On May 12, 2015, the FASB issued an exposure draft for public comment a proposed Accounting Standard Update (ASU) to amend ASC Topic 606, Revenue from Contracts with Customers (ASC 606). Among other provisions, the proposed ASU intends to improve the new standard’s implementation guidance on determining whether a license to intellectual property (IP) is either a right to access IP or a right to use IP.
The proposed ASU defines two types of intellectual property – “functional intellectual property” and “symbolic intellectual property” – as the starting point for determining whether there is a right to access or right to use IP.
Functional Intellectual Property
Functional intellectual property is defined as “intellectual property that has significant standalone functionality (for example, the ability to process a transaction, perform a function or task, or be played or aired)”, and that “derives a substantial portion of its utility (that is, its ability to provide benefit or value) from its significant standalone functionality”. Examples of functional IP include software, biological compounds, drug formulas, and completed media content.
With respect to functional IP, an entity’s activities do not substantively change the functionality or utility of the IP, and the entity does not promise to support or maintain the IP. The proposed update states that the nature of an entity’s promise is to provide the right to use an entity’s functional IP as that IP exists at the time the license is granted, unless the entity is expected to undertake activities (that do not transfer a promised good or service to the customer) that (a) are expected to substantively change the functionality of the IP to which the customer has rights, and (b) the customer is contractually or practically required to use the resulting updated IP. Consequently, a license to functional IP qualifying as a separate performance obligation is satisfied at a point in time, and revenue is recognized when the entity transfers control of the IP to the customer. If a license to functional IP doesn’t meet either criteria (a) or (b) above, then it is satisfied over time and revenue is recognized as the entity transfers control of the IP to the customer.
Symbolic Intellectual Property
Symbolic IP does not have significant standalone functionality. Examples of symbolic IP include brands, teams, trade names, and franchise rights. As it has no standalone functionality, symbolic IP grants a customer a right to access the IP, which is satisfied over time as the entity fulfills its promise to (a) grant the customer rights to use and benefit from the IP by making it available for a customer’s use, and (b) support or maintain the intellectual property. Accordingly, revenue is recognized for symbolic IP as the entity transfers control of the IP to the customer.
Click on the following chart which depicts the above process.
Comments on the exposure draft are due by June 30, 2015.
If you have questions on the above proposed guidance or other provisions in the exposure draft, feel free to contact us.
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