Licensing agreements based on sale and use often have minimum guarantees to reduce the risks to the licensee. These minimum guarantees make it difficult to recognize turnover. The above case study examined the recognition of the turnover of a license of symbolic IP addresses with a minimum warranty. Other approaches deemed acceptable by the DRG were also grouped and compared. If the minimum amount of warranty negotiated seems high for the licensee, the partners should consider implementation: a minimum guarantee is a down payment paid by a licensee to a licensee for the right to sell or distribute music or films. The licensee should account for this payment as a facility. This amount is then charged on the costs in accordance with the terms of the corresponding licensing agreement. If a portion of the payment from the future exploitation of the rights acquired by the licensee appears to be unrecoverable, the non-refundable portion of the payment should be charged on the costs during the current period. NOTE: Licensing agreements similar to those contemplated in this case (i.e., sales or use royalties with minimum guarantees) were the subject of the Meeting of the Transition Resource Group for Revenue Recognition (FIT) on November 7, 2016. The FIT concluded that three common views or approaches to revenue recognition for contracts such as this are acceptable. The following analysis follows View B, which is taken into account by the FIT. An explanation of the other two approaches can be find in the following section entitled “Alternative Approaches.” This section provides a comparison of revenue models for each approach. Recently, FP entered into a five-year licensing agreement with World of Pinball Wizardry (WPW), a manufacturer of high-end pinball machines.
The contract gives WPW the rights to build and manufacture pinball machines with trade names and logos of one of FP`s long-standing television programs, Life and Limb. Life and Limb is a game show that FP started producing about 20 years ago. FP still produces the program and intends to continue production for at least another seven years. Proponents of this view argue that the recognition of turnover for the variable part of the contract, the amount greater than the minimum guarantee before obtaining the minimum guarantee, is contrary to the limitation of royalties on the basis of sale and use, since the sale or use has not yet taken place. As a result, the minimum guarantee is defined in accordance with View C and the minimum guarantee will be allocated during the contractual period using an appropriate progress measure (the time elapsed can be used in the above case) and the royalties above the minimum guarantee in variable consideration.