broadcast television: acquired programming rights

This paper explores the critical considerations under IFRS relating to the recognition, presentation, amortisation and impairment of acquired programming rights.

Media Industry Accounting group

April 2012

MIAG Issue: 3www.pwc.com/miag

Making sense of a complex worldBroadcast television: Acquired programming rights

Contents

Page

Introduction to MIAG 04

Broadcast television: acquired programming rights 05

Background 07

Acquired programming rights: Recognition 09

Acquired programming rights: Classification 11

Acquired programming rights: Amortisation 12

Acquired programming rights: Impairment assessment 17

Acquired programming rights: Sports rights 19

Acquired programming rights: Foreign currency considerations 22

Conclusion 26

Publications / further reading 27

Contacts 28

4 MIAG Issue: 3

Introduction to MIAG

With more than 3,575 industry-dedicated professionals, PwC’s global entertainment & media practice has depth and breadth of experience across key industry sectors including: television, film, advertising, publishing, music, internet, video games, radio, sports, business information, amusement parks, casino gaming and more. And just as significantly, we have aligned our media practice around the issues and challenges that are of utmost importance to our clients in these sectors. One such challenge is the increasing complexity of accounting for transactions and financial reporting of results – complexity which is driven not just by rapidly changing business models but also by imminent changes to the world of IFRS accounting.

Through MIAG, PwC1 aims to work together with the entertainment & media industry to address and resolve emerging accounting issues affecting this dynamic sector, through publications such as this one, as well as conferences and events to facilitate discussions with your peers. I would encourage you to contact us with your thoughts and suggestions about future

topics of debate for the MIAG forum, and very much look forward to our ongoing conversations.

With best regards

Marcel Fenez PwC Hong Kong

Global Leader, PwC Entertainment & Media

Marcel Fenez

PwC’s Media Industry Accounting Group (MIAG) brings together our specialist media knowledge from across our worldwide network. Our aim is to help our clients by addressing and resolving emerging accounting issues which affect the entertainment & media sector.

1 “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network

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Broadcast television: Acquired programming rights

A key to success for many in the television broadcast industry, along with developing their own content, is acquiring rights to programmes for exploitation. Many major broadcasters which report under IFRS, including ITV, Channel 4, Sky, France24, TV Globo, teleSUR, RTL, Deutsche Welle and Bell Media, explicitly highlight acquiring programming rights as a key driver of future revenue growth.

As broadcasting evolves in response to digital transformation and market fragmentation, accounting procedures for acquired content pose new challenges for media companies. Companies which are adept at navigating the intricate accounting and reporting practices can tell their story in a clear and compelling manner, building public trust in their performance with stakeholders such as investors, analysts, employees, suppliers, advertisers and viewers.

This paper explores the critical considerations relating to the recognition, presentation, amortisation and impairment of acquired programming rights under the applicable IFRS standards IAS 2 Inventories and IAS 38 Intangible Assets. We have included a particular focus on sports rights, reflecting their ever-increasing value and importance, which is particularly topical

in 2012 as an Olympic Games year. We also touch on the new accounting challenges arising from multi-platform programming rights across television, desktop computer, tablet and smartphone.

We hope that you find this paper useful and welcome your feedback.

Best wishes

Sam Tomlinson PwC UK

Chairman, PwC Media Industry Accounting Group

Our third MIAG paper explores the critical considerations relating to the recognition, presentation, amortisation and impairment of acquired programming rights. Have you addressed all the key reporting considerations for acquired programming rights?

Sam Tomlinson

6 MIAG Issue: 3

Issue: 3 MIAG 7

PwC’s Global E&M Outlook 2011-2015 forecasts an increase in global television subscriptions and licence fees from €218 billion in 2011 to €285 billion in 2015 and an increase in global television advertising from €175 billion in 2011 to €233 billion in 2015.

Growth on this scale will require a huge volume of content to drive it. The increasing fragmentation of audiences across multiple channels is greatly increasing both the demand and need for acquired programming. Television broadcasters, both terrestrial (“over-the-air”) and cable/satellite (“speciality”) channels, acquire programming for their channels from a variety of sources including major film studios, US and international broadcasters, independent television producers, various sports leagues and other rights holders.

