Financial Accounting

BY THEORY OF ACCOUNTING AND CONTROL

Not all the fiction in Hollywood appears on screensome stories can be found in the studios financial statements. Movie and TV producers have always had some leeway in their accounting. But a proposed SOP, written by AcSEC and approved by FASB, could drastically change the rules and force producers and distributors to curtail some of their more aggressive accounting methods.

Recognition
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. Lets 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, Theres 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 streama process that took more than a decade in some cases. David J. Londoner, another task force member, said in his companys 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 onlyas opposed to the TV market, for exampleand 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 residualscompensation paid to actors and other creative people that is contingent on the films 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 films life how well it will do; thus, producers will have to recognize these liabilities up front.

Stricter guidelines
In general, the ED will halt some past abuses. Said Matusiak: Lets say you plan to license a film for Chinese TVas soon as China gets TV. Thus, if you include this revenue in the ultimate gross revenue estimate over which the films 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 EDs 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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