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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
33.Receipts for out-licensing
Relevant guidance
Company A and Company B enter into an agreement in which
Company A will license Company B’s know-how and technology
to manufacture a compound for HIV. Company A will use
Company B’s technology for a period of three years. Company B
will have to keep the technology updated and in accordance
with Company A’s requirements during this three-year period.
Company B obtains a non-refundable upfront payment of
$3 million for access to the technology. Company B will also
receive a royalty of 20% from sales of the HIV compound if
Company A successfully develops a marketable drug.
When the elements of an out-licensing arrangement represent
a single unit of accounting, the upfront fee should be deferred
over the contractual life of the arrangement unless the upfront
payment is in exchange for products delivered or services
performed that represent the culmination of a separate earnings
process [SAB Topic 13].
Revenue should be recognized on a straight-line basis, unless
evidence suggests that the revenue is earned or obligations are
fulfilled in a different pattern, in which case that pattern should
be followed [SAB Topic 13].
How should Company B account
for a non-refundable upfront fee
received for licensing out its
know-how and technology to a
third party? 
Company B should recognize the non-refundable upfront fee received on a straight-line basis over the three-year term of the
license. The $3 million upfront fee is a service fee for granting a third party access to its technology and to keep it updated in
accordance with its requirements for a period of three years. This is the case even if the technology maintenance requirements are
not expected to be significant.
Company B should recognize the royalty receipts as revenue when earned. If material, the royalty should be presented as a separate
class of revenue in Company B’s income statement.