What are acquired programming rights?

Acquired programming rights are purchased licences to air programming to fill a broadcaster’s television schedule. These licences can include feature films, television series, sports rights and other broadcast productions. A commercial broadcaster typically generates most of its revenue through sales of advertising spots during the programmes – the “advertising model” – and/or through viewers paying subscriptions or licence fees directly (to the channel) or indirectly (as affiliate fees via the cable/satellite operator) for the right to watch the channel – the “paid content model”.

Acquired programming rights can be for single or multiple broadcasts and can have licence periods spanning many years. The agreements may also specify format (e.g. HD, 3D) and geographical

Background

PwC’s Media Industry Accounting Group (MIAG) is a premier forum for discussing and resolving emerging accounting issues that affect the entertainment and media sector – visit our dedicated website: www.pwc.com/miag

rights. Increasingly, programming rights agreements also cover other platforms such as desktop computer, tablet and smartphone.

How are acquired programming rights currently accounted for?

There is diversity in practice among broadcasters as to which is the primary IFRS accounting standard governing acquired programming rights. Some broadcasters reference IAS 2 Inventories whereas others reference IAS 38 Intangible Assets. Our view is that acquired programming rights generally fall more naturally under the remit of IAS 38, but we believe that classification as inventory is also acceptable and is particularly common in those territories where acquired programming rights were classified as inventories under local GAAP prior to transition to IFRS. (Pre IFRS, in the absence of guidance in local GAAP, some broadcasters had also looked to US GAAP, which includes some elements akin to an inventory model.) As we shall see, in practice this selection of the relevant accounting standard currently makes little difference beyond balance sheet classification since initial recognition, subsequent amortisation and impairment review practices are generally applied consistently regardless of whether programming rights are classified as inventories or intangible assets.

Accounting policies for acquired programming rights include the following elements:

Recognition• of an asset for acquired programming rights generally occurs once it is available and licensed to air. At this time the full asset is recognised with a corresponding liability for future payments. Advance payments prior to the programme being available and licensed to air are recorded as prepayments.

Classification• is first within prepayments and then either inventory or intangibles once the licence period commences. In addition, presentation as current or non-current is theoretically based on usage within or beyond the organisation’s operating cycle, although in practice many IFRS broadcasters present all acquired programming rights within current assets and include explanatory footnotes where appropriate.

Costamortisation• should reflect the underlying economics, e.g. in full on first transmission; or based on the contracted or estimated number of airings; or straight-lined over the broadcast licence period; or follow the pattern of expected revenues (“flow-of-revenue”), particularly if a first showing is considered more valuable than reruns. This paper includes a simple worked example to illustrate how the selection of amortisation method can have a significant impact on the timing of cost recognition.

Impairment• is assessed on a programme, series, package, daypart, channel or multi-channel basis. Unamortised cost exceeding estimated recoverable amount represents the amount required to be written off.

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What if a company also develops its own programming content?

Many large media groups have both production divisions and broadcast (including cable or satellite) divisions such that the group is both a producer and broadcaster of the same programming content. Programming aired by a broadcaster that was produced by another division of the same group should be accounted for as original programming in the consolidated group financial statements. Intercompany revenues and costs between the divisions should be eliminated to accurately reflect the overall economics of the programming to the consolidated group.

The accounting considerations when developing and producing (as opposed to acquiring) programming content will be the subject of a separate MIAG paper Cost capitalisation under IFRS for media companies. This separate MIAG paper will also consider cost amortisation by producers selling across multiple territories.

How can this paper help with accounting for acquired programming rights?

For financial executives and their teams, accounting for acquired programming presents many challenges. Neither IAS 2 nor IAS 38 is specific to the television industry nor do they offer relevant interpretive guidance. The significant increase from digital transformation in the number of cable/satellite channels, the variety of funding models and the advent of multi-platform programming rights has added complexity to key areas of judgement such as the amortisation method and assessment of impairment. Furthermore, the increasingly global nature of television broadcasting introduces foreign exchange complexity.

