IFRS 15 Special Topics: Licenses, Contract Modifications, Principal vs Agent, and Other Application Guidance
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Sai Manikanta Pedamallu
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IFRS 15 Special Topics: Licenses, Contract Modifications, Principal vs Agent, and Other Application Guidance
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
Posts 11 and 12 in this series covered the five-step model end to end. If you followed those posts, you can identify a contract, identify performance obligations, determine the transaction price, allocate it, and recognise revenue at the right time. That is the core framework.
But IFRS 15 does not stop at the five-step model. Appendix B of the standard contains application guidance for specific topics that sit within or alongside the five steps. These topics are not afterthoughts. They are among the most commercially significant aspects of the standard and among the most tested areas in the Dip IFRS exam. Licensing alone affects every pharma company, IT software vendor, media company, and franchise business. Principal versus agent affects every e-commerce platform, every travel aggregator, and every distribution business.
This post covers licenses, contract modifications in full calculation depth, principal versus agent, bill-and-hold, consignment, and repurchase agreements. Post 13B covers contract costs.
Licenses of Intellectual Property
When an entity grants a licence of intellectual property, it must determine whether the licence is a separate performance obligation (already covered in Step 2), and if so, whether that obligation is satisfied at a point in time or over time.
The standard covers several types of IP: software and technology, motion pictures, music and media, franchises, patents, trademarks, and copyrights.
Right to Use vs Right to Access: The Core Distinction
This is the central question for every licence of IP. The answer determines the timing of revenue recognition entirely.
Right to use the IP as it exists at the point in time the licence is granted: the performance obligation is satisfied at a point in time, when control of the licence transfers to the customer.
Right to access the IP as it exists throughout the licence period: the performance obligation is satisfied over time, because the customer simultaneously receives and consumes the benefit as the licensor performs.
The question to ask: will the entity's ongoing activities significantly affect the IP to which the customer has rights, such that the customer benefits from those activities as they happen?
Three conditions must all be met for a licence to be right to access (over time):
- The contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the IP
- The rights granted expose the customer to the positive or negative effects of those activities
- Those activities do not result in the transfer of a good or service to the customer as they occur
If all three are met: right to access, over time. If any one fails: right to use, point in time.
Practical Application
Software licence (right to use): An Indian IT company like Tally Solutions sells a licence for its accounting software. The software has significant standalone functionality. Customers use it in its current form. Tally's future development activities, if any, do not significantly change the version the customer licensed. The customer's ability to benefit from the software does not depend on Tally continuing to perform. This is a right-to-use licence. Revenue is recognised at the point in time the customer can use and benefit from the software, typically at delivery or the start of the licence term.
Franchise licence (right to access): A food franchise company like Westlife Foodworld (which operates McDonald's restaurants in India) grants franchisees the right to use the brand. The franchisor continuously maintains and enhances the brand, provides ongoing operational support, refreshes marketing, and updates menus. The franchisee's ability to benefit from the licence depends substantially on the franchisor's ongoing activities. The customer is exposed to the positive and negative effects of the franchisor's brand management. This is a right-to-access licence. Revenue from the franchise fee is recognised over the franchise period.
Pharmaceutical compound licence (right to use): Dr. Reddy's out-licences a drug compound to an overseas pharmaceutical company. The compound is a distinct chemical entity with standalone functionality. Dr. Reddy's has no ongoing obligation to modify or maintain the compound. The licensee uses the compound as it exists today. Right to use. Revenue recognised at the point control transfers, typically at the start of the licence term.
Pharma with ongoing development (right to access): A biotech company licenses a compound that is still in active clinical development. The licensor will continue running trials, seeking regulatory approvals, and potentially modifying the compound. The licensee's ability to commercialise the compound depends entirely on the licensor's ongoing development activities. Right to access. Revenue recognised over the development and commercialisation period.
The distinction between these two pharma examples is exactly what makes licensing one of the most judgment-intensive areas under IFRS 15. Two licensing contracts with the same headline structure can produce entirely different revenue timing based on whether the licensor's activities significantly affect the IP the customer holds rights to.
