Question

Jade MacIntire is a famous singer. Jade Aquarium, Inc. is a multimedia company with business interests in music, videos, and video games. Both Jade MacIntire and Jade Aquarium need help booking the licensing agreements they have entered into during the past year. They entered into the following licensing agreements:

In January, Jade Aquarium, Inc. purchased the intellectual property rights to the music created by Jade MacIntire to date of the contract, for $20,000. Under the terms of the contract has additionally acquired the right to purchase future compositions created and sung by the artist, for $500 per composition, within five-years from the date of the contract. The corporation can legally sell to another party the compositions it has purchased from the artist.

This year, Jade MacIntire has entered into an agreement with the producers of a Broadway musical, giving them the exclusive right to use a song that she wrote, for a $10,000 consideration. It is not a song Jade MacIntire will ever personally perform.

Jade Aquarium, Inc. has also entered into a licensing agreement with a movie company allowing it to use two of the artist’s most popular compositions in future movies over the next two years. The movie company paid $2,000 for the option to use the songs and will pay an additional $1,500 each time the songs are used in a movie. It is expected that the use of the songs in the movies will bolster the artist’s popularity, increasing the demand for her albums.  

Jade Aquarium, Inc. also collects royalties for songs written by Jade MacIntire and played on air. On average the company collects for 3500 song plays each month. Each play earns the company 9.1 cents in royalties.

Jade Aquarium produced a guitar music app that individuals can download for $2.99, with 20,000 apps downloaded this year. The app is fully functional, but the company anticipates needing to provide software updates twice a year for the next five year; these costs are expected to equal $3,000 and are considered immaterial to the total app developmental cost of $60,000.

At the end of June, Jade MacIntire sold the rights to the use of her album cover images for t-shirts and mugs to Music Outfitters-R-Us for two years. Music Outfitters-R-Us paid Jade MacIntire $20,000 for the rights. Music Outfitters-R-Us has offered Jade a bonus of $10,000 if Jade MacIntire averages at least 50 shows per year over the next two years and $5,000 if Jade MacIntire averages at least 40 shows per year over the next two years. By the end of the year, Jade MacIntire had performed 50 shows.

The probability of Jade MacIntire playing 20-29 shows next year is 15%, 30-39 shows next year is 25%, 40-49 shows next year is 30%, 50+ shows next year is 30%.

Case Questions

1. Summarize the issues specifically related to accounting that are in this case.

2. Providing relevant support from the FASB Codification, discuss the proper accounting treatment for the revenue generating activities. More specifically, at what point(s) in time should revenue be recognized, and for what amount(s)?

3. Find, cite, and summarize the relevant international accounting standard applicable to this case. Compare and contrast relevant U.S. GAAP and IFRS standards.

Answer 1

Answer 1 : The accounting related issue with this case belongs to (a) revenue recognition (b) expense amortisation with respect to the intellectual property.

Answer 2 : Support for FASB Codification relates to outside links which is prohibited to include in answer. The suggested accounting treatment is

In books of Jade Aquarium

a) Expense : Amortisation of intellectual property rights at the end of every year for $4000 for next five years

b) Revenue : Sale of rights to movie company for using songs ; $2000 in current year

c) Revenue : Royalty for use of songs by movie company ; $1500 per song per use in the year of usage by movie company

d) Revenue : Royalty for songs played on air ; 3500 songs * 9.1 cents = $318.5 ; to be booked every month

e) Revenue : App download 20000*2.99 = $59800 ; to be booked during the year as and when it accrues

f) Expense : App Maintainence/upgrade = $300 every six months for next 5 years

g) Expense : Amortisation of app development expense $60000/5 = 12000 every year

In the books of Jade Macintire

a) Revenue : Reconigtion of Royalty from intellectual property rights at the end of every year for $4000 for next five years

b) Revenue : Sale of rights to broadway musical for a song ; $10000 in current year

c) Revenue : Royalty for use of cover images of albums ; $10000 at the end of year for two years

d) Revenue : Bonus for performing 50 shows every year basis average for next two years ; $10000 at the end of second year (note : probability for performing 50 shows a year is highest)

Answer 3 : The relevant IAS applicable is No15 Revenue recognition on contracts with customers. We can summarize this standard as identify the contract, trace out performance indicators and consideration, link consideration with the performance indicators and recognise revenue as and when the performance criteria is met

Basic contrast between US GAAP and IFRS : IFRS ensures that the revenue on the contracts should be recognised as and when the performace indicator is met irrespective the contract is discharged in full or not. i.e percentage completion method. However, US GAAP stresses on recognition of revenue on a contract only when the final value is delivered to the customer and not the percentage completion method