8/13/2023 0 Comments Us gaap expense recognitionThe functionality of the intellectual property to which the customer has rights is expected to substantively change during the license period as a result of activities of the entity that do not transfer a promised good or service to the customer. Relevant guidanceĪSC 606-10-55-62: A license to functional intellectual property grants a right to use the entity’s intellectual property as it exists at the point in time at which the license is granted unless both of the following criteria are met:Ī. As a result, the non-refundable upfront payment of $30 million would be recognized at the point in time that the license is granted to Company A.Ĭompany B applies the exception for variable consideration related to sales- or usage-based royalties received in exchange for licenses of IP, therefore the royalties would not be included in the transaction price until Company A sells the product, regardless of whether or not Company B has predictive experience with similar arrangements. As such, Company B would conclude that it has granted a “right to use” license to functional IP. Given the IP relates to a drug compound, has standalone functionality and Company B will not perform any further activities that affect that functionality. Question: How should Company B account for the receipts for the out-license of its IP? Solution Company B will also receive a royalty of 20% from sales of the HIV compound if Company A successfully develops a marketable drug. Company B obtains a non-refundable upfront payment of $30 million for access to the IP. Company A will use Company B’s IP for a period of three years. Company B will not undertake any other activities under the contract. They are exposed to significant risks and rewards dependent on the commercial success of the activity (see paragraphs 808-10-15-10 through 15-13).Ħ-2 Receipts for out-licensing of IP BackgroundĬompany A and Company B enter into an agreement in which Company A will license Company B’s IP related to a compound for HIV. They are active participants in the activity (see paragraphs 808-10-15-8 through 15-9).ī. These arrangements involve two (or more) parties that meet both of the following requirements:Ī. A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.ĪSC 808-10-20: Collaborative arrangement: A contractual arrangement that involves a joint operating activity (see paragraph 808-10-15-7). Relevant guidanceĪSC 606-10-15-3: An entity shall apply the guidance in this Topic to a contract…only if the counterparty to the contract is a customer. Also, the two companies do not appear to share in the risks and rewards that result from the activities under the arrangement. The fees paid are at market rates and payments received are non-refundable. Company A is providing a license and manufacturing services to Company B and those goods and services are the outputs of Company A’s ordinary activities. In this case, the arrangement appears to be in the scope of the revenue standard as Company A and Company B appear to have a vendor-customer relationship. Question: Is this arrangement within the scope of ASC 606? Solutionĭetermining whether an arrangement is within the scope of ASC 606 can be a difficult judgment at times. Consideration payable under this arrangement is at market rates and all payments received by Company A are non-refundable. Company A receives an upfront payment of $40 million, per-unit payments for manufacturing services performed, and a milestone payment of $150 million upon regulatory approval. 6-1 Scope considerations when accounting for collaboration agreements BackgroundĬompany A grants an IP license to a drug compound to Company B and will perform manufacturing services on the compound.
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