What is a royalty?

The royalty term refers to the payment of an economic amount that one person owes another due to the fact that a right that does not belong to them is economically exploited, but to the person who is going to pay them. contraprestación.

Those assets that generally tend to generate royalties more frequently (and the most common) are: brands, patents, auditory, visual, audiovisual or cinematographic records, as well as computer software applications, among others.

The main characteristics of royalties are:

  • It is a consideration resulting from the use of assets or rights unrelated to the person who enjoys them
  • The consideration is established by an agreement between both parties
  • They are ordinary income if the rights constitute the main activity, otherwise they are income

How are royalties accounted for?

Royalties must be accounted for by the companies that receive the amount for the use of the rights. But ... Is what we are going to count a royalty? We must first identify if it is or not.

There will be a royalty when there is income obtained throughout a year in which a third party exploits an asset or right of the company, as long as there is an agreement or contract.

Once the type of ingresos, we must measure royalties based on different aspects. We highlight:

  • If the company that assigns the right receives economic benefit from the assignment
  • If the income is classified as ordinary or as another type of income (depends on the type of activity)
  • If, when the asset is transferred, the cost of the transaction can be measured and identified

Finally, the royalties will be counted taking into account the recognition of an income for a royalty (ordinary or not, said income) and must be made from the moment it begins to be carried out, as long as it has been previously agreed their respective percentages or amounts.

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