Contract year

Contract year: A contract year is the twelve-month measurement period a licensing agreement defines for its own obligations — the period over which the minimum guarantee is tested, cumulative rate tiers reset, gratis and deduction caps are measured, and annual reporting and audit rights fall due. It runs from the agreement's effective date, or from a date the agreement names, and it is set by the contract rather than by the licensee's books: the fiscal year is the licensee's accounting year, the calendar year is what many statement templates and tax rules follow, and the contract year coincides with either only by arrangement. Across a portfolio of licensors the contract years rarely align with each other, so a licensee has as many year-end royalty closes as it has distinct boundaries.

The first and last contract years are frequently not twelve months long. An agreement effective mid-year that the licensor wants aligned to a calendar or season boundary produces a stub year — a short first measurement period, often with a prorated guarantee — and termination or expiry inside a period produces a short final one, followed by the sell-off period. The treatment of a stub should be agreed in writing before the period closes, because it decides the first annual statement's due date, when the first MG measurement starts, and which period the first advance tranche credits against. Amendments and renewals can also move the boundary, which is why the contract year belongs on the agreement's rate card and is re-checked at every amendment.