Financial Accounting


AICPA Issues New Rules for Film Industry

The AICPA issued new accounting guidance for the film industry in June. Statement of Position 00-2, Accounting by Producers or Distributors of Films replaced the requirements in FASB Statement no. 53, Financial Reporting by Producers and Distributors of Motion Picture Films.

Since FASB issued Statement no. 53 nineteen years ago, the film industry has changed significantly: new media, such as video, cable, laser discs and pay-per-view television, have contributed to its revenues and required concomitant changes in accounting rules.

Although FASB knew Statement no. 53 was outdated and new standards for motion pictures were needed, it already had a full agenda. So the board referred the project to the AICPA’s AcSEC, which deals with industry-specific items.

Among the changes from Statement no. 53 were (1) advertising expense for films will no longer be capitalized, (2) film studios will have a maximum of 10 years to amortize films and (3) abandoned projects and excess overhead must be shown as an expense.

SOP no. 00-2 defines “films” as feature films that include live action and animated segments, television specials, television series and similar products that are sold, licensed or exhibited, whether produced on film, videotape or digital or other video recording format.

Louis W. Matusiak of Olive LLP, Indianapolis, who serves on the AcSEC and who, until recently, chaired the motion picture task force said, “The new rules will definitely affect Hollywood in a substantive way.” Asked if SOP 00-2 would have an effect on Wall Street, Matusiak said, “When Sony analyzed the effects of this SOP, it predicted it would have to take a charge of several hundred million dollars to its financial statements in view of the drastic changes.”

David Londoner, managing director of ABN AMRO, a Dutch bank in New York, who served on the task force said, “I don’t think there will be a major change in the way Hollywood will spend advertising money, but how it will account for the expense will change, and reported earnings will more closely match the economics of the movie business and the numbers for all the companies will become comparable.”

Londoner added that the rules will reduce the carrying value of studios’ film and television inventories, and each studio may be able to take a one-time, noncash writeoff—that could range anywhere from $200 million to $900 million.

At big studios, such as Warner Bros. and Disney, reporting to shareholders will change because under SOP 00-2 advertising as an expense will have to be recorded even before a movie is released.

Also in June, FASB issued Statement no. 139, which formally rescinded FASB Statement no. 53 and amended FASB Statement no. 63, Financial Reporting by Broadcasters, to require a broadcaster to apply the guidance in SOP 00-2 if it owns the film (program material) that is shown on its cable, network, or local television outlets.

The new rules are effective for fiscal years beginning after December 15, 2000, although earlier adoption is encouraged. (See Official Releases, page 104, for the text of the SOP.)

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