Revenue – ifrs 15 handbook

Example 14 – Royalty: Licence of IP is the predominant item
Film Distributor D licenses the right to show a film in cinemas for six weeks to 
Film Company T. D has agreed to provide memorabilia to T for display at cinemas 
and to sponsor radio adverts. In exchange, D will receive a royalty equal to 30% 
of the ticket sales.
D has a reasonable expectation that T would ascribe significantly more value to 
the licence than to the related promotional activities, and therefore D concludes 
that the licence to show the film is the predominant item to which the sales-
based royalty relates.
D applies the royalties exception to the entire sales-based royalty and therefore 
cannot recognise revenue when the promotional activities are provided based 
on an estimate of the expected royalty amount. 
If the licence, the memorabilia and the advertising activities were separate 
performance obligations, then D would allocate the sales-based royalties to 
each performance obligation when or as the subsequent sales occurred. Then 
it would recognise the royalties allocated to each performance obligation based 
on whether that performance obligation has been satisfied – e.g. whether the 
licence, which is a right to use IP in this example, has been transferred to the 
customer or whether the advertising services are complete.
Exception for sales- or usage-based royalties aligns the 
accounting for different licence types
A key practical effect of the exception for sales- or usage-based royalties is 
that it may reduce the significance of the distinction between the two types of 
licences in certain circumstances. In particular, if the consideration for a licence 
consists solely of a flat sales- or usage-based royalty for a distinct licence, then 
an entity is likely to recognise it in the same, or a substantially similar, pattern, 
irrespective of whether the licence provides the customer with a right to access 
IP or a right to use IP.