Revenue – ifrs 15 handbook

Application of royalties exception to milestone payments
Company X enters into a contract to licence IP to Company Y. In exchange for 
the licence, X is entitled to a 5 million milestone payment after Y has reached 
50 million in sales.
The royalties exception generally applies to the milestone payment because the 
payment is based on Y’s subsequent sales. Consequently, X does not recognise 
any revenue for the variable amount until the subsequent sales occur. However, 
this view does not extend to milestone payments that are determined with 
reference to other events or indicators – e.g. regulatory approval or enrolment in 
clinical trials.
For example, arrangements in the life sciences industry often include a licence 
of IP of a drug and an obligation to perform R&D services, with a substantial 
portion of the fee being contingent on achieving milestones such as regulatory 
approval of the drug.

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228 | Revenue – IFRS 15 handbook
Guaranteed minimum payment – Right-to-use licence
For a right-to-use licence, any guaranteed minimum payment represents fixed 
consideration – i.e. it is an amount payable by the customer that will not vary 
based on sales, usage or any other metric. This fixed amount is recognised as 
revenue at the point in time when the customer obtains control of the licence. 
Royalties earned in excess of the guaranteed minimum are recognised as and 
when the related sales or usage occurs.
Guaranteed minimum payment – Right-to-access licence
The standard does not prescribe a single approach for recognising revenue for 
a right-to-access licence when the contract includes royalties with a minimum 
guarantee. Instead, an entity chooses an approach that appropriately considers 
all of the principles in the standard, including the royalty exception, selecting 
measures of progress and the variable consideration allocation exception.
One acceptable approach is illustrated in 
Example 15B
in this chapter.