Licensing Developments from the January 6, 2016 FASB Board Meeting

While no official decisions were made, the Board observed two major points in relation to the accounting for licenses.

Observation #1 - Under ASC 606, license renewals will not be recognized as revenue until the term of the license renewal begins.

Under current GAAP, license renewals are to be recognized once an agreement is made between the Licensor and the Customer, regardless of when the new license term actually begins.  Since no additional performance is required by the Licensor by extending the term of a license, delivery (the triggering event) has occurred.

Under the new standard, a Customer must be able to use AND benefit from a performance obligation before a Vendor can recognize revenue.  

Accordingly, a Licensor cannot recognize revenue from a term license renewal until the Customer has the right to use and benefit from the license (i.e. when the term actually begins).  

Observation #2 - The application guidance on licensing does not override the five-step revenue recognition model in Topic 606.

In other words, licensing arrangements will still be considered under the context of ASC 606.  The licensing sub-topic will work in conjunction with the new revenue standard and will not require Companies to evaluate licensing deals outside of ASC 606.