on national brand advertising and to continue running its brand campaign, and Brandco has done so for the previous fifteen years across all its licensees. Brandco carries out no work for Maker Ltd. There are no other promised goods or services. All figures are in a single currency and are constructed for this example.

Step 1: is there a licence, and is it distinct?

Rights over a trademark are a licence under IFRS 15.B52(d). There are no other promised goods or services, so the distinctness gate in IFRS 15.B53 and B54 is cleared without difficulty: the licence is the only performance obligation. Brandco's advertising is an activity, not a transfer to Maker Ltd, and IFRS 15.25 confirms that activities an entity must undertake to fulfil a contract are not performance obligations unless they transfer a good or service.

Step 2: work the three criteria in IFRS 15.B58

All three are met, so under IFRS 15.B60 the licence is a performance obligation satisfied over time because the criterion in IFRS 15.35(a) is met. Note that the four-year term and the United Kingdom limitation played no part in reaching that answer, because IFRS 15.B62(a) requires both to be disregarded.

Step 3: measure of progress

Under IFRS 15.39 to 45 Brandco selects a single method that depicts the transfer of access. Access to the brand is provided continuously and evenly across the term; there is no seasonality in the licensed product category and no front-loading of Brandco's commitment. A time-based measure is appropriate, giving 4,800,000 divided by 48 months, or 100,000 per month, 1,200,000 per year.

Journals, year 1

At 31 December 20X1 the contract liability is nil, because the annual fee received on 1 January has been fully earned by 31 December. The cycle repeats on 1 January 20X2. Revenue over the four years is 1,200,000 each year, totalling 4,800,000.

The wrong answer, and what it costs

The wrong answer usually comes from treating the grant of the licence as the delivery. It is not, where IFRS 15.B58 is met, because the object of the promise keeps changing. Note that the error is purely one of timing over the life of the contract, which is exactly why it is easy to let through and expensive when it is caught in the wrong year.

Local FAQs

Does the 2% spend commitment create an onerous contract issue if sales spike? IFRS 15 has no onerous contract requirement; it was removed during development. The assessment is made under IAS 37.66 to 69 for the contract as a whole, and is covered in the IAS 37 onerous contracts article.

What if the fee were payable as a single 4,800,000 on day one? The recognition pattern is unchanged: 1,200,000 per year under IFRS 15.B60. The contract liability would be 4,800,000 on day one, unwinding across four years, and Brandco would have to consider under IFRS 15.60 to 65 whether the four-year prepayment gives it a significant benefit of financing.

Potential risks

Recognising the annual instalment in the month of receipt because "the fee relates to that year". The instalment is a payment, not a measure of progress. If the fee structure were 3,000,000 in year 1 and 600,000 in each of years 2 to 4, the revenue profile would still be 1,200,000 per year.

Worked example B: a perpetual software licence with territory and user restrictions

The facts

Vendor Ltd licenses an on-premises analytics platform to Client plc. The agreement is signed on 15 November 20X1. It grants a perpetual licence, restricted to Client plc's United Kingdom operations and to a maximum of 250 named users, with no right to sub-license. The customer installs and runs the software on its own servers and can take possession of it. The contract also includes twelve months of post-contract support running from 1 December 20X1: bug fixes, a helpdesk and any patches Vendor Ltd releases. The support does not include upgrades to future major versions, which are licensed separately at list price. Total contract consideration is 972,000, payable 30 days after delivery of the access code. Vendor Ltd delivers the access code on 1 December 20X1. Observable stand-alone selling prices are 900,000 for the licence and 180,000 for a year of support, the latter evidenced by the annual renewal price. Figures are constructed for this example.

Step 1: performance obligations

Two. The licence is capable of being distinct under IFRS 15.27(a) because the customer can install and run the software on its own infrastructure and obtain benefit from it, and support is sold separately. It is separately identifiable under IFRS 15.27(b) because Vendor Ltd is not integrating the two into a combined output under IFRS 15.29(a), neither significantly modifies the other under IFRS 15.29(b), and the software runs without the support under IFRS 15.29(c). Support is a stand-ready service of the type described in IFRS 15.26(e).

Note that IFRS 15.B54(b) does not apply. Client plc can benefit from the software without Vendor Ltd's ongoing service, because it holds and runs the code. That is the fact that separates this arrangement from a hosted one.

Step 2: the three IFRS 15.B58 criteria

All three fail, and any one would have been enough. Under IFRS 15.B61 the licence is a right to use, satisfied at a point in time.

Step 3: what the restrictions do

Nothing. The United Kingdom limitation is a restriction of geographical region and the 250-user cap is a restriction of use. IFRS 15.B62(a) requires both to be disregarded when determining whether the licence provides a right to access or a right to use. They define the attributes of what Client plc bought. Client plc received the entire restricted product on 1 December 20X1.

