Revenue – ifrs 15 handbook

Judgement is required to assess when a licence of IP is 
‘predominant’
IFRS 15.B63A
An entity may be entitled to a sales-based or usage-based royalty in exchange 
for a licence and other goods or services in the contract, which may or may not 
be distinct from the licence. Licences of IP are often bundled with other goods 
or services, with the consideration taking the form of a sales- or usage-based 
royalty for all goods or services in the contract. For example:
– software licences are commonly sold with PCs and other services (e.g. 
implementation services) or hardware where there is a single consideration 
in the form of a sales- or usage-based royalty; 

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9 Licensing | 227
9.6 Sales- or usage-based royalties
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– franchise licences are frequently sold with consulting or training services or 
equipment, with ongoing consideration in the form of a sales-based royalty;
– biotechnology and pharmaceutical licences are often sold with R&D services 
and/or a promise to manufacture the drug for the customer, with a single 
consideration in the form of a sales-based royalty; or 
– licences for digital media and a promise for promotional activities may be 
sold with a single consideration in the form of a sales-based royalty.
The guidance specifies that the royalties exception applies when the licence is 
the predominant item to which the royalty relates. ‘Predominant’ is not defined. 
However, the standard says that “this may be the case when the customer 
would ascribe significantly more value to the licence than to the other goods or 
services to which the royalty relates”.
Significant judgement may be required to determine whether a licence is the 
predominant item in an arrangement. For example, an entity may determine 
that a licence of IP is the predominant item when it represents the major part or 
substantially all of the value or utility of the bundle. Another entity may conclude 
that the exception would apply when a licence of IP is the largest single item 
in a bundle of goods or services. These different interpretations could result in 
differences in practice and may give rise to differences in the transaction price 
and timing of revenue recognition, because they could affect the conclusion on 
whether the royalties exception applies to an arrangement.