Revenue – ifrs 15 handbook

 
Additional application examples
Example 5 – Licence for drug compound and related service: 
Separate performance obligations
Pharma Company P enters into an arrangement with Customer C. Under the 
arrangement, C receives a licence for exclusive worldwide rights to Compound 
B. B has shown promising results in early testing but still requires further R&D 
before it can be commercialised. P will perform the R&D services required 
to get B approved for commercial sale, which primarily relate to testing and 
validating its efficacy. The R&D services required to develop B further could be 
performed by another pharma company.
P considers whether the licence and the R&D services are distinct and 
determines that:
–
the R&D services required to take B through to commercialisation are not 
unique or specialised − i.e. other entities could perform them;
–
the required R&D services do not have a transformative effect on the licence; 
and
–
P’s services do not change the nature of B.
Therefore, P concludes that the licence and the R&D services are distinct and 
the contract includes two performance obligations:
–
a licence; and
–
an R&D service. 
However, if the nature of the R&D services provided were different such that 
only P could perform those services – e.g. the R&D work is highly specialised 
or would significantly modify B – then P may conclude that the licence for B and 
the R&D services were not distinct in the context of the contract and should be 
treated as a single performance obligation.
Example 6 – Licence for drug compound and related service: Single 
performance obligation
IFRS 15.IE281–IE288
Pharma Company P licenses its patent rights to an approved drug compound to 
Customer C for 10 years and promises to manufacture the drug for C. The drug 
is a mature product; therefore, P will not undertake any activities to support the 
drug, which is consistent with its customary business practices. In this case, no 
other entity can manufacture the drug because of the highly specialised nature 
of the manufacturing process. As a result, the licence cannot be purchased 
separately from the manufacturing service – i.e. the licence is not capable of 
being distinct.
P determines that C cannot benefit from the licence without the manufacturing 
service. Therefore, the licence and the manufacturing service are not distinct 
and P accounts for them as a single performance obligation.

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214 | Revenue – IFRS 15 handbook
Conversely, if the manufacturing process used to produce the drug were not 
unique or specialised and other entities could also manufacture the drug for C, 
then P might instead conclude that C could benefit from the licence on its own 
and that the licence and manufacturing service were separate performance 
obligations.