Sales-Based and Usage-Based Royalties: The Exception
For royalties promised in exchange for a licence of IP, a special rule applies that overrides the normal variable consideration framework. Revenue is recognised only at the later of:
- When the subsequent sale or usage occurs, or
- When the performance obligation to which the royalty has been allocated is satisfied (or partially satisfied)
This exception exists because royalties are so variable and dependent on the licensee's own activities that the constraint on variable consideration would otherwise defer almost all royalty revenue.
Indian example: Sun Pharma out-licences a generic drug to a distributor with a royalty of 8% of net sales. The performance obligation (granting the licence) is satisfied when the distributor receives the right to use the compound. Revenue from the royalty is not recognised at that point. It is recognised as the distributor makes sales, period by period, based on actual sales reported.
The exception applies only to royalties on IP licences. A royalty on something other than a licence, for example a royalty based on usage of manufacturing equipment, follows the standard variable consideration rules.
Contract Modifications: Full Calculation Mechanics
Post 11 covered the three treatments conceptually. Here I work through the calculations with Indian examples so the accounting is clear.
Recall the three treatments:
- Treatment A: new separate contract (distinct goods or services at standalone selling price)
- Treatment B: terminate old, create new (non-distinct additions, or distinct at non-SSP)
- Treatment C: prospective with cumulative catch-up (remaining goods are distinct, partial catch-up needed)
Treatment A: Separate Contract
No calculation complexity. The original contract continues unchanged. The modification is accounted for as if it were a completely new contract. Revenue from the original contract follows its original allocation. Revenue from the new contract follows its own allocation.
Treatment B: Terminate and Create New
Worked example: L&T construction contract modification
L&T has a contract to build a commercial complex for Rs. 200 crore. Recognised revenue to date: Rs. 80 crore (40% complete on cost-to-cost basis). Remaining performance obligation at the modification date: Rs. 120 crore.
The client requests a scope change: add a basement car park. This work is not distinct from the existing construction (the basement is structurally integrated with the building). The modification adds non-distinct goods. Treatment B applies.
Additional consideration for the basement: Rs. 30 crore.
New transaction price for the remaining work = remaining original consideration + modification consideration:
| Item | Rs. Crore |
|---|---|
| Original contract price | 200 |
| Revenue already recognised | (80) |
| Remaining original consideration | 120 |
| Add: modification consideration | 30 |
| New transaction price for remaining work | 150 |
This Rs. 150 crore is allocated to the single remaining performance obligation (the integrated construction including the basement) and recognised as the remaining work is completed.
The key: there is no catch-up adjustment because the modification is treated as a termination and fresh start. Revenue recognised to date (Rs. 80 crore) is not revisited. From the modification date, revenue is recognised on the Rs. 150 crore basis as work progresses.
Treatment C: Prospective with Cumulative Catch-Up
This treatment applies when the modification adds distinct goods or services at a price that does not reflect standalone selling price, and the remaining goods or services in the original contract are also distinct.
Worked example: Infosys software maintenance modification
Infosys has a 12-month application maintenance contract for Rs. 24 crore (Rs. 2 crore per month). Eight months have passed. Revenue recognised: Rs. 16 crore. Remaining: Rs. 8 crore over 4 months.
The client requests additional scope: extend the contract by 3 months at Rs. 1.5 crore per month (instead of the original Rs. 2 crore rate). The additional months are distinct (each month's service is substantially the same over-time obligation). But Rs. 1.5 crore per month is not the standalone selling price (which is Rs. 2 crore). Treatment C applies.
The remaining performance obligations are all distinct months of service (4 original + 3 new = 7 months).
Revised transaction price = remaining original consideration + modification consideration:
| Item | Rs. Crore |
|---|---|
| Remaining original consideration | 8.00 |
| Modification consideration (3 × Rs. 1.5 crore) | 4.50 |
| Total for remaining 7 months | 12.50 |
New monthly rate = Rs. 12.50 crore / 7 months = Rs. 1.786 crore per month
In the month of modification, Infosys recognises revenue for that month at the new rate of Rs. 1.786 crore, not the original Rs. 2 crore. If the modification occurs mid-month, a cumulative catch-up adjustment is calculated for any difference between what has already been recognised in that period and what should be recognised under the new rate.
The catch-up: say the modification happens at the start of month 9. No catch-up adjustment is needed because month 9 has not yet started. The new rate applies from month 9 onward. If the modification happens partway through month 9 after Infosys has already recognised Rs. 1 crore for the first half, but the new rate for the full month is Rs. 1.786 crore, the adjustment in month 9 is Rs. 0.786 crore (recognise the balance).
