Revenue – ifrs 15 handbook

performance obligations
An entity may enter into a contract with multiple performance obligations that 
consist of a licence of IP and another good or service that is transferred over 
a different time period. If the requirements to allocate variable consideration 
entirely to one performance obligation are not met, then an entity allocates the 
sales- or usage-based royalties to multiple performance obligations. 
The standard is not clear about how an entity allocates the consideration to 
its performance obligations when the contract includes sales- or usage-based 
royalties predominantly associated with a licence of IP and a guaranteed 
minimum. Multiple approaches could be acceptable if they are consistent with 
the allocation objective and application of the royalty exception. We believe that 
the following are examples of acceptable approaches. 
– 
Approach 1:
Allocate the fixed consideration and variable consideration 
separately based on relative stand-alone selling prices.
– 
Approach 2:
Estimate the total transaction price (including royalties) and 
allocate that amount to each performance obligation subject to a cumulative 
recognition constraint.
 
Additional application examples
Example 15A – Software licence with a guaranteed minimum (1)
Company M enters into a five-year arrangement to license software to 
Customer C. The software licence provides C with the right to use M’s software 
– i.e. revenue is recognised at a point in time. The consideration for the licence 
is a sales-based royalty of 5% of C’s gross sales of products that include M’s 
software, with a minimum guaranteed amount of 5,000.

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230 | Revenue – IFRS 15 handbook
The 5,000 guaranteed royalty amount is fixed consideration and is recognised 
in the same manner as any other fixed consideration – i.e. as revenue when the 
customer obtains control of the licence. Any royalties in excess of the minimum 
guaranteed amount are recognised when C’s subsequent sales – i.e. those 
above the minimum – occur.