Step 4: allocation

Total stand-alone selling prices are 900,000 plus 180,000, or 1,080,000. The transaction price is 972,000, so the contract contains a discount of 108,000, or 10%. There is no evidence under IFRS 15.82 that the discount relates to one obligation only, so it is allocated proportionately under IFRS 15.76.

Check: 0.833333 multiplied by 972,000 is 810,000, and 0.166667 multiplied by 972,000 is 162,000. The two sum to 972,000.

Step 5: timing

The licence transfers on 1 December 20X1, when the access code is made available. Under IFRS 15.38 Client plc has a present right to payment, has accepted the software and can direct its use. The IFRS 15.B61 floor is cleared on the same date, because the licence period and the availability of the code coincide. Signature on 15 November is not the trigger.

Support runs from 1 December 20X1 for twelve months. It is a stand-ready obligation with no discernible pattern of performance, so a time-based measure of progress under IFRS 15.39 to 45 gives 162,000 divided by 12, or 13,500 per month.

Journals

Revenue for the year ended 31 December 20X1 is 810,000 plus 13,500, or 823,500. The remaining support of 148,500 is recognised at 13,500 per month across the eleven months to 30 November 20X2 and sits as a contract liability at the year end.

The wrong answer, and what it costs

A common error is to read the territory limitation and the user cap as evidence that Vendor Ltd retains control over how the IP is used, conclude a right to access, and spread the licence over an assumed five-year economic life. That produces 810,000 divided by 60 months, or 13,500 per month for the licence, of which one month falls in 20X1.

Check on the wrong-answer liability: 972,000 less 27,000 recognised equals 945,000. Check on the correct liability: 162,000 less 13,500 equals 148,500, and the licence element is fully recognised. The 796,500 difference reconciles.

Local FAQs

What if the support included all future major versions? Then the licence would arguably expose Client plc to changes in the platform, engaging IFRS 15.B58(b). Criterion (c) would still need to be cleared, and an upgrade right delivered to the customer is a transfer of a good or service, so criterion (c) would likely fail and the licence would remain a right to use. The upgrade right would be a separate performance obligation under IFRS 15.26(e).

Does the perpetual nature of the licence matter? Not to the classification. Perpetual is the absence of a time restriction, and time restrictions are disregarded either way under IFRS 15.B62(a). It does matter to the measure of progress if the licence were somehow a right to access, because there would be no contractual term to spread over.

Potential risks

Recognising on the invoice date rather than the code availability date. Where those differ, IFRS 15.B61 governs.

Using the contractual licence price of 900,000 rather than the allocated 810,000. IFRS 15.77 warns that a contractually stated price shall not be presumed to be the stand-alone selling price, and IFRS 15.76 requires proportionate allocation of the discount.

Worked example C: a pharma out-licence with upfront, milestones and royalties

The facts

Biotech Ltd grants Pharma plc an exclusive worldwide licence on 1 July 20X1 to develop, manufacture and commercialise a compound that has completed Phase I trials. The compound is fully characterised and the patent estate is granted. Consideration:

(1) A non-refundable upfront payment of 40,000,000 on signature.
(2) A contracted development programme run by Biotech Ltd over 24 months from 1 July 20X1, for a fixed fee of 12,000,000, billed quarterly at 1,500,000 in arrears.
(3) A milestone of 25,000,000 on European regulatory approval and 15,000,000 on United States approval.
(4) A royalty of 8% of Pharma plc's net sales of the approved product, for the life of the patents.

Biotech Ltd's estimated stand-alone selling prices are 44,000,000 for the licence, using an adjusted market assessment approach under IFRS 15.79(a) benchmarked against comparable out-licensing deals, and 11,000,000 for the development programme, using an expected cost plus margin approach under IFRS 15.79(b). European approval is obtained on 1 March 20X3. United States approval has not been obtained by 31 December 20X3. Pharma plc's net sales are 60,000,000 in the third quarter of 20X3 and 75,000,000 in the fourth. Figures are constructed for this example.

Step 1: performance obligations

Two. The licence is capable of being distinct under IFRS 15.27(a): the compound is fully characterised, the patent is granted, and Pharma plc could commission the development work from a contract research organisation, which under IFRS 15.28 makes that a readily available resource. It is separately identifiable under IFRS 15.27(b) because Biotech Ltd is not integrating the licence and the trials into a single combined output under IFRS 15.29(a), the trials do not modify the compound under IFRS 15.29(b), and the licence has value independent of who runs the trials under IFRS 15.29(c).