The information in this paper should be used as a framework when considering how to recognise, classify and measure your acquired programming rights. The answer for complicated real life transactions will, as always, depend on the specific facts and circumstances in each case.

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Acquired programming rights Recognition

When should an asset for acquired programming rights be recognised on the balance sheet?

Regardless of whether the broadcaster references IAS 2 or IAS 38, the asset for acquired programming rights should be recognised when the cost of the acquired programming is known and it is available for its first licensed airing by the broadcaster. At this time the full asset is recognised with a corresponding liability for any future payments.

Payments in advance of the programme being available and licensed to air should be recorded as prepayments rather than acquired programming rights. In practice, many IFRS broadcasters report both programming prepayments and acquired rights within one line item on the face of the balance sheet and then distinguish between the two in the footnote. This is particularly common for those broadcasters which classify acquired programming rights as intangible assets.

For a programme which is prepaid in full prior to the licence period commencing, the onset of the licence period then simply results in a reclassification within the footnote. In contrast, the onset of the licence period for a television series for which payments are staggered before and during the licence period will have a significant measurement impact since at this time the contract value is recognised in full with an associated liability for the unpaid portion. Where payments are staggered across multiple years then, if the effect of the time value of money is significant, this liability should be discounted to present value.

The requirement that the programming material be available for airing often prevents “live” programming such as sports and other event-driven broadcasting (e.g. the Olympic Games, X Factor, American Idol) from being recognised as a programming rights asset until the event date occurs. In contrast, the acquisition of the rights to air a completed television series or a theatrically released film will generally meet the “available for airing” criteria at the commencement of the licence period. In these cases, a programming rights asset and liability (for the entire contract) is typically recognised at the commencement of the licence period.

A broadcaster has recently acquired significant programming rights that become available in future periods. When is it appropriate to record the corresponding asset and liability associated with these rights?

Until the licence term commences and the programming has been made available, the asset has not been “received” by the broadcaster. Accordingly, for completed movies, rerun shows, and finite drama series that are recorded in full prior to airing, the rights under the contract would be recorded on the later of licence period commencement date and programme availability. Payments made in advance of this are classified as prepayments.

For programming delivered across its production cycle, programming assets and liabilities would be recorded as the episodes become available. Examples include e.g. sports rights, talk shows, and ongoing drama series or soap operas. Payments made in advance of production are classified as prepayments.

A secondary broadcaster has acquired rerun programming rights which are restricted such that the reruns can only begin once the primary network has finished the first run. When and how should an asset be recognised by the secondary broadcaster?

In this scenario, the rerun licence term only commences once the primary network first run has finished. Advance payments would therefore represent prepayments not acquired programming rights. The question arises whether the secondary broadcaster has an asset at all given there are broadcasting restrictions (i.e. the timing of the primary network first run) outside its control. Clearly, specific facts and circumstances should be considered, but in general we believe a prepayment asset would be recognised, either because it is clear in a practical sense that the primary run will inevitably occur within a certain timeframe, or because there is a protection clause in the secondary broadcaster’s contract which protects their investment in the unlikely event the primary broadcaster declines to finish the primary run.

In addition to the core programming rights, a broadcaster must pay incremental fees each time it broadcasts a rerun. How should the incremental fee be accounted for?

In general, these incremental fees would simply be recognised and expensed as each additional broadcast occurs. However, careful assessment of the specific facts and circumstances may be required if it can readily be seen that this will distort results within a given reporting period (e.g. if the level of the incremental fee significantly increases or decreases across a multi-year licence period).

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Issue: 3 MIAG 11

Acquired programming rights Classification

What is the appropriate classification for acquired programming?

There is diversity in practice among broadcasters as to which is the primary IFRS accounting standard governing the accounting for acquired programming rights. Some broadcasters reference IAS 2 Inventories whereas others reference IAS 38 Intangible Assets.

IAS 2 defines inventories as assets (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. In contrast, IAS 38 defines an intangible asset as an identifiable non-monetary asset without physical substance.

