KINGFISHER SCHOOL OF BUSINESS

AND FINANCE

ACCTG 10
ONLINE CLASS
Chapter 11: Revenue Recognition:
Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee &
Consignment

John Leo D. Ambuyoc, CPA

Instructor
Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Licenses
❑ Allow customer to use the seller’s intellectual property. It is a permission that
establishes rights to the intellectual property.

Types of License
❖ Right to use – seller provide the customer the right to use the intellectual
property as it exists when the license is granted. Subsequent activity of the
seller does not affect the benefit that the customer will receive.
For Right to use Licenses revenue is recognized at the point in time when
the right is transferred.

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 Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment
Types of License
❖ Right to access – seller provide the customer with access to the intellectual
property where in the seller will undertake ongoing activities during the license
period that affect the benefit the customer receives.
Requirement to be classified as Right to Access License
1. Contract Requires or customer expects that IP will change and customer
has right to change.
2. Rights granted by license may have positive or negative effect on the
customer.
3. No further transfer of goods or services
For Right to Access Licenses, revenue is recognized over the period of time as
for which the access is provided.

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Illustration: Types of Licenses

Identify whether the performance obligation is satisfied at
point in time or overtime?
Situation 1: Lowela Ramos Microsoft licenses its enterprise resource
planning software platform for a 3-year period, including software
upgrades.

Situation 2: Ma. Ella Tejada Guerrero Microhard licenses its office

software to a customer, with no expectation that it will provide any
additional services or upgrades, it recognizes satisfaction of the
performance obligation when it transfers the licenses and software to the
customer.

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Distinct Licenses
❑If the promise to grant a license is distinct & not interdependent
from the other promised goods or services, it is a separate
performance obligation.

❑If the promise to grant a license is not distinct & interdependent

from the other promised goods or services, the entity should
account for the licenses and other performance obligation as a
single performance obligation.

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Illustration: Distinct Licenses

AA computer licenses customer-relationship software to ABS Company. In
addition to providing the software itself, AA Computer promises to provide
consulting services by extensively customizing the software to ABS’s
information technology environment, for a total consideration of P3,456,000.
In this case, AA Computer is providing a significant service by integrating the
goods and services into one combined item for which ABS has contracted. In
addition, the software is significantly customized by AA computers in
accordance with the specifications negotiated by ABS.

License and the consulting services are interdependent, and therefore

should be accounted for as one performance obligation.
ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1
Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment
Illustration: Licensing – Performance Obligation
Armel Gamboa Jonas licenses customer relationship software to Malen Cezar
Hedges Inc. for 3 years. In addition to providing the software, Armel Gamboa
Jonas promises to perform consulting services over the life of the license to
maintain operability within Malen Cezar Hedges’ computer system. The total
transaction price is P200,000. Based on stand-alone values, Armel Gamboa Jonas
estimates the consulting services have a value of P75,000 and the software license
has a value of P125,000. Upon installation of the software on July 1, 20x5, Malen
Cezar Hedges pay P100,000; the contract balance is due on December 31, 20x5.

Identify whether the performance obligation and the revenue in 20x5, assuming
❖ The performance obligation are interdependent, and
❖ The performance obligations are not interdependent

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment
Illustration: Licensing – Performance Obligation
Identify whether the performance obligation and the revenue in 20x5, assuming
❖ The performance obligation are interdependent,
Cash - 100,000
Notes Receivable – 100,000
Unearned Revenue – 200,000

❖ The performance obligation are not interdependent,

Cash -100,000
Notes Receivable – 100,000
Unearned Revenue – 75,000
Revenue – 125,000

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Variable Consideration included in License

❑ Variable Consideration is the portion of contract price that depends on the

outcome of future events.
If variable consideration is based on sales or usage of a license, revenue
should be recognized when;
❖ Sales or usage has actually occurred

❖ Performance obligation to which variable consideration has been allocated

has been performed.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Illustration: Variable Consideration included in License

Juliet Mindanao Technologies licenses its intellectual property to Francis Bautista
Industries. Terms of the arrangement require Francis Bautista to pay Juliet
Mindanao P500,000 on April 1, 20x4, when Francis Bautista first obtains access to
Juliet Mindanao’s intellectual property, and then to pay Juliet Mindanao a royalty of
4% of future sales of products that utilize that intellectual property. Juliet Mindanao
anticipates receiving sales-based royalties of P1,000,000 during 20x4 and
P1,500,000/year for the years 20x5–20x9. Assume Juliet Mindanao accounts for the
Francis Bautista license as a right of use, because Juliet Mindanao’s actions
subsequent to April 1, 20x4.
What journal entry would Juliet Mindanao record on April 1, 20x4, when it receives
the P500,000 payment from Francis Bautista?

