A royalty may be defined as the compensation owed the owner of an asset determined by the income generated by the user of that asset. Royalty agreements are complex and specific to the industry for which they were created. Among sectors where royalty compensation is prevalent are:
• Gas and oil leases
• Book publishing
• Music publishing
A license agreement is the contract that defines the terms under which the asset is licensed by the owner to the user. The terms can be:
• Without restriction
• Limited by any number of factors such as time, geographical boundaries or type of product
• Subject to regulation if the government is the owner of the asset
Calculating the Royalty
By far the most common dispute revolves around the calculations determining whether a royalty is due, how much and how it should be divided among the potential recipients. Reviewing the licensing agreement to determine how the royalty is to be calculated and comparing the royalties claimed with any contractual obligations is a first step. However, there are many variables in accounting for costs of production that blur the line.
An independent accounting to determine actual royalties owed is commonplace where payments are not forthcoming or are less than anticipated. Typical issues arising in royalty accounting include:
• Are gross revenues or net revenues the basis for payment?
• Is there a fixed price per unit sold?
• Is there a minimum rent, whereby the owner receives either the contractual royalty amount or a fixed payment, whichever is greater?