A broadcaster typically acquires programming rights to fill the broadcaster’s television schedule and hence generate revenues either through sales of advertising spots and/or through viewers paying directly or indirectly for the right to watch the channel. The acquired programming right is an identifiable non-monetary asset without physical substance (i.e. an intangible asset under IAS 38) and will not itself be obviously sold or consumed in the rendering of these broadcast services (as required by the definition of inventory under IAS 2). Furthermore, acquired programming rights can have licence periods spanning many years, whereas inventories are typically viewed as current assets.

Our view is therefore that, for broadcasters, acquired programming rights generally fall more naturally under the remit of IAS 38 than IAS 2. However, we believe that classification as inventory is also acceptable and is particularly common in those territories where acquired programming rights were classified as inventories under local GAAP prior to transition to IFRS. At the time of transition this familiar classification had the pragmatic benefit of assisting users of the accounts who were reviewing IFRS financial statements for the first time.

In practice this classification as either IAS 2 Inventories or IAS 38 Intangible Assets currently makes little substantive difference to measurement of the asset since initial recognition (covered above) and subsequent amortisation and impairment review practices (all covered below) are usually treated the same in practice.

Should acquired programming rights sometimes be presented as non-current assets?

The licence periods for acquired programming rights frequently extend across many years, which leads to the question as to whether they should be presented by broadcasters as non-current assets. There is a diversity of practice here for two reasons.

First, for those broadcasters that account for acquired programming rights as inventories, it is usual to present the entire rights as current assets since it is rare in any industry to see inventories classified as non-current assets on the face of the balance sheet.

In contrast, those broadcasters that account for acquired programming rights as intangible assets more often (though not always) present the intangible as a non-current asset.

Second, IFRS does not define current and non-current by reference to a specific time period such as 12 months. Instead, IAS 1 Presentation of financial statements defines an asset as current when the entity expects to realise or consume it within its normal operating cycle. Many broadcasters avoid explicitly defining their operating cycle but would presumably use it as a justification for presenting all acquired programming rights within current assets.

A number of broadcasters who present all acquired programming assets within current assets use either quantitative or qualitative statements to acknowledge that a portion will be utilised across more than 12 months.

(Since the classification as inventory or intangibles is often associated with presentation as current or non-current assets respectively, the classification will affect the current ratio. It can also impact commercial transactions such as acquisitions or financing arrangements, since inventory is generally automatically deemed to be working capital whereas intangible assets are more likely to be the subject of negotiation. Given the nature of the underlying asset, programming rights classified as intangible assets are also ultimately likely to be treated as working capital, but only after debate rather than by automatic assumption.)

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Acquired programming rights Amortisation

What factors help a broadcaster determine the appropriate amortisation method for the various types of acquired programming rights?

Technically, there is a difference between the utilisation of inventories and intangible assets: IAS 2 requires inventories to be recognised in the income statement in the same period as the related revenue, whereas IAS 38 requires an intangible asset to be amortised so as to reflect the pattern of consumption of its economic benefit. But in practice this difference has historically been moot since, regardless of whether broadcasters classify acquired programming rights as inventories under IAS 2 or intangibles under IAS 38, cost recognition in the income statement has generally followed the methods described below.

Different types of acquired programming can have different underlying economics, resulting in various amortisation methods. For example, sporting events typically generate higher advertising revenues during the live airing of high profile matches compared to highlights or reruns; and successful theatrically released films typically generate higher advertising revenues during their first airing than in subsequent airings. In contrast, second or third reruns of episodic television series may generate fairly consistent levels of advertising revenue.

The unique nature of each acquired programming rights requires the broadcaster to consider several factors when selecting the appropriate amortisation method, including:

Expected pattern of revenues and the • related ability to reliability estimate these revenues;

Likelihood that future runs or airings • would generate different revenues or audiences;

Significance of the specific right and • its importance to the overall broadcast schedule; and

Relationship of the programming to • other significant revenue streams such as affiliate fees.

After careful consideration, a broadcaster determines an appropriate amortisation method. Amortisation can occur in full on first transmission; or be based on the contracted or estimated number of airings; or be straight-lined over the broadcast licence period; or follow the pattern of expected revenues (“flow-of-revenue”) particularly if a first showing is considered more valuable than later reruns. The application of these different methods is considered in Figure 2 below.

