Technology licensing revenues have increased dramatically over the past twenty years. Patent licensing fees, estimated at $15 billion in 1990, have the potential to reach $500 billion by 2015. As licensing revenues have increased, so has the need for accuracy in license agreement compliance.
Misinterpretation of agreement terms, inaccurate exchange rates, poor accounting systems, and poor communication between engineering and accounting departments are just a few of the causes of royalty underpayment. Traditional auditing procedures, designed to determine whether financial statements are materially misstated, are not adequate to determine whether royalties have been accurately paid.
IPFC employs professionals with the required combination of skills necessary to identify underpayments and to assist in negotiation between licensors and licensees. CPAs and other financial professionals with years of experience in auditing, negotiating royalty settlements, and working with counsel are uniquely qualified to perform such engagements.
IPFC incorporates a three stage approach to royalty audit engagements:
Map Licensee’s Business and Accounting System
- Identify licensee’s system of recording sales and determining royalty owed.
- Identify licensee’s method of allocating revenue and cost to products.
- Identify timeline of product launch and incorporation of licensed technology.
- Identify geographic sales territories.
- Identify related party sales.
- Identify relationship between licensed product lines and licensee’s other product lines.
- Determine manner in which licensee’s products are sold.
Independently Calculate Royalty Based on License Agreement Terms
- Work with licensor to understand the terms of the agreement.
- Calculate royalty owed based on mapping of licensee’s business and terms of the agreement.
Reconcile Independent Calculation of Royalty to Actual Amounts Paid
- Identify any differences between amounts calculated by IPFC and amounts paid by licensee.
- Prepare report of initial findings for purposes of discussion with licensee
- Prepare final report of amounts owed for licensee and licensor.