Lecture Note
Film - Revenue and Cost Recognition
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University:
California State University, Northridge -
Course:
CTVA 250 | Fundamentals of Film Production Academic year:
2024
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Views:
428
Pages:
45
Author:
talamegi9ue
FILMED ENTERTAINMENT
Revenue and cost recognition Current release windows of a film
Licensing and Merchandising
Free TV
(network &
syndicated)
Pay TV
PPV/VOD
Home Entertainment (DVD, Blu-ray)
Digital Media
Theatrical
3
6
9
12
15
18
21
24
27
30
33
36
(months) •
•
•
•
•
Network
Cable
Home entertainment
Syndicated TV
New media
Digital Media
TV show markets Revenue recognition
• Guidance: ASC 926 (SOP 00-2) and ASC 605 (SAB 104, FAS
48)
• Five revenue recognition criteria, as defined in ASC 926:
– Persuasive evidence of sale or licensing agreement with
customer
– Film or TV show completed and available for delivery (not
necessarily physical delivery)
– License period has begun and customer can begin exploitation,
exhibition or sale
– Fee is fixed or determinable
– Collection of fee reasonably assured
• If an entity does not meet any one of the preceding
conditions, the entity should defer recognizing revenue
until all of the conditions are met Revenue recognition - theatrical
• Revenues recognized over the exhibition
period
• If MG or advance received before exhibition
date, defer and recognize in accordance with
ASC 926
• Settlement rates and “film rentals”
• International markets Revenue recognition – home
entertainment
• Revenue not recognized until “street date”
• All criteria of ASC 926 must be met
• Shipping considerations (FOB shipping point /
destination)
• Reserves (contra-revenue) must be recorded
and inventory must be adjusted Revenue – home entertainment –
reserves
• Returns reserves (must have ability to estimate)
– New release
– Catalog
– Inventory adjustment component
•
•
•
•
Price protection
Slotting fees
Charge backs
Co-op advertising Revenue recognition – PPV / VOD
• All criteria of ASC 926 must be met
• Recognized as subscribers access (buy) film
from cable / satellite company
• May require reporting from provider for
revenue recognition (estimable license fee) Revenue recognition – Pay TV
• All criteria of ASC 926 must be met
• Recognized as film becomes available
• Output deals – contain terms, including
revenue (generally based on box office)
• Allocation of license fee – multiple windows Revenue recognition – Free TV
• All criteria of ASC 926 must be met
• Generally recognized when film is available to
the network
• Terms included in agreement – output or
“one off”
• May require allocation to multiple windows Revenue recognition – Licensing &
merchandising
• All criteria of ASC 926 must be met
• Usually subject to advances and/or MGs
• MG generally recognized when film is
available in the theatrical market
• Overages/royalties based on statements from
licensee
• Cash vs. accrual basis Revenue recognition – TV shows
• Same criteria as for films
• License fee on a per-episode basis
• Revenue generally recognized as each
episode is delivered
• License fees paid over more than one year
must be discounted Revenue recognition – other
considerations
• Cross collateralization
– If cannot allocate, recognized on an “earn out”
basis Ultimate revenues - Film
• Markets include revenues from:
–
–
–
–
–
–
Theatrical (U.S. and Non-U.S.)
PPV / VOD
SVOD
Home entertainment
Pay TV
Free TV (network & syndication)
• Includes revenue estimates up to 10 yrs from initial
theatrical release
• Should not include revenues from unproven territories or
markets
• Discounting not allowed except in certain situations Ultimate revenues – Episodic TV
• Markets include revenues from:
– TV license fees
– Home entertainment
– SVOD
• Includes revenue estimates up to the later of:
– 10 yrs from date of delivery of first episode or,
– If still in production, 5 yrs from date of delivery of most
recent episode
• Include estimates of secondary market sales only if
company can demonstrate history of success Cost amortization basics
• Individual film forecast (IFF) method, as
stipulated in ASC 926 (SOP 00-2)
• Cost amortization is based on estimated
gross margin for the life of the film
• Estimated gross margin may change
throughout life, which may affect cost
amortization in period change occurs Amortization calculation
• Year 1
Yr. 1 revenues
Ultimate revenues
Ultimate
costs
Costs to
amortize
Ult costs
to go
Costs to
amortize
• Year 2
Yr. 2 revenues
Ult revs to go Amortization calc – Example – Yr 1
Yr. 1
Ultimate Revenues (total)
Ultimate Costs (total)
Ultimate Gross margin
Actual Revenues:
Yr. 1 revenues
Ultimate revenues
20
60
$ 60
40
20
20
Ultimate
costs
40
Costs to
amortize
13 Recording amortization – Year 1
Cost of revenues (Amortization expense) $13
Capitalized film costs (Accumulated amort)
$13
Record Year 1 amortization expense Amortization calc – Example – Yr 2
Ultimate Revenues (total)
Ultimate Costs (total)
Ultimate Gross margin
Actual Revenues:
Actual Costs Amortized:
Yr 1
$ 60
40
20
20
13
Yr. 2 revenues
Ult revs to go
Ult costs
to go
15
40
27
Yr 2 (to go)
$ 40
27
13
15
?
