Standards for revenue recognition, historically, have varied among industries. The FASB has undertaken the enormous task of simplifying the standards so all industries can follow the same guidance. Friedman LLP’s Robert Graham and Brian Kearns take a look at what the recent standards update will mean for businesses and how they can prepare.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, which affects public, private and non-profit entities that enter into contracts with customers. On August 12, the FASB issued an update deferring the effective date of the new revenue recognition standards by one year, making them effective for annual reporting periods after December 15, 2017 for public entities. The new guidance is intended to remove inconsistencies and weaknesses in existing revenue recognition requirements and improve comparability of revenue recognition practices across various industries.
Current standards include complex and disparate revenue recognition requirements for specific transactions and industries. As a result, accounting standards for similar transactions vary from industry to industry. The standards update is meant to achieve a degree of uniformity.
One example of revenue recognition that varies by industry but has similar underlying transactions is licensing revenue. Under the new revenue guidance, a licensor would recognize revenue if the customer has a right to access the entity’s intellectual property. On the other hand, a licensor would recognize revenue at a point in time if the customer has a right to use the entity’s intellectual property without modification at the point in time at which the license is granted.
To clarify, if a doctor purchases a license to a medical database that allows the doctor to perform research on the site but not to make any edits to the content of the site, then the doctor has “access” to the site. In the case where a movie theater purchases a license for a movie which it then is able to add announcements and previews to and show the movie in its theater for a period of time, then the theater has the “right to use” the movie.
Examples of intellectual property include software and technology, motion pictures, music, franchises, patents, trademarks and copyrights. The right to access intellectual property versus the right to use it is typically determined by the customer’s ability to direct the use of and obtain substantially all of the remaining benefits from a license at the point where the license is granted. If the intellectual property changes throughout the license term with the continued involvement of the selling entity then the customer is viewed to have access to the intellectual property and revenue is typically recognized over the term of the license agreement.
Please feel free to contact your Friedman LLP professional should you have any questions on licensing revenue recognition under the new standards or related topics.