Licence of IP vs service: the most consequential judgement in pharma accounting

The question looks deceptively simple: is this a licence, or is it a service?

Under IFRS 15, the answer determines whether revenue is recognised on day one or spread across years. In a deal worth €200 million, the difference between those two treatments can be €180 million recognised immediately versus €20 million per year for nine years. Same commercial arrangement. Same cash flows. Entirely different financial statements.

This is not a technical footnote. It is the single accounting judgement with the greatest capacity to reshape a pharma company's reported performance — and it is routinely made too late, with too little rigour, by people who do not fully understand what the standard actually requires.

The framework

Right to use vs right to access: what IFRS 15 actually says

IFRS 15 draws a fundamental distinction between two types of intellectual property licence:

A right to use licence gives the customer access to the licensor's IP as it exists at the point in time the licence is granted. Revenue is recognised at the point in time when control transfers — typically at contract inception or on delivery of the licence.

A right to access licence requires the licensor to continue undertaking activities that significantly affect the IP to which the customer has rights throughout the licence period. Revenue is recognised over time, as those activities occur.

(US GAAP readers will recognise these as functional IP and symbolic IP under ASC 606. The conceptual framework is similar — both distinguish between IP with standalone utility and IP whose value depends on the licensor's ongoing activities — but the frameworks are not identical. ASC 606 applies specific bright-line tests that differ in certain respects from the IFRS 15 indicators. Where a transaction involves entities reporting under both standards, the two assessments should be performed separately.)

The critical test under IFRS 15 paragraph B58 is whether the licensor's ongoing activities significantly affect the intellectual property to which the customer has rights. If yes — right to access, over time. If no — right to use, point in time.

This sounds mechanical. In practice, it requires genuine judgement about the nature of the IP, the substance of the licensor's ongoing obligations, and the degree to which those obligations are inseparable from the value the customer is receiving.

The test in practice

What "significantly affect the IP" actually means in a pharma context

The standard offers three indicators that a licence provides a right to access:

1. The customer reasonably expects the licensor to undertake activities that will significantly affect the IP.
2. The rights granted expose the customer directly to any positive or negative effects of those activities.
3. Those activities do not result in the transfer of a good or service to the customer as they occur.

In pharmaceutical licensing, this framework produces some clear cases and some genuinely difficult ones.

Clear right to use: A company out-licences a fully developed, regulatory-approved compound to a regional distributor. The licensor has no ongoing development obligations. The compound exists independently of anything the licensor will do going forward. Revenue recognised at point in time.

Clear right to access: A company licences its brand and ongoing research programme to a partner who will sell products bearing the brand and benefit from the continuous pipeline development. The licensor's ongoing activities — brand management, research updates, clinical data — directly affect the value of what the customer holds. Revenue recognised over time.

Genuinely difficult: A company licences a pre-approval compound with significant ongoing development obligations retained by the licensor. The compound does not yet have standalone functionality independent of the licensor's continued work. The licensor's phase 3 programme will determine whether the licensor delivers something of value at all. The question is whether the retained development activities significantly affect the IP to which the customer currently has rights — or whether they are simply activities the licensor is undertaking in parallel.

This is where most misclassifications occur.

Where it goes wrong

Four misclassification patterns finance must recognise

Pattern 1: treating retained development obligations as irrelevant

The commercial team structures a deal as a licence with upfront payment plus milestones. Finance classifies it as a right to use and recognises the upfront payment immediately. The licensor has, however, retained significant development obligations — ongoing clinical trials, regulatory filing support, manufacturing process development — that are substantively connected to the value the customer receives.

The test is not whether the obligations are labelled as services. It is whether they significantly affect the IP the customer holds. If the answer is yes, the licence is a right to access, and the upfront payment should be deferred.

Pattern 2: conflating a licence with bundled services

A deal includes a licence, a research collaboration, and access to the licensor's manufacturing know-how. Finance treats the whole arrangement as a single licence and recognises revenue at inception. In fact, there are multiple performance obligations — and the research collaboration and manufacturing support are services recognised over time. The licence element may be a right to use, but it cannot drag the service elements with it.

Pattern 3: using the wrong reference point for "existing at a point in time"

Some finance teams assess the right to use vs right to access question by asking whether the IP exists today. This misses the point. The question is whether the licensor's future activities will significantly affect the IP to which the customer has rights. Even if the IP exists today, if the licensor's planned activities — a next-generation formulation, a label expansion, a manufacturing process improvement — will change what the customer holds, the licence may be a right to access.