Costs to
amortize
10 Recording amortization – Year 2
Cost of revenues (Amortization expense) $10
Capitalized film costs (Accumulated amort)
$10
Record Year 2 amortization expense Amortization calc – Example – Yr 2
(revised ultimate)
Yr. 1 Ult
Yr. 2 Ult
Ultimate Revenues
Ultimate Costs
Ultimate Gr. margin
Actual revenues:
Actual costs amortized
Yr. 2 revenues
Ult revs to go
15
35
60
40
20
20
13
Yr. 2 (to go)
(revised)
55
40
15
Ult costs
to go
27
(revised)
35
27
8
15
?
Costs to
amortize
12 Recording amortization – Year 2
(revised ultimate)
Cost of revenues (Amortization expense) $12
Capitalized film costs (Accumulated amort)
$12
Record Year 2 amortization expense – revised ultimate Participations – overview
• Contingent compensation for creative talent
(actors, writers, directors, producers)
• Expensed using IFF method (based on ultimates)
• Amounts paid, if any, are based on contractually
agreed-upon formulas and cash received (not
revenue recognized)
• Formulas vary depending on star power of talent
(gross deal vs net deal) Participations – overview
• Agreements typically include:
– Revenues to be included (music, merch, etc)
– Percentages to be used (2.5% of net profits)
– Producer’s recoupment of direct and indirect
production costs
– Producer’s recoupment of exploitation costs
– Reporting periods and payment terms
– Audit rights Participations – common terms
•
•
•
•
•
•
•
•
Gross receipts
Distribution fees
Production costs and production interest
P&A, marketing and distribution costs
(exploitation costs)
Adjusted gross receipts
Net receipts
Break even (first, second, rolling)
Bonuses and deferments Sample participation calculation
DIST FEES
%
30%
38%
n/a
n/a
30%
25%
35%
40%
$
49,500
72,200
4,350
2,500
6,300
10,800
REVENUES
YR 1
Total Ultimate Revenues
Domestic Theatrical
International Theatrical
Domestic HE (@ 20%)
Int'l HE (@ 20%)
Pay Television
Network
Domestic Syndication
Int'l Syndication
$
165,000
190,000
17,000
10,000
14,500
10,000
18,000
27,000
451,500
(11,800)
85,000
50,000
LESS: Residuals and other deductions
ADJUSTED GROSS RECEIPTS (AGR)
439,700
Production Costs:
P&A:
(209,500)
(160,000)
BREAK EVEN (BE)
(369,500)
AGR in excess of BE
70,200
Distribution Fees
NET RECEIPTS
567,500
(145,650)
$
(75,450) Participation calculation example
Year 1
MALE STAR (Gross)
2% AGR
LESS: Advance
FEMALE STAR (Gross)
1% AGR to BE
3% AGR after BE
LESS: Advance
DIRECTOR (Gross)
2% Adjusted Gross up to $100 million
3% Adjusted Gross over $100 million
$
8,794
(250)
8,544
3,695
2,106
(500)
5,301
2,000
10,191
12,191
WRITER (Net Receipts)
2% of Net Receipts
SUPPORTING CAST (Gross)
1% Adjusted Gross over $100 million
3,397
3,397
SUPPORTING CAST (Net)
2% of Net Receipts
ADVANCES
Male Star
Female Star
ULTIMATE PARTICIPATIONS
250
500
750
$
30,183 Participations – Example – Yr 1
Yr. 1
Ultimate Revenues (total)
Ultimate Participation Costs
$ 567,500
30,200
Actual Revenues:
Yr. 1 revenues
Ultimate revenues
362
567.5
362,000
Ultimate
costs
30.2
Costs to
amortize
19.3 Recording participations
Costs of revenues (Participation exp) $19.3
Accrued participations
$19.3
Record Year 1 participation expense and related liability Residuals – Overview
• Additional compensation for “ancillary” markets
(DVD, pay TV, cable, network TV, etc)
• Residuals based on percentage of gross revenues
received by a distributor from ancillary markets
• Residuals for TV shows based on original salary
paid during the production and are not paid on
the initial airing of the show (only on “re-runs”)
• Union or “guild” specific
• Payments made to individuals or to the guilds on
behalf of members Residuals – Overview
• Guilds in TV and film:
– Screen Actors Guild (SAG*) – represents motion picture
actors
– American Federation of Television and Radio Artists
(AFTRA*) – represents television actors and radio
personalities
– Directors Guild of America (DGA) – represents directors
– Writers Guild of America (WGA) – represents writers
– American Federation of Musicians (AFM) – represents
musicians
– International Alliance of Theater and Stage Employees
(IATSE) – represents production crew and administrative
staff
