Revenue Recognition for E-Learning Tools

Many nonprofits offer electronic learning tools to members and nonmembers. These can include items such as electronic textbooks, on-demand learning courses, or webinars (collectively, “e-learning”). The accounting for e-learning revenue depends on when control is being transferred to the customer and if it contains a license of intellectual property.

According to FASB ASC 606-10-55-54, a license establishes a customer’s rights to the intellectual property of an entity. Licenses of intellectual property may include, but are not limited to, licenses of any of the following:

1. Software (other than software subject to a hosting arrangement that does not meet the criteria in paragraph 985-20-15-5) and technology
2. Motion pictures, music, and other forms of media and entertainment
3. Franchises
4. Patents, trademarks, and copyrights.

As with any exchange transaction revenue, e-learning revenue streams must first be analyzed using the ASC 606 five step model:

First, determine if an enforceable contract exists. This is usually straightforward to determine. Next, determine the performance obligation(s) (unit of account). E-learning services are often sold in bundles or provided as an add-on benefit of membership. To determine performance obligations, try listing out everything that is being transferred within the bundle of goods/services and determine which items are distinct. An item is distinct if the customer can benefit from the item alone without the other items in the bundle. Next, determine the standalone selling price of each distinct item in the bundle of services. This may require a degree of estimation if the distinct item is not normally sold separately. Lastly, ratably allocate the total purchase price of the bundle (i.e. the transaction price) to each distinct item in the bundle based on their standalone selling prices.   E-learning revenue is then recognized as underlying performance obligations are satisfied. If any performance obligation includes a license of intellectual property, additional guidance must be considered.

If any of the distinct items are licenses of intellectual property (e.g. – a license to use to an electronic textbook or an on-demand course or webinar), specific guidance for functional intellectual property needs to be applied. Functional intellectual property derives its value from its standalone function. A customer can use it just how it is. For example, if a nonprofit grants a customer access to an electronic textbook, control is typically transferred when access is provided. The nonprofit typically is not required to perform anything else; future editions of the electronic textbook are likely to be sold separately. Therefore, revenue associated with licenses of functional intellectual property are recognized at the point in time access is provided to the customer.

In cases where the nonprofit must make significant changes to the licensed functional intellectual property over the term of the contract, revenue should instead be recognized over time. For example, a nonprofit would likely recognize revenue over time if it consistently makes updates to an online e-textbook it licenses to customers. This situation is not expected to be common.

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