Accounting for the granting of a royalty in exchange for cash

[Arthur Vandelay]

If a company grants a royalty on future sales of its product(s) in exchange for an upfront cash payment, I am a bit confused as to how this would properly be accounted for. How would one eliminate the imbalance created by debiting cash?

 

[bklynboy]

This is a fairly complex area and depends on several factors including whether there is any contingency on that royalty and how variable it is. In general, you would need to create an offsetting liability for the future obligation as the cash received creates a liability for the organization. I recommend you look at the following for a comprehensive overview of current and proposed accounting on this topic.

http://kc3.pwc.es/local/es/kc3/publ...6E167/$FILE/pwc-miag-royalty-arrangements.pdf