So is classification as inventories or intangible assets irrelevant for amortisation?

In practice, regardless of whether broadcasters classify their acquired programming rights as inventories or intangible assets, they select the amortisation method which most appropriately reflects underlying economic reality subject to pragmatic constraints such as simplicity of application and the availability of reliable data. In that sense, the classification as inventories or intangible assets is irrelevant.

However, although the timing and magnitude of the related expense is unaffected, its disclosure can vary. The cost associated with an intangible asset is invariably described as “amortisation” whereas those broadcasters who classify acquired programming rights as inventories sometimes do refer to them as being amortised but sometimes use other terms (e.g. “cost of programming”) and sometimes do not separately disclose the related expense at all. Comparing EBITDA between broadcasters is a complex and hazardous task, with some broadcasters reversing programming amortisation out of EBITDA while others leave it in.

(Throughout this paper, we use “amortisation” to refer generically to the expensing of acquired programming rights in the income statement, even where these rights are classified on the balance sheet as inventories.)

How might the accounting guidance for amortisation change in the future?

The International Financial Reporting Interpretations Committee (IFRIC) included this statement within its November 2011 agenda paper:

“The Committee noted that the principle in IAS 38 is that an amortisation method should reflect the pattern of consumption of the expected future economic benefits and not the pattern of generation of expected future economic benefits… In particular, the Committee noted that amortisation methods based on revenue are not an appropriate reflection of the pattern of consumption of the expected future economic benefits embodied in an intangible asset.”

Issue: 3 MIAG 13

Figure 1: Impact of classification of acquired programming rights

Balance sheet classification of acquired programming rights:

Inventories (IAS 2) Intangible asset (IAS 38)

Initial recognition: Cost Cost

Balance sheet presentation prior to licence period:

Prepayment either on face of balance sheet or as a sub-category within inventory programming rights footnote

Sub-category of prepayments within intangible assets programming rights footnote

(analogous to “assets in the course of construction”)

Balance sheet presentation once licence period commences:

Usually all in current assets(sometimes with qualitative or quantitative footnote disclosure to acknowledge a portion will be realised > 12 months)

Sometimes all in non-current assets

Sometimes all in current assets

(if the latter, sometimes with qualitative or quantitative footnote disclosure to acknowledge a portion will be realised > 12 months)

Income statement utilisation: Various methods – refer to Figure 2 below

Various methods – refer to Figure 2 below

Expense disclosed as: Sometimes “amortisation”

Sometimes disclosed using another term

Sometimes not explicitly disclosed

Amortisation

Expense reversed out from EBITDA: Sometimes reversed out from EBITDA

Sometimes included within EBITDA

Sometimes reversed out from EBITDA

Sometimes included within EBITDA

Disclosures: Relatively few mandatory disclosure requirements

More extensive disclosure requirements including roll-forward from prior year and separation of impairment vs. amortisation

Cash flow treatment of expenditure on programming rights:

Within operating activities Usually within investing activities

Sometimes within operating activities

Potential future impact of IFRIC statement in November 2011:

n/a – no impact Matching amortisation cost to expected revenues (“flow-of-revenue”) may not be permitted in the future

Following its March 2012 meeting, the IFRIC recommended a clarification of IAS 38 to prohibit the use of amortisation patterns which reflect the "generation of economic benefit". This would potentially require those broadcasters classifying acquired programming rights as intangibles to discontinue use of the “flow-of-revenue” amortisation method. Such broadcasters would need to amend their amortisation profiles; or reclassify acquired programming rights as inventories; or demonstrate that their current revenue matching methods (“generation of economic benefit”) approximate to an amortisation method explicitly permitted in IAS 38 such as unit-of-production or diminishing balance (“consumption of economic

benefit”). For now, we advise broadcasters to pay close attention to further IFRIC and IASB pronouncements and to formally comment if they feel strongly on this topic.

What amortisation methods are commonly used?

In practice, companies select amortisation methods depending on the type of programming and its purpose on the specific network or channel.

Figure 2 lists various types of programming rights acquired from third parties by broadcasters, the common amortisation methods, and some considerations in selecting the most appropriate method.