Pattern 4: letting the deal structure drive the accounting

This is the most dangerous pattern. The commercial team has structured the deal as a licence because that produces better accounting — immediate revenue recognition, cleaner P&L. Finance validates the label rather than the substance. The standard does not care what the contract calls the arrangement. It cares what the arrangement actually is.

Consequences

What a misclassification produces

Revenue timing. A misclassified right to access recognised as a right to use produces an immediate revenue overstatement. In a material deal, this can be a restatement event. The correction — moving revenue from one period to multiple future periods — is visible, headline-generating, and difficult to explain without acknowledging the original error.

Audit exposure. Auditors reviewing a large upfront payment on a licensing deal will scrutinise the right to use vs right to access assessment. If the documentation is thin — or if the assessment simply asserts "the compound exists at inception" without addressing the licensor's ongoing activities — the position will not hold under challenge.

Impairment risk. Where a misclassified right to use licence is subsequently found to be a right to access, the primary consequence is restatement — prior period revenues are restated and deferred over the correct recognition period. A secondary consideration for the licensee is that the original valuation attributed to the licence may require scrutiny: if the asset's value was assessed on the assumption of immediate standalone functionality, and that assumption was wrong, the basis for the original recognition warrants review. The direct impairment trigger, however, remains future cash flows from the asset — not the licensor's revenue recognition method.

Investor and partner confidence. Revenue recognition restatements in pharma are visible and interpreted as governance failures. Partners who structured deals on the basis of particular accounting treatments may find their own positions affected. The commercial relationship consequences of a restatement can extend well beyond the financial statements.

Worked example

Same deal, two treatments, materially different P&L

Consider a licensing arrangement with the following terms: upfront licence fee of €80 million, milestone payments of €120 million across regulatory and commercial events, royalties of 12% of net sales. The licensor retains ongoing obligations: completion of a Phase 3 programme, regulatory filing support across three territories, and first-generation manufacturing process transfer over 36 months.

Both treatments may be defensible depending on the specific facts. Neither can be chosen on the basis of which produces the preferred outcome. It is worth noting that the total economics are unchanged — the same cash flows, the same milestones, the same royalties. What differs is entirely the timing of reported revenue. That distinction matters enormously to investors, analysts, and audit committees reading the financial statements.

Before the deal closes

Five questions finance must answer before signature

These questions need answers before the term sheet is signed — not after. Once the commercial structure is locked, the accounting follows. Finance cannot renegotiate economics to produce a better accounting treatment after the fact.

• What IP exists at the date of the licence grant, and what is its standalone functionality independent of anything the licensor will do going forward?
• What obligations has the licensor retained, and do those obligations directly affect the IP the customer holds — or are they separate activities the licensor is undertaking on its own account?
• Does the customer have contractual exposure to the positive or negative effects of the licensor's ongoing activities?
• If the licensor ceased all activity after the licence grant, what would the customer hold, and what would it be worth?
• Would a knowledgeable, independent auditor examining the substance of this arrangement conclude that the licensor's ongoing activities significantly affect the IP transferred?

If the answers to questions 2, 3, and 5 are yes, the licence is a right to access. Document that assessment before closing. The documentation must address the substance of the licensor's ongoing obligations — not simply assert that the IP existed at inception.

For deal teams

This cannot be delegated to technical accounting after close

The right to use vs right to access assessment is not something that can be delegated to the technical accounting team after the deal closes. By that point, the commercial structure — the upfront fee amount, the milestone schedule, the retained obligation profile — has been set. Finance can assess the accounting consequences of the structure, but it cannot change them.

The assessment must happen during term sheet negotiation, when the retained obligation profile is still being shaped. If the deal structure produces a right to access treatment and the business case depends on immediate revenue recognition, the structure needs to change — not the accounting.

Chapter 2 of Accounting for Innovation works through the right to use vs right to access framework in detail, with full analysis of the IFRS 15 indicators and their application to pharma and biotech licensing structures.

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The bottom line

What to take from this

The right to use vs right to access question is not answered by reading the contract label. It is answered by examining the substance of the licensor's obligations and their relationship to the IP the customer holds.

Finance teams that wait until the deal is signed to perform this assessment are not managing accounting risk — they are discovering it after the fact.

The time to ask the question is before the term sheet is agreed. The time to document the answer is before the contract is signed. The time to brief the audit committee is before the first financial statements that reflect the arrangement are published.

If any of those steps happened after the fact on your last major licensing deal, it is worth asking why — and what changes before the next one.

Series

More in the pharma licensing series

• Article 1 — The €200M licensing deal that destroyed a €2B biotech
• Article 2 — The hidden liabilities that sink licensing deals
• Article 3 — The CFO's complete licensing deal due diligence checklist
• Article 4 — When the auditors miss it