CHAPTER 5 Revenue Recognition and Profitability Analysis 251 Special Issues for Step 5: Recognize Revenue When (Or As) Each Performance Obligation Is Satisfied Previously, we discussed recognizing revenue at a point in time and over a period of time. Now let’s look at a few commonplace arrangements that occur in practice that make it more difficult to determine when revenue should be recognized. In particular, we discuss licenses, franchises, bill-and-hold sales, consignment arrangements, and gift cards. LICENSES. Customers sometimes pay a licensing fee to use a c ompany’s intellectual property. Licenses are common in the software, technology, media, and entertainment (including motion pictures and music) industries. Some licenses transfer a right to use the seller’s intellectual property as it exists when the license is granted. Examples include software like Microsoft Office, music CDs, and movie DVDs. For these licenses, subsequent activity by the seller doesn’t affect the benefit that the customer receives. For example, once you download a Beyoncé hit from Apple’s iTunes, you can enjoy listening to that song as often as you like, regardless of future actions by Beyoncé or iTunes. If a license transfers such a right of use, revenue is recognized at the point in time the right is transferred. Other licenses provide the customer with access to the seller’s intellectual property with the understanding that the seller will undertake ongoing activities during the license period that affect the benefit the customer receives. Examples include licenses to use a company’s brand or trademark. For instance, if the NBA sells Adidas a five-year license to manufacture jerseys with NBA team logos, Adidas would expect that the value of that right is affected by whether the NBA continues to play games and provide advertising during that license period. If a license provides such a right of access to the seller’s intellectual property, the seller satisfies its performance obligation over time as the customer benefits from the seller’s ongoing activities, so revenue is recognized over the period of time for which access is provided. Finally, sometimes a license isn’t distinct from other promised goods or services. For example, an online service might grant a license to customers to access content at a website. In that case, the license isn’t distinct from the content, because the point of the license is to access the content, so they would be treated as a single performance obligation and revenue would be recognized as appropriate for that performance obligation. ● LO5–7 Licenses allow the customer to use the seller’s intellectual property. If a seller’s activities during the license period are not expected to affect the intellectual property being licensed to the customer, revenue is recognized at the start of the license period. If a seller’s activities during the license period are expected to affect the intellectual property being licensed to the customer, revenue is recognized over the license period. Additional Consideration Allocating Variable Consideration. What if a contract that has variable consideration includes multiple performance obligations? Typically the seller would include the variable consideration in the transaction price that is allocated to each of those performance obligations according to their relative stand-alone selling prices. Also, changes in estimated variable consideration are allocated to performance obligations on the same basis. However, if the variable consideration relates only to one performance obligation, it is allocated to only that performance obligation. Additional Consideration Variable Consideration and Licenses. Previously you learned about sellers being able to recognize revenue associated with variable consideration. There’s an exception for sales-based or usage-based royalties on licenses. Those royalties are only included in the transaction price when they are no longer variable (which happens when the customer’s sales or usage has actually occurred).
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