That conclusion is fact-dependent and would flip on different facts. If the compound were pre-clinical, if the patent estate depended on data the trials would generate, or if only Biotech Ltd's proprietary know-how could take the compound forward, the two promises would be highly interrelated under IFRS 15.29(c) and the arrangement would be a single performance obligation, with the pattern set by IFRS 15.31 to 38 under IFRS 15.B55.

Step 2: the licence is a right to use

Under IFRS 15.B61 the licence is a right to use, satisfied at the point in time the licence transfers, which on these facts is 1 July 20X1. Pharma plc can direct use of the compound and obtain substantially all the remaining benefits from that date, and the IFRS 15.B61 floor is cleared because the licence period begins immediately. Exclusivity and worldwide scope are restrictions of use and geographical region and are disregarded under IFRS 15.B62(a).

Step 3: the transaction price at inception

Step 4: allocation

Check: 0.80 multiplied by 52,000,000 is 41,600,000, and 0.20 multiplied by 52,000,000 is 10,400,000, summing to 52,000,000. Note that Biotech Ltd does not recognise 40,000,000 for the licence simply because that is the amount labelled "upfront licence fee" in the contract. IFRS 15.76 requires relative stand-alone selling price allocation across both obligations, and IFRS 15.77 warns against presuming a contractual price is the stand-alone selling price. The allocated licence amount exceeds the cash received on day one, which is what creates the contract asset below.

Step 5: recognition pattern

The licence: 41,600,000 at 1 July 20X1 under IFRS 15.B61.

The development programme: over time under IFRS 15.35(a), because Pharma plc simultaneously receives and consumes the benefit of the trial work as it is performed. Biotech Ltd measures progress using an input method under IFRS 15.39 to 45 and the effort is expected to be broadly even across the 24 months, giving 10,400,000 over four six-month periods, or 2,600,000 per half-year.

The milestones: recognised when the constraint releases under IFRS 15.56 and 59. Each milestone meets both criteria in IFRS 15.85, because it relates specifically to a specific outcome from the licence and allocating it wholly to the licence is consistent with the allocation objective in IFRS 15.73. The licence obligation is already satisfied, so IFRS 15.88 requires the amount to be recognised as revenue in the period the transaction price changes.

The royalty: recognised under IFRS 15.B63 at the later of the sale occurring and the licence obligation being satisfied. The licence was satisfied on 1 July 20X1, so gate (b) is permanently cleared and gate (a) governs. Royalties are recognised in the quarter the net sales occur.

Journals

The contract asset, and why it exists

Biotech Ltd recognised 41,600,000 of licence revenue against 40,000,000 of cash. The 1,600,000 difference is a contract asset under IFRS 15.107, because Biotech Ltd has transferred the licence but its right to that 1,600,000 is conditional on performing the development programme, not merely on the passage of time. It unwinds as the services are billed, because the services are billed at 12,000,000 while only 10,400,000 has been allocated to them.

Check: total fixed consideration is 40,000,000 plus 12,000,000, or 52,000,000. Total revenue from the fixed streams is 41,600,000 plus 10,400,000, or 52,000,000. The contract asset opens at 1,600,000 and closes at nil, and 12,000,000 billed less 10,400,000 recognised equals the 1,600,000 unwind.

Revenue by period

Check on the royalty: 4,800,000 plus 6,000,000 is 10,800,000, being 8% of 135,000,000 of net sales. Check on the total: 41,600,000 plus 10,400,000 plus 25,000,000 plus 10,800,000 is 87,800,000.

Local FAQs

What if the licence and the development programme were not distinct? Then there is one performance obligation and IFRS 15.B55 sends it to IFRS 15.31 to 38. The combined obligation would most likely be satisfied over time under IFRS 15.35(a), so the full 52,000,000 would be recognised across the development period. The 41,600,000 day-one recognition disappears. This is the single most consequential judgement in the example and it is decided in step two, not in Appendix B.

Does the royalty stop being recognised when the patents expire? Recognition follows the contractual entitlement. If the royalty obligation ends, so does the revenue. Nothing in IFRS 15.B63 requires a terminal adjustment.

Should the upfront be discounted for the time value of money? No, it is received on day one. The 12,000,000 billed quarterly in arrears over 24 months would only require adjustment if the timing gave a significant benefit of financing under IFRS 15.60 to 65, which for quarterly in-arrears billing over two years is unlikely to be significant.

Potential risks

Concluding the licence is distinct because it is described as a separate grant in clause 2 of the agreement. The IFRS 15.29 factors must be applied to the substance, and in early-stage out-licensing they very often point to a single obligation.

Allocating the whole 40,000,000 to the licence because the contract calls it a licence fee. IFRS 15.76 and 77 do not permit it, and the resulting 1,600,000 contract asset is the visible consequence of doing the allocation properly.