The selection of amortisation method can have a significant impact on the timing of cost recognition, as illustrated in the example in Figure 3.

14 MIAG Issue: 3

Figure 2: Common amortisation methods

Type of acquired programming rights

Plausible amortisation methods

Considerations in selecting a method

Light entertainment:soap operas, quiz shows, panel shows, music programmes, chat shows, new TV series and pilots

Examples: Eastenders; House; Grey’s Anatomy; Who Wants To Be A Millionaire?; Never Mind the Buzzcocks; The Jonathan Ross Show

Expensed in full on first transmission (of each episode)

Limited ability to predict significant audiences or revenues from future airings suggests the cost should be expensed in full on first transmission.

If management does not believe that subsequent airing will occur, then expensing the entire licence fee upon the initial airing of each episode would be appropriate.

The same consideration would apply if management believes future airings will occur but will have minimal audience or revenue value compared to first airing.

“Pay per play” programming rights are also typically expensed as incurred.

Airing of new series of existing TV shows...

...with known rerun value on main channel e.g. Lost

...with irregular audiences e.g. X Factor, American Idol

Number of contracted or expected airings

Flow-of-revenue

Where the broadcaster has the right to air a programme several times, an allocation between airings based on expected revenues may be appropriate.

Total revenues for series with irregular audiences (e.g. those that increase for a final) may be allocated based on flow-of-revenue.

Syndicated episodic series (television episodes sold for reruns after their initial airing on their primary channel)

Examples: Friends; Sex and the City; Glee; Two and a Half Men; natural history and wildlife documentaries


or

Straight-line over licence period

This type of programming is generally run on cable/satellite channels.

Typically audiences and hence advertising revenues are more consistent across each airing of each episode. Amortisation based on either expected airings or straight-line over the licence period is appropriate.

Some companies adopt a conservative approach such as “greater of cumulative impact of airings and straight-line” to ensure amortisation is no slower than straight-line and potentially accelerated based on airings. However, profiles which defer amortisation compared to straight-line are also permitted by IAS 38.

Children’s TV including cartoons

Examples: Sponge Bob Square Pants; Dora The Explorer; Hannah Montana



Flow-of-revenue

Expensed in full on first transmission (of each episode)

Children’s television shows typically have relatively high rerun value due to both audience turnover as children age and the propensity of children to watch reruns.

It is therefore often supportable to move away from expensing in full on first transmission to amortisation based on airings, straight-line or flow-of-revenue.

Theatrical-release films

Examples: Pirates of the Caribbean; Toy Story 3


Flow-of-revenue


Theatrically-released film contracts usually specify a limited number of airings over a finite period of time.

The flow-of revenue method is often appropriate when a title has significant value, such as for a "blockbuster" type films, where initial airings generate higher advertising revenues.

If a title or, in some cases, a bundle of titles, does not generate significant incremental revenues from its initial airing compared to subsequent airings, amortisation on a straight-line basis or on a fixed amount per airing would usually be appropriate. The straight-line method is often appropriate for “library” titles or a bundle of titles where the airing of individual titles does not generate significantly different value and the titles are airing on a regular basis.

Sports rights

Examples: FIFA World Cup; Olympic Games; Premiership football; Wimbledon

Flow-of-revenue

Expensed in full on first transmission

Flow-of-revenues method is often used for live sporting events, particularly for longer events such as a football season, as advertising revenues and affiliates fees usually see an increase during event periods.

Short-term one-off sporting events such as Wimbledon may be effectively expensed on first transmission if they do not cross a reporting period date.

Issue: 3 MIAG 15

The following example illustrates the impact of the various amortisation methods on the timing of cost recognition:

Timing of cost recognition in income statement

Method Year 1 Year 1 H2 Year 2 H1 Year2 H2 Cumulative

Initial transmission €12m – – – €12m

Flow-of-revenue1 €9m – – €3m €12m

Straight-line2 €3m €3m €3m €3m €12m

Number of airings3 €6m – – €6m €12m

Cost of rights – €12m Expected revenues – €20mExpected number of airings – 2 First airing – €15 million (Year 1 H1)

Licence period – 2 years Second airing – €5 million (Year 2 H2)

(Expected revenues for each airing ÷ Total expected revenues) x Total cost of rights)1. (Total cost of rights ÷ Licence period)2. (Total cost of rights ÷ Number of expected airings)3.

