Music royalties

How do music royalties flow?

Record labels own or control recordings, known as masters, and license them to streaming services, download stores, broadcasters and advertisers, or sell physical copies. Music publishers control songs, the underlying compositions, and earn performance, mechanical and synchronisation royalties, often collected by collecting societies. Streaming services usually pay rights holders a share of their revenue in proportion to streams, sometimes with minimum amounts per subscriber, advances or guaranteed minimums. Labels and publishers in turn pay royalties to artists and songwriters under their contracts. See media accounting.

How is royalty income recognised under IFRS 15?

A licence of recordings or songs is a licence of intellectual property, and royalties based on the licensee's sales or usage fall under IFRS 15's exception for sales-based and usage-based royalties: revenue is recognised at the later of when the usage occurs and when the performance obligation to which the royalty relates has been satisfied. For music already in a catalogue, that means as streams and plays happen. The label does not wait for certainty, but neither does it estimate royalties on future usage: it recognises income for usage that has occurred in the period. See licences under IFRS 15.

What about statements that arrive late?

Streaming services typically report usage a month or more after it occurs, and collecting societies distribute performance income many months or even years later. At a reporting date, a label or publisher therefore estimates royalties for usage that has happened but not been reported, using streaming data, recent statements and historical distribution patterns, and adjusts the estimate when statements arrive. Where the data for a source are too limited to estimate, the company explains the judgement, because income may then be recognised later than the usage that earned it.

How are minimum guarantees treated?

A guaranteed minimum in a licence is fixed consideration, outside the royalty exception. How it is recognised depends on what the licence covers: if the licensee can use an existing catalogue as it stands from the start, the guarantee is recognised when the licence begins; if the licence also covers recordings the label will release during the term, the guarantee relates to content delivered over time and is recognised over the term. Royalties above the guarantee are recognised as the usage occurs. The terms of each agreement decide the answer.

Music royalties: an artist advance and its recoupment

A label signs an artist and pays an advance of US$ 500 thousand, recoupable from the artist's royalties of 20% of the label's net receipts from the album. The artist has a strong track record, so the label expects to recoup the advance. The album earns net receipts of 1,500, 1,000 and 600 thousand in its first three years, recognised by the label as revenue as the streams and sales occur.

The label recognises the advance as an asset when it pays it, because it expects to recover it from royalties. Each year, it recognises the artist's royalty as an expense, usually in cost of sales, matching the revenue that earned it: 300 thousand in year 1, reducing the advance rather than paying cash, and so on. By the end of year 2 the advance is fully recouped, and from year 3 royalties are paid in cash. Had the album earned only 1,000 thousand over its life, royalties would have been 200 thousand, and the label would have written off the 300 thousand it could never recoup as soon as that became clear.

How are bought catalogues accounted for?

Labels, publishers and investment funds buy catalogues of recordings and songs for their royalty streams. A catalogue bought on its own is an intangible asset at cost; one acquired in a business combination is measured at fair value. Catalogues have finite useful lives, and because earnings from most songs decline over time, amortisation should reflect that pattern rather than assume steady earnings forever. Catalogues are tested for impairment when there are indications, such as a fall in streaming income. See IAS 38 intangibles.

Are distributors of independent music principals or agents?

Companies that distribute recordings for independent artists or labels to streaming services, keeping a fee, assess whether they control the recordings before they are transferred. Most act as agents and report only their fee as revenue, while labels that own or exclusively license the masters and set the commercial terms are principals reporting the full royalty income. See principal versus agent.

How does US GAAP differ?

ASC 606 has the same royalty exception, so royalty income is recognised as usage occurs. ASC 928, the music industry topic, says advances to artists are recognised as assets only if the artist's past performance and current popularity provide a sound basis for estimating that the advance will be recouped; otherwise they are expensed. The capitalised balance is reduced as royalties are earned and written down when it is no longer recoverable. See streaming content licences.

This guide is general information. It is not tax or legal advice for your situation.