This cumulative catch-up mechanics is the most common source of errors in exam questions on contract modifications.
Principal vs Agent: Gross vs Net Revenue
Whether an entity is a principal or an agent determines whether revenue is recognised at the gross amount (the full consideration received from the customer) or the net amount (the fee or commission retained).
The rule is straightforward in principle: an entity is a principal if it controls the specified good or service before transferring it to the customer. It is an agent if it arranges for another party to provide the good or service.
Control before transfer is the test. IFRS 15 provides three indicators to help, but these are indicators of control, not a checklist where any two out of three makes you a principal.
Three Indicators of Control (Principal)
Indicator 1: Primary responsibility for fulfilling the promise. The entity is primarily responsible for delivering the good or service to the customer, and the customer holds the entity accountable for delivery. If a customer complains about non-delivery, who do they call?
Indicator 2: Inventory risk. The entity holds inventory risk before the transfer to the customer (for goods) or after transfer if the customer returns it. If unsold inventory sits on the entity's balance sheet and the entity bears the loss if it does not sell, that points toward principal.
Indicator 3: Discretion in establishing price. The entity can set the price the customer pays. An agent typically cannot unilaterally change the price of the third party's goods or services.
The indicators are weighted by relevance. In some contracts one indicator is far more persuasive than the others.
Worked Examples: Principal vs Agent in Indian Context
Example 1: Zomato (Agent)
Zomato facilitates food orders between customers and restaurants. The restaurant prepares the food and is primarily responsible for the food quality and specification. Zomato does not hold inventory of food. Zomato facilitates pricing but the restaurant sets the menu price; Zomato adds a delivery fee. The customer's relationship for the food itself is with the restaurant.
Zomato is an agent for the food order. Revenue: delivery fee and platform commission, not the full order value. If a customer orders Rs. 500 of food and pays Rs. 100 delivery, Zomato's revenue is its delivery fee and restaurant commission, say Rs. 75 in total, not Rs. 600.
Example 2: MakeMyTrip (Agent for flights, principal for packages)
MakeMyTrip sells airline tickets on behalf of carriers. The airline is primarily responsible for the flight, bears inventory risk on the seat, and sets the base fare. MakeMyTrip earns a booking commission. Agent. Revenue: commission only.
For holiday packages where MakeMyTrip bundles flights, hotels, and activities at a fixed price, takes full responsibility for delivery, bears the risk if the hotel cancels, and has discretion over the package price: principal. Revenue: full package price.
The same entity can be a principal in some transactions and an agent in others. The assessment is transaction by transaction, not entity-level.
Example 3: FMCG distributor (Principal)
Hindustan Unilever sells products to a distributor who then sells to retailers. The distributor takes title to the goods, bears inventory risk, sets the selling price to retailers, and is primarily responsible for delivery to retailers. The distributor is a principal for its sales to retailers. Revenue: full selling price to retailers.
If instead the distributor operates on a consignment basis with no title transfer and no inventory risk, and simply passes orders to HUL: agent. Revenue: commission.
The Control Assessment in Digital Businesses
Indian digital businesses face this question constantly. A fintech platform that facilitates lending: is it a principal (recognising full loan disbursement as revenue) or agent (recognising only the origination fee)? An edtech platform that sells third-party courses: principal or agent for the course fees?
The assessment requires examining who is primarily responsible for the goods or service, who bears inventory or delivery risk, and who sets the price. For digital platforms where the customer experience is driven entirely by the third-party provider and the platform merely facilitates discovery and payment, the agent conclusion is usually correct.
Bill-and-Hold Arrangements
In a bill-and-hold arrangement, the entity bills the customer for a good but retains physical possession on the customer's behalf. The customer has not yet taken delivery. The question is whether control has transferred despite physical non-delivery.
Revenue can be recognised in a bill-and-hold arrangement only if four conditions are all met:
- The reason for the bill-and-hold arrangement must be substantive (the customer has requested it, not the seller arranging it for revenue management)
- The product must be separately identified as belonging to the customer
- The product must currently be ready for physical transfer
- The entity cannot have the ability to use the product or direct it to another customer
Indian example: A steel manufacturer completes an order of specialised steel beams for a construction company. The construction site is not ready for delivery. The construction company requests the manufacturer to hold the beams at its warehouse and bills the manufacturer for storage. A formal agreement exists identifying the specific beams as the customer's property. The beams are complete and ready. The manufacturer cannot sell those specific beams to another customer.
