Definition of Royalty

Some business which the owner has a right or monopoly towards some goods or
services can allow other firms to exercise the right. The owner will get a gratuity
based on how far the rights have been exercised.

In other words, it is a transaction where by an owner gives a right to other company

or user to use his/her own properties, and in return, the user will then give a
compensation or payment which is known as royalty.

According to MASB (Malaysian Accounting Standard Board), royalty is the

remuneration payable to a person in respect of the use of long term assets such as
patent, trademarks, copyrights and computer software.

The main forms of royalty are:

a) Mining royalty to extract mineral and ore from earth

b) The book publisher gives gratuity to the author / writer

c) For the use of a design

3.1.2 Royalty Agreement

A royalty agreement will normally contain clauses dealing with the following:

a) Minimum rent guaranteed amount which the landlord, inventor or author is to

receive whatever the output maybe.

b) Royalty per unit per output

c) Right to recoup short-workings

d) Right to subject part or whole of tenancy agreement

Minimum Rent
Minimum Rent is the amount below which landlord never accepts in any year from
the person who has
to pay royalty in case of mines. Minimum Rent is also known as Fixed Rent, Dead
Rent, Flat Rent or
Contract Rent. If in any year amount of royalty is less than the amount of minimum
rent, the amount of
minimum rent is payable by the person who has to pay the royalty, but if the
amount of royalty is more
than the amount of minimum rent, royalty will be paid.
Importance of Minimum Rent
Fixation of minimum rent is in the interest of landlord because it guarantees him the
receipt of the
minimum rent even in the case of low output or sales. In the absence of minimum
rent clause, only the
actual royalty will be paid to the landlord. Moreover, it also gives incentive to the
lessee to enhance
production or sales because he is bound to pay minimum rent.
Redeemable Minimum Rent
Generally, when minimum rent is more than royalty, then minimum rent is payable
if no such provision
is given in the agreement, but if it is mentioned in the agreement that when royalty
will be more than
minimum rent, the excess of minimum rent over royalty paid in the earlier years will
be written off out
of the excess of the royalty over minimum rent in the coming years such minimum
rent is called
Redeemable Minimum Rent.
Shortworkings
The excess of minimum rent over royalty is called Shortworkings. Minimum Rent
Royalty =
Shortworkings or M.R. R = S.W.
Recoupment or Writing off Shortworkings
Recoupment of short working refers to recovering the short working of any year,
from surplus royalty of
the succeeding years. the Recoupment may be permitted over a stipulated period of
time (fixed
Recoupment) or over a specified period following the year of short working (floating
Recoupment) or
within the life time of the lease(Recoupment within life time of the lease).
All the conditions regarding recoupment or writing off shortworkings are based on
the mutual
agreement between the lessee and lessor. Shortworkings may be recouped in all the
future years or it
may be recouped throughout the period of lease. For example, if It recouped during
the first four years
Professor Vipin 2014
www.VipinMKS.com Page 2
of the lease, then recoupment will take place only during the first four years, and
not afterwards, in the
fourth year unwritten balance of shortworking will be transferred to the Profit and
Loss Account and
future years shortworkings will also be transferred to the Profit and Loss Account of
the concerning
year.

Example 1
X Coal Ltd has taken a leas coal field from Y on the following terms:
1) Lease is for 99 years
2) Lease rent is to be 50p per annum for every ton of coal raised
3) Minimum royalty per annum to be Rs. 30,000; the lessee has a right to recoup
any
shortworkings for a period of 3 years for which excess payment was made.
4) In case the working of mines was affected by any strike or riot and if there was no
raising of
coal, minimum rent payable would abate proportionately.
5) The following were the raisings for different years: