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Licensing vs. Sale

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Anna Liza Selauso
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31 views

Licensing vs. Sale

Uploaded by

Anna Liza Selauso
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Intellectual Property (IP) Licensing

IP Forms & Importance: IP includes creativity, innovation, and brand development. Registered IP rights
(e.g., trademarks, patents, designs, copyrights) provide exclusive use, creating competitive advantages.

Types of IP Rights:

Trademarks

Patents

Designs

Plant variety rights

Copyrights

Note: Rights are often territorial and apply to specific countries.

Licensing vs. Sale

Licensing: Grants permission to use, sell, or reproduce IP, without transferring ownership.

Exclusive/Non-exclusive:

Exclusive: Single licensee

Non-exclusive: Multiple licensees (e.g., franchises)

Sale: Transfers full ownership.

Benefits of Licensing:

Retains ownership, allows for ongoing revenue (royalties).

IP remains with experts capable of maximizing returns.

Royalties & License Fees


Upfront Fees & Royalties: Licensees pay an upfront fee + ongoing royalties (usually 25% of the licensee’s
net sales).

Royalty Calculation:

Cost approach

Market approach

Income approach

Royalties from licensing intellectual property - recognise only when the usage occurs.

Here are some examples that illustrate this concept :


Example 1: Sales-Based Royalties on Music Licensing

A music production company licenses its music catalog to a streaming service


provider. According to the licensing agreement:The streaming service will pay
the music production company a royalty of 5% of the revenue generated from
streams of the licensed music.The royalty payments are calculated and paid
quarterly based on actual streaming data.

Revenue Recognition:

The music production company recognizes revenue only when the streaming
service generates sales (i.e., when users stream the music). It does not recognize
any revenue until the usage occurs.

For instance, if the streaming service reports $1,000,000 in revenue from


streams for the first quarter, the music company recognizes $50,000 (5% of
$1,000,000) as revenue for that quarter

Example 2: Royalties from Licensing Film Rights

A film production company licenses the rights to a popular movie to a


broadcaster:The broadcaster agrees to pay a 10% royalty on advertising revenue
generated during the airing of the movie.
The royalty is determined based on actual advertising revenue from each airing.

Revenue Recognition:

The film production company recognizes royalty revenue only when the movie
is aired and the advertising revenue is earned.

If the broadcaster airs the movie in January and generates $200,000 in


advertising revenue, the film production company recognizes $20,000 (10% of
$200,000) as revenue in January.

Example 3: Royalties on Pharmaceutical Patents Based on Sales

A pharmaceutical company licenses a patented drug formula to a


manufacturer:The manufacturer pays a fixed upfront fee plus a 15% royalty on
net sales of the drug.The royalty is based on the actual sales made by the
manufacturer.

Revenue Recognition:
The pharmaceutical company recognizes the upfront fee when control of the
license is transferred.The sales-based royalty (15% of net sales) is
recognized only when the manufacturer sells the drug and generates sales.

If the manufacturer reports $500,000 in sales for a month, the pharmaceutical


company recognizes $75,000 (15% of $500,000) as revenue for that month.

Key Takeaway

Under IFRS 15, sales-based and usage-based royalties from licensing intellectual
property are recognized as revenue only when the underlying sales or usage
occurs. This ensures that revenue is recognized in a way that reflects the actual
economic activity and performance related to the intellectual property.

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