IFRS 15 for UK biotech startups: recognising IP licensing, milestones and royalties

Understanding IFRS 15 for UK Biotech Startups

For a UK biotech startup, signing a major intellectual property (IP) licensing agreement is a landmark event. When a significant upfront payment arrives in the company bank account, it feels like a definitive win. But a common question quickly follows: how much of that cash is actually revenue? The answer is governed by a complex accounting standard. Getting it wrong leads to misinformed conversations with your board and investors about the company's financial health. Understanding how to recognise IP licensing revenue under IFRS 15 is not just about compliance for UK companies; it’s about accurately reflecting your startup’s performance and building a credible financial narrative. This framework provides the answers needed for precise reporting and strategic financial management.

The Core Principles: How to Recognise IP Licensing Revenue Under IFRS 15

At its heart, IFRS 15 is designed to make revenue recognition consistent across industries. For a biotech startup, this means applying a structured, five-step model to your unique contracts. The central idea is that revenue should only be recognised when you deliver on a promise to your customer. As the standard states, "The core principle of IFRS 15 is that an entity recognises revenue when it transfers a promised good or service to a customer." (citation: IFRS 15). Let's break down the five steps in the context of biotech licensing.

1. Identify the contract with a customer. This is typically straightforward; it is your signed licensing agreement. The contract must be legally enforceable and have commercial substance.
2. Identify the performance obligations (POs) in the contract. This is the most critical step for biotech licensing income. A PO is a distinct promise to provide a good or service. In a licensing deal, these promises could include granting a licence to your IP, performing specific R&D services, participating in a steering committee, or providing manufacturing rights. A promise is 'distinct' if the customer can benefit from it on its own or with other readily available resources. For example, an R&D service is often distinct from the initial IP licence itself.
3. Determine the transaction price. This is the total compensation you expect to receive, including upfront fees, fixed payments, and variable considerations like milestones and royalties. Estimating variable amounts requires careful judgement.
4. Allocate the transaction price to the POs. You must assign a portion of the total transaction price to each distinct PO based on its standalone selling price. This can be complex if you do not sell these services separately, often requiring management to make reasonable estimates.
5. Recognise revenue when (or as) you satisfy a PO. Revenue is recognised either at a single 'point in time' or 'over time' as you fulfil your promise. The cash you receive is tied to fulfilling these promises. Any cash received before a promise is fulfilled is not yet revenue. Instead, it is recorded on your balance sheet as a liability, typically called Deferred Revenue, until you earn it.

Decoding Your Licensing Agreement: A Guide to Biotech Revenue Recognition

Licensing agreements in biotech are rarely simple. They often include a mix of upfront payments, performance-based milestones, and future royalties. Applying the five-step model to correctly account for each type is essential for financial compliance. The main challenge is determining if revenue should be recognised at a single point in time or spread over the contract period.

To illustrate, consider a mini case study: BioInnovate UK, a seed-stage biotech startup, signs an agreement with a large pharmaceutical partner. The deal includes a £2M upfront payment for a two-year R&D service contract, giving the partner access to BioInnovate’s discovery platform. It also includes a £500k milestone payment, contingent on a successful pre-clinical trial outcome, and future sales-based royalties.

Upfront and Access Fees

A key question founders ask is, “A partner just paid us a £2M upfront fee. How much of that is revenue now versus later?” For an early-stage UK biotech, the answer is almost always ‘later’. This is because the performance obligation is typically not the one-time transfer of a licence but the provision of ongoing access or services. In BioInnovate’s case, the partner is paying for two years of continuous R&D services and platform access. The benefit is delivered to the customer over the entire period, not just on day one.

Therefore, the revenue is not recognised when the cash is received. It's recognised straight-line over the two-year (24-month) contract period. This means BioInnovate recognises £83,333 in revenue each month (£2M / 24 months). The unrecognised balance sits on the balance sheet as Deferred Revenue, gradually decreasing as revenue is earned each month. For more detail, see our guide on upfront payment accounting.

Milestone Payments

Milestones present another common query: “Is the milestone a payment for achieving a goal, or is it just funding for the next stage?” Under IFRS 15, the distinction is critical. If the milestone achievement represents a discrete, value-creating event that provides a new benefit to the customer, it is generally recognised as revenue when that event occurs (point in time).

However, if the payment is more like a simple pass-through for funding ongoing research without creating a distinct new asset or benefit for the customer, its value may need to be included with the initial transaction price and recognised over time. For BioInnovate, the successful trial outcome is a distinct achievement that provides significant new value to the partner; it validates the platform and de-risks the asset. Therefore, the £500k is recognised as revenue in full at the point the trial’s success is confirmed and communicated.

Accounting for Royalties UK Biotech Companies Receive

Accounting for royalties is simplified by a specific rule within the standard. According to IFRS 15, "IFRS 15 includes a specific exception for sales-based or usage-based royalties on intellectual property (IP), allowing revenue to be recognised when the licensee's subsequent sales or usage occurs." (citation: IFRS 15). This practical expedient means you do not have to estimate future royalty streams at the start of the contract.

For practical implementation, you should treat sales-based or usage-based royalties as earned when the licensee reports the relevant sales or usage, which typically happens quarterly. Revenue is recognised in the period the sales occur, not when the cash is later received.

