Accounting for royalty arrangements

The fourth in the series of guides from PwC's Media Industry Accounting Group, this paper explores some of the key challenges under IFRS in accounting for royalty arrangements by both licensors and licensees.

PwC’s 15th Annual Global CEO Survey highlighted that CEOs in the entertainment and media sector are particularly likely to be planning strategic alliances and to view collaboration as critical to success. The licensing of intellectual property from one party to another is a key component of many media sectors as content is made available to consumers across multiple platforms and territories.

Accounting for these royalty arrangements is challenging due to both the inherent complexity of the commercial contracts and because there is limited accounting guidance available under IFRS for licensors or licensees. Challenges can arise right along the royalties lifecycle, beginning with advance payments from the licensee to licensor prior to content being developed; through the decision as to whether the arrangement constitutes an outright sale of intellectual property by the licensor; and in the final phase when royalties are earned by the licensor through sales by the licensee.

This paper focuses primarily on the treatment of these challenges under current accounting guidance, but it does also consider the treatment under the revenue recognition Exposure Draft (ED) re-exposed in November 2011.

What the paper covers:

  • Royalties in the media sector: we identify the key players and types of royalties across the major media segments including publishing, music, internet radio, video games, mobile apps, film rights, and sports rights.
  • Accounting for royalties receivable: Advance payments; outright sale; stepped royalties; contingent royalties.
  • Accounting for royalties payable: Advance payments; recognition and valuation of assets and liabilities; stepped royalties; contingent royalties.

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