Figure 3: Impact of amortisation methods

Year 2 H2Year 2 H1Year 1 H2Year 1 H1

Initial transmission

Straight-line

Flow of revenue

Number of airings

12

9

3

6

3 3 33

6

0 0 0 0 0 0 0

The selection of the most appropriate method will vary depending on specific facts and circumstances. A rational amortisation method supported by the underlying economics of the transactions, consistently applied across similar types of programmes and between reporting periods, is usually effective in determining an appropriate amortisation method.

The amortisation method selected should be periodically reviewed to confirm its ongoing appropriateness. For example, with increases in time-

shifted viewing (through e.g. Video on Demand, BBC iPlayer, etc.) and micropayments to view programmes online it is possible that amortising in full on first transmission might become less appropriate in the future.

Furthermore, it is increasingly common for programming rights agreements to also cover other platforms such as desktop computer, tablet and smartphone. These can be treated as separate elements for accounting purposes, in which case the acquired programming rights must be allocated

between each platform (e.g. based on relative fair value); or they can be treated as one element, with amortisation being either straight-line across one combined licence period or following an aggregated flow-of-revenue method. Today, treatment as one accounting element is often sufficient to reflect the underlying economics of the transaction, although this may change with the rapid growth of digital delivery platforms. The accounting for multi-platform rights is an emerging area which will be addressed in more detail in a future MIAG paper.

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Acquired programming rights Impairment assessment

What are the key considerations when assessing acquired programming rights for impairment?

When considering potential impairment of programming, various models are used by different broadcasters, reflecting the economics of their specific circumstances. Typical practices are:

Cable/satellite channels often assess • programming for impairment on an individual channel basis, since their programming is typically interchangeable throughout each day. Broadcasters that have classified programming rights as intangible assets under IAS 38 can directly justify this practice by stating that the channel is the cash generating unit (CGU) i.e. it is the lowest level at which cash flows can be independently assessed. For broadcasters that have classified programming rights as inventory under IAS 2 there is no direct equivalent to a CGU, but in practice these broadcasters often still assess at the channel level on the pragmatic grounds that information is not available at a sufficiently granular level to assess recoverability at the individual programme level.

Some cable/satellite networks assess • impairment by reviewing a selection of channels as a whole, including channels that are currently loss making, but for which future operating costs can be adjusted or which form an integral part of generating audiences and revenues for other profitable channels. This approach effectively combines multiple channels into a single CGU. For both single and multi-channel CGUs, any impairment recognised is allocated across all long-lived assets not just programme rights.

Broadcasters of all types will write off • (“abandon”) programming on an individual programme basis when it is no longer expected to air for the remainder of the licence period.

Some broadcasters may record a • similar write down when it becomes

obvious that the use of an individual programme will change significantly e.g. it will now be used only in a much inferior slot to that originally intended. Others may avoid such a write-down if they perform impairment assessments only at the channel or multi-channel level, since the loss on an individual programme may be sheltered by other more profitable ones.

Overall, it is important that the basis for a broadcaster’s impairment assessment be consistent with the underlying economics of its business, including the nature and the expected usage of its programming. The impairment assessment model(s) adopted should be applied consistently across similar channels and programme types and between reporting periods.

What is a “daypart” and how is it used in impairment assessment in the US?

A “daypart” is defined as an aggregation of programs broadcast during a particular time of day (e.g. daytime, primetime, late night) or programs of a similar type (e.g. sports, news, children's shows). Broadcasters generally sell advertising access by reference to these types of classifications.

US terrestrial broadcasters and other large scale networks which report under US GAAP often assess programming for impairment based on a daypart model as programming is typically interchangeable within each daypart. To the extent that the estimated net realisable value (NRV) of acquired programming rights exceeds unamortised cost, an impairment charge may be recorded. This NRV analysis is prepared on a program-by-program, series, package, or daypart basis as considered appropriate.