All four conditions are met. Control has transferred. Revenue is recognised even though the beams have not left the manufacturer's warehouse.
Where arrangements do not meet these conditions, revenue is deferred until physical transfer occurs. Arrangements that appear to be bill-and-hold but where the real purpose is to pull forward revenue without a genuine customer request are a significant fraud risk area. Big 4 audit teams scrutinise bill-and-hold disclosures carefully.
Consignment Arrangements
In a consignment arrangement, a manufacturer or supplier delivers goods to another party (dealer, distributor, retailer) but retains control of the goods until a specified event occurs, typically the sale to the end customer.
Revenue is not recognised when goods are delivered to the consignee. Revenue is recognised when the consignee sells the goods to the end customer (or another specified event that transfers control).
IFRS 15 provides indicators that an arrangement is a consignment:
- The product is controlled by the entity until a specified event occurs (end customer sale, specified period expires)
- The entity can require the return of the product or transfer it to another party
- The consignee does not have an unconditional obligation to pay for the product (though it may have a deposit obligation)
Indian example: A two-wheeler manufacturer delivers motorcycles to a dealer network on consignment. The dealer holds the bikes on the manufacturer's behalf. The manufacturer can recall unsold bikes. The dealer has no obligation to pay until a bike is sold to a customer. Control has not transferred to the dealer. Revenue is recognised when the dealer sells to the end customer.
Contrast this with a standard distribution arrangement where the dealer takes title to the bikes, pays on credit terms regardless of whether they sell, and cannot return unsold inventory. Control transfers on delivery to the dealer. Revenue recognised at that point.
The distinction matters enormously for inventory recognition and revenue timing. Indian automotive companies with large dealer networks had to assess whether their dealer arrangements were consignment or sale on transition to Ind AS 115.
Repurchase Agreements
A repurchase agreement arises when an entity sells an asset and also promises, or has the option, to repurchase it. IFRS 15 distinguishes three types based on the nature of the repurchase right:
Forward (entity has an obligation to repurchase): The entity retains control because it is obligated to buy back. No revenue is recognised. The transaction is either a financing arrangement (if the repurchase price is equal to or greater than the original selling price) or a lease (if the repurchase price is less than the original selling price). This is a common structure in Indian sale-and-leaseback transactions.
Call option (entity has the right to repurchase): The entity can repurchase but is not obligated. Whether control transfers depends on whether it is more than insignificantly likely that the entity will exercise the option. If it is likely the entity will repurchase, no revenue is recognised. If not likely, revenue is recognised with a right-of-return provision.
Put option (customer has the right to require repurchase): The customer can force the entity to buy back. If the customer has significant economic incentive to exercise the put (because the repurchase price is significantly higher than the expected fair value at repurchase), the entity retains control and no revenue is recognised. The transaction may be a lease or financing arrangement. If no significant economic incentive exists, revenue is recognised with a right-of-return provision.
Indian example: A capital equipment manufacturer sells machinery to a customer for Rs. 50 lakh with a contractual right to repurchase at Rs. 55 lakh in two years. The entity has a forward obligation to repurchase. No revenue is recognised. The transaction is a financing arrangement. The customer pays Rs. 50 lakh, which the entity recognises as a financial liability. Interest expense of Rs. 5 lakh is recognised over two years. At repurchase, the entity pays Rs. 55 lakh and derecognises the liability.
Customer Options for Additional Goods or Services
When a contract gives a customer the option to acquire additional goods or services, the option is a performance obligation if it provides a material right that the customer would not receive without entering the contract.
A material right is a discount or other incentive that goes beyond what the customer could get without the contract. Loyalty points, volume discounts on future purchases, and options to buy additional goods at a significant discount all qualify if the discount is material.
Indian example: Reliance Retail offers loyalty points on purchases. Every Rs. 100 spent earns 10 points redeemable at Rs. 1 each against future purchases. The loyalty points are a material right: customers would not receive these points without purchasing. Reliance allocates a portion of the transaction price to the points at each sale, deferring that amount as a contract liability until the points are redeemed or expire.
The amount allocated to the points is their standalone selling price: the discount they provide times the probability of redemption. If Rs. 100 of points will be redeemed at Rs. 1 and the redemption rate is 80%, the standalone selling price of the points is Rs. 0.80 per Rs. 100 of purchases.
Ind AS 115 vs IFRS 15: Special Topics
For all the topics covered in this post, Ind AS 115 is fully converged with IFRS 15. The principal vs agent guidance, licensing guidance, bill-and-hold criteria, consignment indicators, and repurchase agreement framework are identical.
The one area with a practical Indian nuance: the principal vs agent assessment for entities operating under government-regulated pricing (utilities, PSUs) can be complex because the entity may have limited discretion over prices, which affects the price-setting indicator. The overall control assessment still applies, but price discretion carries less weight in regulated industries.
What Big 4 Auditors Focus On in These Areas
Licensing: Whether the entity has correctly assessed right-to-use versus right-to-access. For pharma companies and software vendors, this is a recurring audit focus. The assessment requires understanding the nature of the entity's ongoing activities relative to the licensed IP.
Principal vs agent: Whether the entity has genuinely assessed control before transfer, or defaulted to gross recognition because it inflates revenue. Auditors look for contracts where the entity has no inventory risk and no primary responsibility but recognises gross revenue.
Bill-and-hold: Whether all four conditions are met and whether the customer genuinely requested the arrangement. Bill-and-hold fraud is well documented globally. Auditors confirm the customer's request independently and verify that the goods are separately identified.
Contract modifications: Whether modifications are identified in a timely way and correctly treated. Unrecorded modifications, particularly for large IT services and construction contracts, are a completeness risk.
Dip IFRS Exam Angle
Most Tested Areas in This Post
Licensing right to use vs right to access: the examiner describes a licensing arrangement and expects you to classify it and explain the revenue timing. Know the three conditions for right-to-access. Know that software with standalone functionality is almost always right-to-use.
Sales-based royalties exception: a common standalone question. Know that the exception applies only to royalties on IP licences, not royalties on other items. Know the later-of rule.
Principal vs agent: a scenario with an intermediary and the question of whether gross or net revenue is recognised. Apply the three indicators of control, state which is most persuasive in the given facts, and conclude.
Contract modifications: given a modification mid-contract, calculate revenue for the period of modification. Know which treatment applies and how the transaction price is recalculated.
Common Examiner Traps
Applying royalty exception to non-IP royalties: the exception is specific to IP licences. A usage-based fee on a service contract is not within the exception.
Confusing bill-and-hold with consignment: bill-and-hold requires that the customer has requested the arrangement and the goods are identified as theirs. Consignment involves the supplier retaining control until a specified event.
Three out of three for right-to-access: all three conditions must be met. Candidates who see two conditions met and conclude right-to-access lose marks.
FAQ
Can a licence be both right-to-use and right-to-access within the same contract?
Yes, if a contract grants licences to multiple IP assets that have different characteristics. Each licence is assessed individually. One may be right-to-use and another right-to-access.
If I am an agent, where does my revenue appear in the income statement?
Net of the amounts payable to the principal. Only the commission or fee is revenue. The gross amounts are not shown anywhere in revenue.
Does the bill-and-hold exception apply to services?
No. Bill-and-hold guidance applies to goods. Services are recognised over time or at a point in time based on when the performance obligation is satisfied.
Can a contract modification change a right-to-access licence into a right-to-use licence?
If the modification changes the entity's ongoing obligations relative to the IP (for example, if the entity agrees to stop further development of the IP), the nature of the licence may change. The modification would need to be assessed under the contract modification framework and the licence re-evaluated.
What is the difference between a consignment and a sale with a right of return?
In a consignment, control has not transferred to the consignee. In a sale with a right of return, control has transferred but the customer has an option to return. The right-of-return is accounted for as variable consideration (expected returns reduce the transaction price and a refund liability is recognised).
How are loyalty points affected if they expire?
If points expire without redemption, the deferred revenue (contract liability for the points) is recognised as revenue at expiration, because the performance obligation (providing the discount) no longer exists.
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This is Post 13A of the Global Fin X IFRS Series. Previous: IFRS 15 Part 2: Steps 3, 4 and 5. Next: IFRS 15 Part 3B: Contract Costs.