A licensor grants a customer a license to use a completed, previously released feature film for a fixed term, with no obligation on the licensor to make further changes to the film during that term. Under ASC 606's licensing implementation guidance, how should the licensor recognize the license revenue, and why?
- At the point in time the license period begins, because the film is functional intellectual property whose significant standalone functionality is not expected to substantively change during the license period
- Over the license term, because all intellectual property licenses are recognized over time regardless of whether the licensor updates the IP
- At the point in time the license period begins, but only if the customer also purchases a separate maintenance contract
- Over the license term, because the licensor retains legal ownership of the copyright throughout the license period
Correct answer: A. At the point in time the license period begins, because the film is functional intellectual property whose significant standalone functionality is not expected to substantively change during the license period
Under ASC 606's licensing implementation guidance, a completed media work such as a feature film is an example of functional intellectual property, meaning it has significant standalone functionality that is not expected to substantively change through the licensor's ongoing activities during the license term; a license to functional IP is recognized at the point in time the customer obtains the right to use it, which is when the license period begins. The claim that all IP licenses are recognized over time is incorrect because the standard explicitly distinguishes functional IP (generally point in time) from symbolic IP such as brands or trade names (generally over time, because the customer's ability to benefit depends on the licensor's continued supporting activities). Point-in-time recognition for functional IP does not depend on the customer separately purchasing maintenance; if maintenance or updates were a distinct promise, they would be identified and accounted for as their own separate performance obligation rather than changing how the license itself is classified. Retaining legal or copyright ownership is a feature of essentially all IP licenses, whether functional or symbolic, so it cannot be the basis for choosing over-time recognition; the standard instead focuses on whether the entity's ongoing activities significantly affect the IP the customer has rights to.
Source: FASB Accounting Standards Codification: ASC 606-10-55-59 through 606-10-55-65b, Revenue from Contracts with Customers — Licensing