Companies often buy or sell IP licenses – items such as patents, software, music and scientific connections. These contracts are common in sectors such as technology, entertainment and media, pharmacy and life sciences, as well as commerce and consumers. ASC 606 Revenue from Contracts with Customers (ASC 606) provides accounting instructions for IP licensing. In this article, we read this guide and provide practical examples of its application. Accounting for fees based on the sale and use of IP licences is a significant departure from primary IP licensing guidelines and is not addressed in this article. For more information, please see the RevenueHub Sales- and Usage-Based Royalties article. Part of the basic approach of the new guidelines is that revenue should be recognized to represent the transfer of a promised service or service. The application of the concept of transfer to licences, as well as several other unique aspects of licensing, required specific advice for revenue recognition. For example, the evidence of the transfer of a service is that the customer can dictate how goods or services are used; However, intellectual property licenses may contractually prevent the customer from dictating the use of licensed intellectual property. Because intellectual property can be copied unlimitedly, the client may not be able to use the majority of the benefits of the asset or prevent others from obtaining asset benefits in the same way as for a traditional service. In a letter to W.R. Grace (Grace), the SEC asked the SEC to describe whether the technology “is functional or symbolic and explains the basis of your determination” (Letter of August 2018).
Grace stated that “UNIPOL technology licenses® polypropylene are operational,” and cited three main reasons: companies that license intellectual property follow the same five steps to record revenue, such as those that contract with customers for other types of goods or services. First, they analyze whether they have a contract with a client under theme 606. Second, they check whether promised goods and services, including licensed intellectual property, are separate performance obligations.