We are early yet (the revenue recognition changes discussed below are designed for annual reporting periods beginning on or after January 1, 2015), but valuators need to be aware that the FASB and the International Accounting Standards Board (IASB) in November released a revised proposal that would create a single revenue recognition standard for both U.S. GAAP and IFRS. The standard is designed to streamline accounting for revenue across industries and correct inconsistencies in existing standards and practices.
The latest proposal includes a detailed section of implementation guidance. Here is the guidance issued with respect to IP and licensing revenue:
Revenue from an IP license (including licenses of motion pictures, software, technology, other intangibles) cannot be recognized before inception of the license term. Once the term begins, revenue is to be recognized consistent with the nature of the transaction and the earnings process. Additional license revenue recognition guidance is industry-specific.
Revenue from a license or other right to use arrangement is recognized when the licensee obtains control of the rights.
• Revenue cannot be recognized before the beginning of the period the licensee can use and benefit from the license property;
• Revenue is generally recognized at a point in time, unless:
-The fee is sales-based;
-The fee is not sales-based but the entity is otherwise constrained by the reasonably assured criterion;
-The right to use is combined with other performance obligations (i.e., is not distinct).
[Original source: FASB Exposure Draft paragraphs 85, IG33–IG37, and IG81]