An entity enters into a contract with a customer for two intellectual property licences (Licences A and B), which the entity determines to represent…

(a) Case A—Variable consideration allocated entirely to one performance obligation To allocate the transaction price, the entity considers the criteria in paragraph 85 and concludes that the variable consideration (ie the sales-based royalties) should be allocated entirely to Licence B. The entity concludes that the criteria are met for the following reasons: (a) the variable payment relates specifically to an outcome from the performance obligation to transfer Licence B (ie the customer's subsequent sales of products that use Licence B). (b) allocating the expected royalty amounts of 20,00,000 entirely to Licence B is consistent with the allocation objective in paragraph 73 of Ind AS 115. This is because the entity's estimate of the amount of sales-based royalties (20,00,000) approximates the stand-alone selling price of Licence B and the fixed amount of 16,00,000 approximates the stand-alone selling price of Licence A. The entity allocates - 16,00,000 to Licence A. This is because, based on an assessment of the facts and circumstances relating to both licences, allocating to Licence B some of the fixed consideration in addition to all of the variable consideration would not meet the allocation objective in paragraph 73 of Ind AS 115. The entity transfers Licence B at inception of the contract and transfers Licence A one month later. Upon the transfer of Licence B, the entity does not recognize revenue because the consideration allocated to Licence B is in the form of a sales-based royalty. Therefore, the entity recognizes revenue for the sales-based royalty when those subsequent sales occur. When Licence A is transferred, the entity recognizes as revenue the - 16,00,000 allocated to Licence A. Case B—Variable consideration allocated on the basis of stand-alone selling prices To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to determine whether to allocate the variable consideration (ie the sales-based royalties) entirely to Licence B. In applying the criteria, the entity concludes that even though the variable payments relate specifically to an outcome from the performance obligation to transfer Licence B (ie the customer's subsequent sales of products that use Licence B), allocating the variable consideration entirely to Licence B would be inconsistent with the principle for allocating the transaction price. Allocating - 6,00,000 to Licence A and - 30,00,000 to Licence B does not reflect a reasonable allocation of the transaction price on the basis of the stand-alone selling prices of Licences A and B of 16,00,000 and - 20,00,000, respectively. Consequently, the entity applies the general allocation requirements of Ind AS 115. The entity allocates the transaction price of 6,00,000 to Licences A and B on the basis of relative stand-alone selling prices of 16,00,000 and - 20,00,000, respectively. The entity also allocates the consideration related to the sales-based royalty on a relative stand-alone selling price basis. However, when an entity licenses intellectual property in which the consideration is in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the following events: the subsequent sales occur or the performance obligation is satisfied (or partially satisfied). Licence B is transferred to the customer at the inception of the contract and Licence A is transferred three months later. When Licence B is transferred, the entity recognizes as revenue - 3,33,333 [(₹ 20,00,000 ÷ ₹ 36,00,000) × ₹ 6,00,000] allocated to Licence B. When Licence A is transferred, the entity recognizes as revenue - 2,66,667 [(₹ 16,00,000 ÷ ₹ 36,00,000) × ₹ 6,00,000] allocated to Licence A. In the first month, the royalty due from the customer's first month of sales is 4,00,000. Consequently, the entity recognizes as revenue - 2,22,222 (₹ 20,00,000 ÷ ₹ 36,00,000 × ₹ 4,00,000) allocated to Licence B (which has been transferred to the customer and is therefore a satisfied performance obligation). The entity recognizes a contract liability for the - 1,77,778 (₹ 16,00,000 ÷ ₹ 36,00,000 × ₹ 4,00,000) allocated to Licence A. This is because although the subsequent sale by the entity's customer has occurred, the performance obligation to which the royalty has been allocated has not been satisfied.