Interest, Royalties, and DividendsRevenue from use of entity’s assets yielding interest, royalties and dividends shall be recognized when,
- It is probable that the economic benefits associated with the transaction will flow to the entity;
- the amount of the revenue can be measured reliably
1. Interest is recognized using the “effective interest method”
2. Dividends are recognized when the shareholder has a right to receive payment
Accounting Policies (Extract)
Hargreaves Lansdown Plc, (LON:HL), Consolidated Financial Statement December 2012
|Investment Revenue Recognition (Extract) |
Interest income is accrued on a time basis by reference to the principal outstanding and the effective interest rate applicable. Dividend income from investment is recognized when the shareholder’s right to receive payment is established.
3. Royalties are recognized on an accruals basis in accordance with the royalty agreement.
The entity may receive fees for allowing use of its asset, namely
- Brand Name
- Copyright for music, books, motion picture films
- Software, or right to use particular technology
|Database4U Co. grants a license to a customer to use its web-site, which contains proprietary databases. The license allows the customer to use the web-site for a two-year period (1 January 2012 to 31 December 2014). The license fee of $72,000 is payable on 1 January 2012.|
The substance of the agreement is that the customer is paying for a service that is delivered over time. Although Database4U will not incur incremental costs in serving the customer, it will incur costs to maintain it’s the web-site. The revenue from the license fees should be accrued over the period of the service agreement; therefore the fee of $72,000 received on 1 January 2012 should be recognized as a deferred income (liability).
Further, each month the entity would release $3,000 deferred income and recognized as income to reflect the service that is delivered.
Example: Royalties contingent on future service
MusicMedia plc, a film distributor, grants a license to a cinema operator to show film at its theatre. The terms of the agreement states that theatre will run 50 shows of the film in specified location in the following year in return for a percentage of the box office receipts. The distributor will license the film to other operators in other locations.
MusicMedia should recognize the revenue on the dates the film is shown. In this case, MusicMedia plc can only measure the amount of revenue from license once the event has occurred, that is the film is screened. Here, the MusicMedia has not sold the rights to cinema operator, but assigned him the rights for specific period and specific location.
Accounting Policies (Extract)
Koninklijke Philips Electronics NV, (AMS:PHIA), Consolidated Financial Statement Dec 2012
Royalty income, which is generally earned based upon the percentage of sales or a fixed amount per product sold, is recognized on an accrual basis.