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 Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment
Illustration: Variable Consideration included in License

What journal entry would Juliet Mindanao record on April 1, 20x4, when it receives
the P500,000 payment from Francis Bautista?
Cash 500,000
License revenue 500,000
Assume on December 31, 20x4, Juliet Mindanao receives P1,000,000 for all
sales-based royalties earned from Francis Bautista in 20x4. What journal entry
would Juliet Mindanao record on December 31, 20x4, to recognize any revenue
that should be recognized in 20x4 with respect to the Francis Bautista license
that it has not already recognized?
Cash 1,000,000
License revenue 1,000,000
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 Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment
Illustration: Variable Consideration included in License
Assume Juliet Mindanao accounts for the Francis Bautista license as a five-year
right to access Juliet Mindanao’s intellectual property from April 1, 20x4, though
March 31, 20x9. Juliet Mindanao expects that its ongoing marketing efforts will
affect the value of the license to Francis Bautista during the five-year license
period.
Cash 500,000
Deferred Revenue 500,000
Journal Entry on December 31, 20x4
Cash 1,000,000
Deferred Revenue 75,000
Revenue 1,075,000
Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Franchise
❑ Franchise is contract arrangement with a franchisor to which franchisor
permits the franchise to use the franchisor business name, manufacture or
sell franchisor products/ services, and/or use franchisor system.

❖ Right to open a business

❖ Use of trade name or other intellectual property.

❖ Continuing services, such as marketing help, training and in some

cases supplying inventory and inventory management.

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Franchise
Amount commonly charged by Franchisor;

❖ Initial Franchise Fee – payment for establishing the relationship

and providing some initial services.

❖ Continuing Franchise Fee – amount charged in return for

continuing rights granted by the agreement & amount charged for
providing advertising and other services
➢ Reported as Revenue when the performance obligations
related to those fees have satisfied.

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

When to recognize revenue from Initial Franchise Fee?

❑ Franchise granted as right to use:

➢ Revenue is recognized when the right is transferred (Date of Opening

of the franchisee )
➢ If date of opening is not given, presumption is right was transferred at
the date of signing.
❑ Franchise granted as right to access:
➢ Revenue is from the date of opening until the end of accounting period.

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Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

When to recognize revenue from Initial Franchise Fee?

❑ Commingled Revenue – It refers to a single initial franchise fee for rights,

initial services & tangible properties.

❖ The portion of the fee applicable to these assets shall be based on

the fair values and these assets are recognized upon transfer of
ownership.
❖ Allocation of transaction price is based on stand-alone fair values.

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1

Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Illustration: Recognition of Revenue - Franchise

Dominador’s Pizza Inc. enters into a franchise agreement on December 31, 20x7, giving Dian
Jaycerette the right to operate as a franchisee of Dominador’s Pizza for 5 years. Dominador’s
charges Dian Jaycerette an initial franchise fee of P570,000 for the right to operate as a
franchisee. Of this amount, P228,000 is payable when Dian Jaycerette signs the agreement,
and the balance is payable in five annual payments of P68,400 each on December 31. The
credit rating of Dian Jaycerette indicates that money can be borrowed at 8%.

Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8,

and Dian Jaycerette holds a grand opening on February 4, 20x8.

Dian Jaycerette also promises to pay ongoing or continuing fee (royalty payments) of 1% of
its annual sales (payable every January 31 of the following year) and is obliged to purchase
products from Dominador’s at its current stand-alone selling prices at the time of purchase.
Chapter 11: Revenue Recognition: Licenses & Royalties, Franchises,
Non-Refundable Upfront Fee & Consignment

Solution..
Transaction price = 228,000 + 68,400 x (3.99) = 500,916

Assumption of allocation for transaction price:

Rights to the trade name,. -P228,000
Services – training, etc - 113,316
Machinery and equipments, etc. (costing, P114,000). - 159,600

ADVANCED FINANCIAL ACCOUNTING AND REPORTING PART 1