The example below illustrates the accounting for a licensing arrangement with a

The example below illustrates the accounting for a

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data and develop assumptions to make a reasonable estimate. The example below illustrates the accounting for a licensing arrangement with a sales-based royalty: Illustration 4 — Licensing SSR Co. (SSR), a soft drink company, enters into a licensing contract with Fabrics Worldwide Inc. (FWI), an apparel company. The licensing contract permits FWI to use the SSR trademarked logo and tagline on a new line of FWI’s T-shirts, hats, shorts and other apparel for a three- year period. As consideration, FWI pays SSR a one-time fee of $1 million at the inception of the license term and an 11% sales-based royalty based on the total quarterly sales of apparel items that include the SSR logo. The rights and terms granted by SSR to FWI under the agreement are similar to those granted by SSR in licensing contracts with other apparel companies. FWI will provide updated sales data on a quarterly basis; however, this data will be available on a lag. Assume that SSR determines that the nature of its promise is to provide FWI a right to access SSR’s symbolic IP over time. The up-front payment of $1 million is recognized as the performance obligation (i.e., the license) is satisfied, which is over the three-year contract period. SSR would need to select a measure of progress that faithfully depicts its performance in providing FWI with access to its symbolic IP over the three-year contract period. The sales-based royalties are recognized when the underlying sales occur. Because the sales data is provided by FWI on a lag, SSR will make an estimate of royalties earned for each reporting period. Nonrefundable minimum guarantees for symbolic licenses Retail and consumer products licensing arrangements commonly include a nonrefundable minimum guarantee that effectively establishes a floor for the amount of consideration to be paid to the licensor. The licensor earns additional sales-based royalties when the royalties exceed the nonrefundable minimum guarantee. Minimum guarantees may be negotiated for several reasons and may take different forms. For example, a contract might establish a minimum amount of consideration that is payable to the licensor in installments over the term of the license period, or the minimum amount of consideration could be paid at the beginning or end of the license period. Contracts with a sales- or usage-based royalty and a minimum guarantee include both fixed and variable consideration. FASB TRG members generally agreed 24 that various recognition approaches could be acceptable for nonrefundable minimum guarantees promised in exchange for licenses of symbolic IP, which require revenue to be recognized over time. The TRG agenda paper describes two approaches. Under one, an entity would estimate the total consideration (i.e., the fixed minimum and the variable consideration from future royalties) and apply an appropriate measure of progress to recognize revenue as the entity satisfies the performance obligation, subject to the royalty recognition constraint. Alternatively, an entity could apply a measure of progress to the fixed consideration and begin recognizing the variable component when the fixed amount is exceeded on a cumulative basis.
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  • Fall '17
  • meenakshi

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