From Theory to Practice: Audit-Ready IFRS 15 Disclosure for Biotech

The most significant operational challenge in managing IFRS 15 disclosure for biotech is organising contract data to satisfy auditors without overcomplicating your processes. The reality for most early-stage startups is pragmatic: your approach should match your company’s stage. While larger entities adopt complex software, a pre-seed or seed-stage company with one or two licensing agreements can manage effectively with a well-structured spreadsheet.

It’s only when managing three or four complex agreements, typically around Series A or B, that investing in specialised accounting software like Xero with advanced revenue recognition modules becomes necessary. Your initial spreadsheet is your source of truth and should track:

• Contract Details: Customer name, total contract value, start and end dates.
• Performance Obligations (POs): A clear list of each distinct promise made (e.g., “Two-year R&D service,” “Successful trial outcome”).
• Transaction Price Allocation: The amount of the total contract value assigned to each PO.
• Revenue Schedule: A month-by-month forecast of when revenue will be recognised for each PO.

When your auditor asks for your IFRS 15 disclosures, they are generally looking for three key items that can be generated from this spreadsheet. Note that similar requirements exist under local standards like FRS 102, as outlined in recent UK GAAP updates on revenue recognition.

1. Revenue Disaggregation: A breakdown of your total revenue by type, such as upfront fees, milestones, and royalties. This shows where your revenue is coming from.
2. Contract Balances: The opening and closing balances for your deferred revenue account, showing how it has changed over the reporting period.
3. Remaining Performance Obligations (RPO): This is a critical forward-looking disclosure. As the standard explains, "A required disclosure is the 'Remaining Performance Obligations,' which forecasts contracted revenue expected to be recognised in the future, typically broken down into the next 12 months and the total thereafter." (citation: IFRS 15). Your revenue schedule directly provides this information.

Bridging the Gap: Translating Revenue into Your Cash Flow Forecast

One of the most difficult conversations for a founder is explaining to the board why revenue is up but the cash balance is down. This addresses the core pain point: “How do I explain why we recognised £500k in revenue last quarter but our cash balance went down?” The answer lies in the fundamental distinction between the accounting P&L and your actual cash flow. Revenue recognition follows IFRS 15 rules; cash follows when money actually enters your bank account. They are not the same and will not match.

To manage board and investor expectations, you must maintain and present two separate schedules: an IFRS 15 revenue forecast for your statutory accounts and a cash-flow forecast for managing runway. Using the BioInnovate UK example, the difference becomes clear.

• Quarter 1: BioInnovate receives £2M in cash. However, it only recognises three months of revenue from the two-year service agreement, which is £250,000. The board sees a huge cash increase but a modest profit on the P&L.
• Quarter 2: No new cash is received. The company continues to spend on R&D, so its cash balance decreases. Yet, it recognises another £250,000 in revenue from the ongoing service obligation. The board might ask, "Why is our cash balance down if we are still generating revenue?"
• Quarter 3: The pre-clinical trial is successful, and the partner pays the £500,000 milestone. The company recognises this £500,000 in full, plus another £250,000 from the upfront fee, for a total of £750,000 in revenue. Both cash and P&L look strong this quarter.
• Quarter 4: Again, no new cash comes in, and operational burn continues to reduce the bank balance. The company still recognises £250,000 in revenue. The board is likely back to the same question from Q2.

This pattern demonstrates that high revenue in a quarter does not guarantee positive cash flow. By presenting both perspectives, you can educate your stakeholders and prevent surprises. This allows you to have more strategic conversations focused on what matters most: extending runway while methodically building value.

Practical Takeaways for Founders

Navigating IFRS 15 for intellectual property revenue UK startups generate does not require a dedicated finance team at the outset. By focusing on a few practical steps, founders can establish a compliant and insightful process.

• Document Everything. Your licensing agreement is your source of truth. Read it carefully to identify each distinct performance obligation you have promised to your partner.
• Build a Simple Schedule. In a spreadsheet, track each PO, allocate the transaction price, and map out the revenue recognition over the contract term. This becomes your foundation for both accounting and disclosures.
• Maintain Separate Forecasts. Create and manage distinct forecasts for revenue (IFRS 15) and cash. Use them to manage your business internally and to communicate clearly with your board and investors.
• Communicate Proactively. Explaining the difference between recognised revenue and cash in the bank is crucial for building trust. By managing expectations effectively, you can prevent surprises, and have more strategic conversations about long-term growth.

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Frequently Asked Questions

Q: What is the main difference between IFRS 15 and FRS 102 for revenue recognition in the UK?

A: IFRS 15 is the global standard and is more principles-based, requiring significant judgement, especially around identifying performance obligations. FRS 102, the UK standard for most SMEs, is generally simpler but is being updated to align more closely with the five-step model of IFRS 15, making the core principles increasingly similar for all UK companies.

Q: Can we recognise an upfront fee at signing if the contract says it's 'non-refundable'?

A: No, the term 'non-refundable' does not dictate revenue recognition timing under IFRS 15. Revenue is recognised as you deliver the promised service. If the fee is for ongoing access or R&D over two years, the revenue must be spread over those two years, even if the cash is non-refundable from day one.

Q: How should we account for a licence with no ongoing service obligation?

A: If you grant a licence that the customer can use immediately without further involvement from you (a 'right to use' licence), the revenue is typically recognised at a single point in time when the customer gains control of the licence. This is less common for early-stage UK biotech startups, whose agreements usually involve significant ongoing R&D services.