Wiley GAAP 2008

Concepts, Rules, and Examples

Accounting by Licensors

Revenues

A license agreement is considered an outright sale when the licensor has

1. Signed a noncancelable contract

2. Agreed to accept a specified fee

3. Transferred the music rights to the licensee, who is able to use them

4. Fulfilled all significant duties owed the licensee

When all of these conditions are met, the earnings process is complete and revenue is recognized if there is reasonable assurance that the license fee is fully collectible.

In some cases the licensee pays a minimum guarantee, which is an amount paid in advance to a licensor for the right to sell or distribute recordings or sheet music. A minimum guarantee is first recorded by the licensor as a liability and then amortized to income as the license fee is earned. If the amount of the fee that is earned is indeterminable, then straight‐line recognition of revenue from the guarantee is required over the license period.

Example

A licensor receives a $10,000 minimum guarantee under a five‐year license agreement. The entry to record the receipt of cash is

Cash	10,000
Liability under license agreement	10,000

The licensor recognizes revenue from the guarantee on a straight‐line basis. At the end of each year of the license period, the licensor records the following entry:

Liability under license agreement	2,000
License fees earned (revenue)	2,000

A licensor may charge fees for such items as free recordings beyond a certain number given away by a recording club. The amount of such ...