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Royalties
Extract from FRS102 – Section 23.29(b)
23.29 An entity shall recognise revenue on the following bases:
(b) Royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement.
OmniPro comment
The licensor recognises fees and royalties paid for the use of an entity’s assets (such as trademarks, patents, software, music copyright, record masters and motion picture films) in accordance with the substance of the agreement. As a practical matter, this may be on a straight-line basis over the life of the agreement, for example, when a licensee has the right to use specified technology for a specified period of time (Section 23A.34).
An assignment of rights for a fixed fee or non-refundable guarantee under a non-cancellable contract that permits the licensee to exploit those rights freely and the licensor has no remaining obligations to perform is, in substance, a sale. An example is a licensing agreement for the use of software when the licensor has no obligations after delivery. Another example is the granting of rights to exhibit a motion picture film in markets in which the licensor has no control over the distributor and expects to receive no further revenues from the box office receipts. In such cases, revenue is recognised at the time of sale (Section 23A.35).
In some cases, whether or not a licence fee or royalty will be received is contingent on the occurrence of a future event. In such cases, revenue is recognised only when it is probable that the fee or royalty will be received, which is normally when the event has occurred (Section 23A.36).
Some points that should be considered when deciding whether revenue should be recognised as a sale of goods (as opposed to recognizing revenue over the period) are:
- where there is a fixed or non-refundable fee
- a non-cancellable contract ensuring risk and rewards of ownership transfer
- no software updates to be provided over the remaining period.
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