Revenue Recognition for IP Licences Under Ind AS 115

1. Facts

Silver-Frame Studios Limited, hereinafter referred to as “the company”, is engaged in the business of entertainment. The company licenses a popular movie character to a gaming company, hereinafter referred to as “the customer”, for use in an online game over a five-year period. The license grants the gaming company continuous access to the character’s evolving storyline, updates, and brand value, indicating that the nature of the promise is a right to access symbolic intellectual property.

Under the agreement, the company is entitled to a royalty of 8% of the gaming company’s yearly revenues generated from the game. However, the contract also includes a minimum guarantee of ₹50 crore over the five-year term, payable irrespective of actual game performance. Based on initial projections, the company expects that total royalties will exceed

₹50 crore, but there is uncertainty in the early years due to market volatility. Additionally, the company provides ongoing promotional support and periodic content updates, which are not separately identifiable and are bundled into a single performance obligation.

The management of the company, while preparing the financial statements, is in a dilemma as to the revenue recognition arising out of a licensing arrangement involving symbolic intellectual property with a sales-based royalty and a minimum guarantee. Further, the company wants to understand how it should determine the most appropriate method for recognising revenue over time so that it faithfully depicts the transfer of control, particularly when actual royalties are uncertain, and multiple recognition approaches appear acceptable.

2. Relevant Provisions

Ind AS 115 – Revenue from Contracts with Customers

Para 35 of Ind AS 115

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.

b) The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or

c) The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date

Para 39 of Ind AS 115

For each performance obligation satisfied over time, an entity shall recognise revenue over time by measuring the progress towards complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer (i.e. the satisfaction of an entity’s performance obligation).

Para B63 of Ind AS 115

Notwithstanding the requirements in paragraphs 56-59, an entity shall recognise revenue for a sales-based or usage-based royalty promised in exchange for a licence of intellectual property only when (or as) the later of the following events occurs:

a) the subsequent sale or usage occurs; and

b) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied)