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Question on Licenses and Franchises

8 June 2009 345 views 3 Comments

Dear All,
It is to request you all for reply of my question stated below: “Company A” grants license to “Company B” to sell its products in exchange of license fee to be paid to “Company A”.

All transactions of “Company B” will be reported to “Company A”, i.e. “Company B” will be perform operations under the control of “Company A”.

How will both the companies account for this license in their books?

Thanking you in anticipation. Regards Waliullah CA (Module D) Institue of Chartered Accountants of Pakistan (ICAP)

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  • Valuable Internet Information » Question on Licenses and Franchises | IFRSLIST.COM - The online … said:

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    # 8 June 2009 at 4:40 pm
  • asadlarik3 said:

    first company B(please refer to IAS 38 for details)

    Company B will recognize the license as an intangible asset.

    Company A will recognize the license fees as income.

    Feel free to discuss if not clear.

    # 9 June 2009 at 9:22 pm
  • admin (author) said:

    Message from Jeroen

    Dear Wali,

    The license only has a value for company B (it generates future sales)

    Before granting/selling the license company a is not allowed to account for it as an asset as it is an internally generated intangible asset (basically brand value).

    The license itself would be initially valued at cost for Company B if they paid anything at all for it (IAS38,24). Company A would record a revenue for the sale of the license.

    Subsequently the license can be carried at cost plus amortization/impairments (IAS 38.74) or at fair value (revaluation model) according to IAS 38.75. however, you need to have an active market for the intangible asset. this would be the case if for example Company A is selling a number of licenses every year. This would help you te determine a market value for the license. Gains on revaluation are measured in other comprehensive income/equity (IAS 38.85).

    Please note: if no intial payment for the license took place (which might happen in intercompany relationships), it can not be measured at cost (since its zero). According to IAS 38.76 the revaluation model is not allowed for intangible assets that have not been recognised initially.

    Obviously all of the above needs to be eliminated in the consolidated accounts as B is under control of A.

    Hope this helps.

    Regards,

    Jeroen

    # 26 June 2009 at 3:30 pm

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