Lights! Camera! AcSEC!
Recognition, advertising and contingent costs
The Journal spoke with Louis W. Matusiak, Jr., AcSEC member and chairman of the motion pictures task force, about some of the differences between the provisions in the proposed SOP, Accounting by Producers and Distributors of Films, and the current guidance found in FASB Statement no. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. "Revenue recognition will be significantly different," he said. "Let's say a producer licenses 60 episodes of M*A*S*H. Currently, the producer gets to record the revenue as soon as the episodes are delivered. The ED says the revenue should be recorded ratably over the entire licensing period."
Continued Matusiak, "There's a big, big change for handling advertising costs." Under Statement no. 53, producers capitalized these costs, also called exploitation costs, and wrote them off over the revenue stream--a process that took more than a decade in some cases. David J. Londoner, another task force member, said in his company's newsletter that many film companies have been capitalizing all their advertising and writing it off against total estimated revenues from the film. As an example, he said that the cost of ads in Toledo could end up being amortized in part against revenues from New Zealand. The proposed SOP says producers can capitalize these costs in the theatrical market only--as opposed to the TV market, for example--and must write them off over the theatrical release period or three months, whichever is shorter.
The third big proposed change, according to Matusiak, relates to "participations and residuals"--compensation paid to actors and other creative people that is contingent on the film's success. Currently, these costs are accrued and recorded when the film achieves the financial goals that trigger accounting recognition. A lot of the accounting in the ED is based on the premise that the industry can predict early in a film's life how well it will do; thus, producers will have to recognize these liabilities up front.
In general, the ED will halt some past abuses. Said Matusiak: "Let's say you plan to license a film for Chinese TV--as soon as China gets TV. Thus, if you include this revenue in the ultimate gross revenue estimate over which the film's costs will be amortized, the asset sits there like a huge intangible." The ED eliminates such practices. Another questionable practice that will be curtailed involves what can be capitalized and amortized as overhead. "A producer could have 10 films: 7 lose money, 2 break even and one becomes Forrest Gump. Currently, the producer can take the losses of the 7 losers and capitalize them in the balance sheet. That is, the producer records them as an asset on the balance sheet and amortizes those costs over the income of Forrest Gump. So it looks like the big hit was a loser too."
Matusiak said that many of the studios will be upset with these changes, although some, like Disney, have been using accounting methods similar to those in the new model already. "This could significantly affect a lot of the smaller, independent producers who will miss the loss of flexibility."
The ED's exposure period runs until January 18, 1999. The proposed SOP appears on the AICPA Web site, www.aicpa.org. Copies can be ordered by calling 888-777-7077. CPAs outside of Hollywood will be pleased to note the ED includes a brief glossary of film industry terms.
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|Title Annotation:||proposed changes in entertainment industry accounting methods|
|Publication:||Journal of Accountancy|
|Date:||Dec 1, 1998|
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