Rights Accounting

Rights income is earned from the licensing of intellectual property. The most common types of rights income for book publishers are translation rights income and permissions income.

  • Translation rights refer to the right to publish a book in another language.
  • Permissions income is derived from a one-time license fee for the use of licensed content.

The usual royalty for authors on rights income is 50% of net receipts.

Rights Income Reporting for Publishers

Rights income is reported as other publishing income, net of royalties earned. If you receive $1000 in translation rights income this would be reported on the income statement as;

Other Publishing Income……… $500

($1000 revenue less royalties of $500)

FASB’s (Financial Accounting Standards Board) Emerging Issues Task Force 99-19 document states that revenue should be recognized on a net basis when 1) the supplier of the product (i.e. the licensee) has the primary obligation for fulfillment and customer service, 2) the amount the company earns per transaction is fixed (in dollars or as a percentage) and 3) the supplier; the licensee, has the credit risk for collecting on the sale of the product.

SEC Staff Accounting Bulletin 101 on Revenue Recognition, Question 10 SEC states that firms should report revenues on a net basis (revenue less costs) if they did not take title to the products, did not have the risk and rewards of ownership, and acted as an agent or broker.

A publisher’s chart of accounts may have sub-accounts for each type of rights income.

  • 400100 – Other Publishing Income
  • 400110 – Translation Rights (sub-account)
  • 400120 – Permissions Income (sub-account)

When the licensing agreement includes a “non-refundable advance” the advance; net of royalties earned, is recognized as income when received.

A refundable advance is credited to the liability account: “Deferred Rights Income” and recognized as income when royalties are earned.

Compliance Monitoring

The rights department; or the accounting department in smaller publishers, is responsible for tracking adherence to the terms of the license agreement. These duties include;

  1. Did you receive the promised advance(s)?
  2. Is the rights owner actively marketing the IP?
  3. Did you receive a copy of the translated book?
  4. Did you receive the sales statement for the royalty period?
  5. Did you receive payment for royalties earned on the reported sales?

In our experience, many licensees need a reminder to remit sales statements and royalty payments for the rights they purchased.

Audit Concerns

1. Is rights income recognized net of royalty expense? GAAP statements and SEC regulations state that firms should report revenues on a net basis if they did not take title to the products, did not have the risk and rewards of ownership, and acted as an agent or broker.

http://www.fasb.org/

www.sec.gov/interps/account/sab101.htm (Question 10)

You overstate revenue when you report gross rights income as sales. This violation of GAAP can have a negative impact if you are planning to sell your company or go public.

Example: Groupon (2011)

September 24, 2011: The Wall Street Journal reported…” Groupon said it would change what it books as revenue after discussions with the Securities and Exchange Commission. It will now only count as revenue its commission on sales, rather than the total value of an on-line coupon. Previously, when it sold a restaurant gift certificate for $10, for instance, it would book the full amount, even though a portion went to the business owner. That change reduces Groupon’s stated revenue for 2010 to $312.9 million, down from the $713.4 million previously reported.”

2. Does the company have procedures in place to track in-bound royalties due? The absence of such policies is an operational weakness.

Example: Adams Media (2008)

 An Authors Guild email to its members contained the following: “Internal e-mails, including an admission that Adams Media has “no system in place for tracking inbound Royalty Statements from translation rights deals,” and a recent arbitrator’s ruling in Massachusetts awarding $209,000 to an author raise serious questions about the accounting practices of …”

Rights Management Software

Companies with substantial licensing activities may use rights management software to market rights and track inbound royalties due.

Our company distributes and supports That’s Rights!, an affordable application for marketing and managing the licensing of intellectual property. This software integrates with Easy Royalties, our royalty software solution.

That’s Rights!

  • Tracks rights sold and rights still available
  • Tracks the status of outstanding proposals
  • Tracks inbound royalties due
  • Reports on missing sales statements and royalty payments
  • Reports on expiring contracts and licenses
  • Generates royalty statements for rights income recipients

To download a 30 trial version of That’s Rights! visit: http://www.easyroyaltiesus.com/

For more information or to schedule an on-line demo please contact: edwin@kensai.net