* SAG and AFTRA recently merged Residual rates – Motion pictures
Percentages used for residual calculation:
Guild
SAG
DGA
WGA
AFM
IATSE
Pension rate
P/R Tax
Potential residual rate
Pay/
HE
HE
Basic
Free TV
1st $1M
> $1M
Cable
13.44
16.54
19.66
12.40
3.60
1.20
1.20
1.00
5.40
0.45
0.59
4.50
1.50
1.50
1.00
6.75
0.56
0.73
5.40
1.80
1.80
1.00
8.10
0.68
0.88
3.60
1.20
1.20
1.00
5.40
NA
NA Residual rates – TV shows
Percentages used for residual calculation:
Guild
SAG/AFTRA
DGA
WGA
AFM
IATSE
Network
Syndication
Re-run
(% of appl. minimum)
2 50%
2 40%
3 40%
3 30%
4-6 25%
4-6 25%
7-10 15%
7-10 15%
11-12 10%
11-12 10%
13+ 5%
13+ 5%
NA
NA
NA
NA
Pay/
HE
Free TV
1st $1M
(same % as films)
Basic
cable
3.6
1.2
1.2
4.5/5.4
1.5/1.8
1.5/1.8
6.0
2.0
2.0
1.0
5.4
1.0/1.0
6.75/8.1
NA
NA Residuals – Overview
• Pro-ration for filming outside the U.S.
• Some states are “right-to-work” states (nonunion)
• SAG/AFTRA applies no matter where actor works
• Range from 12.5% - 20% of revenues generated
in ancillary markets
• Fringe benefits (payroll tax, pension, health &
welfare benefits) can add another 25%
surcharge to residual payments Residuals – Guild audits
• Guilds conduct periodic audits of film and TV
producers
• Specialized firms do most audits
• Industry-wide litigation regarding various
practices employed by film producers when
calculating residuals
– Percentage of home entertainment revenues
subject to residual payments
– Allocation of minimum guarantees Residuals calculation
Residuals Ultimate
Pay TV
Network & Basic Cable
Domestic Syndication
Int'l Syn
Total Free & Pay TV Ult Rev
Rate (all guilds)
Sub Total Ultimate Residuals
Domestic HE @ 20%
Int'l HE @ 20%
Total Video
All Video 1st $1M
Rate (all guilds)
Ultimates Residuals HV $1M
Video > $1M
Rate (all guilds)
Ultimates Residuals HV > $1M
Total Ultimate Residuals
$
85,000
50,000
Yr 1
14,500
10,000
18,000
27,000
48,211
13.44%
6,480
17,000
10,000
27,000
1,000
16.54%
165
26,000
19.66%
5,112
$
11,757 Residuals – Example – Yr 1
Yr. 1
Ultimate Revenues (total)
Ultimate Residuals Costs
Actual Revenues:
Yr. 1 revenues
Ultimate revenues
362
567.5
$ 567,500
11,800
362,000
Ultimate
costs
Costs to
amortize
11.8
7.5 Recording residuals
Costs of revenues (Residuals expense)
Accrued residuals
$ 7.5
Record Year 1 residuals expense and related liability
$ 7.5 Other expenses
• DVD inventory
– Manufacturing costs
– Obsolescence reserves (don’t forget about units
added back as part of returns reserve calculation)
• Prints – capitalize and amortize vs. expense
• Advertising – ASC 720-35 (SOP 93-7)
– Expense as incurred or
– Upon first airing Ultimate costs – Film and episodic TV
• Estimated total costs directly associated with
generation of ultimate revenues
• Production (or acquisition) costs
– Negative costs
– Capitalized overhead
– Capitalized interest
• Participations and residuals
• Other considerations Tax incentives and credits
• Offered by various cities, states and countries
to entice filming in their locale
• Treated as a reduction to film costs
• Timing of recording Impaired film / TV show costs
• Pre-release write down
• Impairment after release of film
• Certain events or changes in circumstances
may indicate company should assess whether
product is impaired (fair value less than
unamortized film costs):
•
•
•
•
Film performance
Costs in excess of budget
Delays in completion or release schedules
Insufficient funding or resources to complete film and
market it effectively Impaired film / TV show costs
• If there is indication product is impaired,
must determine fair value of film and write
off amount by which unamortized capitalized
costs exceed fair value
• If film already released, calculate and record
IFF amortization first, then calculate
impairment
• Discounted cash flow analysis Development cost write downs
• Presumption that if a film has not been set
for production within 3 years of first
capitalized cost, it will be disposed of
• Write off required (assumes fair value of $0)
• What about films with a longer production
period (e.g. CG animation)?
Film - Revenue and Cost Recognition
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