The Ultimate Frisbee League (UFL) licenses its trademark to Tank-Skin Apparel. Under the license arrangement, Tank-Skin pays the UFL a $1 million initial license fee plus a bonus when annual sales of Tank-Skin merchandise reach a threshold. The license agreement is for 4 years. Assume that the UFL anticipates that, in addition to receiving the $1 million license fee, it will receive a bonus of $2 million in year 1 of the contract and a bonus of $3 million in years 2-4 of the contract based on Tank-Skin's sales. Also assume that the UFL is convinced that it is probable there will not be a significant reversal of any revenue recognized with respect to the bonus in subsequent periods. At the inception of the contract, what is the amount of transaction price that the UFL would estimate with respect to this license arrangement?

Question

Quizplus · Accepted Answer

Normally the UFL would include an estimate of variable consideration in its estimate of the transaction price, yielding an estimate of $12 million (computed as $1 million initial fee + $2 million year 1 bonus + ($3 million × 3 years for subsequent-year bonuses). However, ASU No. 2014-09 does not allow estimates of sales-based royalties on licenses to be included in the transaction price until that consideration is no longer variable, so those amounts would be excluded from the transaction price estimated at the inception of the contract, and the transaction price would only include the $1 million initial fee.

The Ultimate Frisbee League (UFL) Licenses Its Trademark to Tank-Skin