The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the boards) agreed to clarify the guidance in their new revenue standards on accounting for licenses of intellectual property (IP) and identifying performance obligations. However, they did not agree on the nature and breadth of the changes or the timing of when such changes may be finalized. Both topics aim to address issues of interest to entities in the media and entertainment (M&E) industry.
FASB Chairman Russell Golden said his goal is to issue a proposal as soon as possible and receive feedback from constituents by the end of June so the FASB can finalize the guidance in the third quarter of 2015.
The IASB decided not to issue an exposure draft at this time. Instead, the governing group chose to wait until it determines whether additional guidance is needed on other topics. The IASB indicated that a proposal could be made in June. Their final guidance could be issued near year end. Here, we’ll discuss how M&E entities would be affected by additional guidance the boards are considering.
IP Licences
Licences of IP are very common in the media and entertainment industry. Motion picture studios grant rights to broadcast or distribute a film or television program; music companies grant digital publishing rights to their music libraries; book publishers license the international rights to a character and sports leagues grant the right to use a sports team’s name and logo.
The new standards provide guidance for accounting for licenses of IP which differs slightly from the model for other promised goods and services. M&E entities have raised questions on licenses of IP in the below areas:
- Determining the nature of a licensor’s promise in a license of IP when its activities “significantly affect” the IP to which the licensee has rights • Identifying performance obligations when there are restrictions on availability.
Determining the nature of an entity’s promise in granting a license
Both boards were in agreement that activities performed by the licensor which affect the “utility” of the IP, meaning its form, functionality and/or value, require the license to be recognized over time. If the IP has significant standalone functionality, the licensor’s ongoing activities will not significantly affect the utility of the IP, and revenue would be recognized at a point in time. For M&E entities, marketing or promotional activities performed by the producer would not affect the utility of completed films or television shows. However, the boards reached different conclusions on how this clarification should be made.
After debating two approaches at length, the FASB directed staff to draft amendments requiring entities to classify IP into one of two categories:
- Functional: Revenue for these licenses would be recognized at the point in time that the IP is made available for the customer’s use and benefit (e.g., when the film is made available to the customer).
- Symbolic: Revenue from these licenses would be recognized over time as the performance obligation is satisfied (e.g., over the license period).
We believe that both of the boards’ approaches would enhance the operability of the guidance for M&E entities and result in more consistent application. However, the FASB’s tentative decision should require less judgment in this area.
Restrictions of availability
The IASB staff did not recommend any changes to the guidance on restrictions of availability because it believes the existing guidance is sufficient.
The FASB plans to propose a three-part change: (1) refine the principle for determining distinct within the context of the contract to emphasize that evaluation hinges on whether the multiple promised goods or services work together to deliver a combined item, (2) align its standard’s three indicators for determining whether a good or service is separately identifiable with this principle and (3) add examples to its standard. The IASB voted to only consider adding a limited number of examples (e.g., one or two).
What to expect
Any changes made to the new revenue standards will be subject to the due process procedures of each board, including outreach for public comment. We expect the FASB to meet next week to discuss a possible delay in the effective date of the new revenue standard. Stay tuned for the latest happenings in the implementation of new #RevRec standards.