This free, guided checker walks your finance team through the key decision points for ASC 606 Licensing of Intellectual Property. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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The licensing implementation guidance applies only when the contract establishes a customer's rights to intellectual property that the entity retains. Common licensed IP includes software and technology, motion pictures, music and other media, franchises, patents, trademarks, and copyrights (ASC 606-10-55-54). A hosting arrangement in which the customer never takes possession of the software is a service, and an outright sale of the IP asset is not a license.
Not a license of IP - the promise is a service; apply the general model in ASC 606-10-25-23 through 25-30. Not a license - a transfer of control of the IP itself is a sale; the licensing guidance in ASC 606-10-55-54 through 55-65B does not apply.
Official guidance: FASB Accounting Standards Codification
Identify every explicit and implied promise before assessing the license. Promises can arise from customary business practices, such as an established practice of providing when-and-if-available upgrades even when the contract is silent. A setup activity that transfers no good or service to the customer is not a separate promise, but post-contract support and updates usually are.
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Official guidance: FASB Accounting Standards Codification
Apply the two-part distinct test of ASC 606-10-25-19: the license must be capable of being distinct and distinct within the context of the contract. ASC 606-10-55-56 identifies two licensing patterns that are not distinct - a license embedded in and integral to a tangible good, and a license the customer can benefit from only with a related service. A common trap is separating a term software license from critical unspecified updates that fundamentally sustain the software's utility.
License not distinct - combine with the tangible good into a single performance obligation (ASC 606-10-55-56). License not distinct - combine with the related service into a single performance obligation (ASC 606-10-55-56). License not distinct under ASC 606-10-25-21 - combine into a single performance obligation and apply ASC 606-10-25-23 through 25-30.
Official guidance: FASB Accounting Standards Codification
Distinguish contractual restrictions, which are attributes defining the scope of a single license, from provisions that obligate the entity to grant further rights. A three-year license limited to one country is one license with attributes; a contract that adds a second country's rights beginning in year two contains two licenses, and this analysis should be run for each. Mislabeling additional rights as mere restrictions accelerates revenue improperly.
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Official guidance: FASB Accounting Standards Codification
Classification drives timing: a license to functional IP generally transfers at a point in time, while a license to symbolic IP transfers over time. Judge where the IP's utility comes from - what it can do on its own versus its connection to the licensor's continuing activities and reputation. Completed film content and released software are typically functional even though the licensor continues to market and promote them.
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Official guidance: FASB Accounting Standards Codification
This exception is narrow. When-and-if-available updates that transfer a promised service to the customer do not satisfy criterion (a), because that activity transfers a good or service and is a separate performance obligation. The exception is aimed at arrangements where the licensor continuously alters the IP itself and the customer must always operate on the current version, converting the license into a right to access.
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Official guidance: FASB Accounting Standards Codification
The royalty exception in ASC 606-10-55-65 overrides the variable consideration guidance in ASC 606-10-32-5 through 32-14, so sales-based and usage-based royalties on IP licenses are not estimated or constrained. Predominance is assessed under ASC 606-10-55-65A - for example, whether the customer would ascribe significantly more value to the license than to other items the royalty relates to - and a royalty is accounted for entirely under one model, never split (ASC 606-10-55-65B).
Royalty exception - recognize at the later of the sale or usage and satisfaction of the license obligation (ASC 606-10-55-65).
Official guidance: FASB Accounting Standards Codification
ASC 606-10-55-58C sets a floor for every IP license: revenue cannot be recognized before both (a) the entity provides or otherwise makes available a copy of the IP to the customer and (b) the beginning of the period during which the customer is able to use and benefit from the license. A renewal signed and even paid in advance is therefore recognized no earlier than the start of the renewal period, regardless of when the key or media was delivered.
Right to use - recognize revenue at the point in time control of the license transfers (ASC 606-10-55-62; ASC 606-10-25-30). Right to use, but recognition is deferred until both the IP is made available and the license period begins (ASC 606-10-55-58C).
Official guidance: FASB Accounting Standards Codification
For a right-to-access license, the later-of test in ASC 606-10-55-65 generally results in recognizing royalties as the underlying sales or usage occur, because the over-time performance obligation is being satisfied throughout the license period. Check predominance under ASC 606-10-55-65A when the royalty also compensates other goods or services, such as franchise training, site selection, or supply arrangements.
Royalty exception - recognize as the underlying sales or usage occur, no earlier than satisfaction of the over-time license obligation (ASC 606-10-55-65). Right to access - recognize the license fee over time using an appropriate measure of progress (ASC 606-10-25-31 through 25-37).
Official guidance: FASB Accounting Standards Codification
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