Outside the US the use of “dayparts” within impairment assessment is relatively uncommon. Most terrestrial broadcasters which report under IFRS follow the cable/satellite channel practices described above.

When is it appropriate to record a provision for an unfavourable programming contract?

An executory contract is one that remains unperformed or incomplete so requires the attention of either or both parties to the contract. For example, if a broadcaster has a contract to air four seasons of football matches for a fixed price per season, this is an executory contract in that the licensee (broadcaster) must air the matches and the licensor (football governing body) must deliver the matches. For some executory contracts, such as sports rights, a broadcaster may engage in an executory contract for which expected contractual costs exceed expected revenues. Alternatively, a broadcaster may be party to a contract under which it is committed to paying for programming it no longer intends to air. In these types of situations questions arise as to whether it would be appropriate to record an onerous contract provision under IAS 37 Provisions, contingent liabilities and contingent assets.

Where a broadcaster is committed to paying for programming which will not be aired, such a contract is clearly onerous. In this situation an onerous contract provision would normally be recognised (after first writing off any related assets from the balance sheet). This is analogous to the impairment practice set out in the third bullet above.

On the other hand, where a broadcaster is committed to paying for a programme which will be individually loss-making, but the channel is profitable overall (or is part of a network of profitable channels) then it is relatively uncommon to see an onerous contract provision being recorded.

However, if the expected loss on an individual programme rises over time to a point where it is clearly well in excess of the loss as originally budgeted when the contract was initiated, some broadcasters will use this as a trigger to record an onerous contract provision.

The assessment of onerous programming contracts, like the application of impairment models, is complex and judgemental. As usual, a key consideration is consistency of application across similar situations and between reporting periods.

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Issue: 3 MIAG 19

Acquired programming rights Sports rights

PwC’s Changing the game: Outlook for the global sports market to 2015 forecasts global sports media rights to increase from $27 billion in 2011 to $35 billion in 2015. In fact, the value is even higher in 2014 at $38 billion, since sports rights peak in “even” years due to the cyclical nature of the Olympic Games and FIFA World Cup.

Acquired sports rights have unique economic characteristics compared to other types of acquired broadcast rights. How do these considerations impact the accounting for acquired sports rights?

For acquired sports rights, the programming is unique because it is normally aired only once, when the match is played. Key economic characteristics to be considered for accounting sports rights are listed below:

Advance payments on sports right • contracts are typically recorded as a prepaid asset rather than an acquired broadcast right.

Sports rights typically have significant • contractual licence fees that are paid throughout a multi-year term. The timing of these payments compared to relative economic value may not be fully aligned and may impact the amortisation method.

A programme liability position may • result if cost recognition based on relative economic value received exceeds the contractual payments made to date (i.e. where payments are end-loaded).

Whether the broadcaster has one • revenue stream or multiple revenues streams (e.g. affiliate fees) may impact the amount of licence fee paid and the underlying economic substance of a sports rights arrangement.

All of these factors should be considered when selecting the proper amortisation method. In practice, there are three common methods when accounting for acquired sports rights: flow-of-revenue, straight-line, and contractual-terms methods. In addition, short-term one-off sporting events such as tennis grand slam tournaments may be effectively expensed on first transmission if they do not cross a reporting period date.

In applying a flow-of-revenue method for sports rights amortisation, what revenue streams are considered appropriate for inclusion?

Under a flow-of-revenue method, amortisation is based on the ratio of current period direct revenues divided by estimated total direct revenues over the sports rights licence period. In this method, consideration should be given to what comprises direct revenues, typically advertising revenues.

As sports governing bodies continue to migrate their sports contracts to cable/satellite networks (e.g. club football/soccer in most countries; test match cricket; club rugby) the underlying economics for sports rights paid by the channel is often driven not only by incremental advertising revenues but also by potential increases in subscription/licence fees paid directly by viewers or indirectly as affiliate fees. For a cable/satellite channel that generates a significant portion of its total revenues from affiliate fees, consideration should be given to whether these affiliate revenues can be used as a basis of flow-of-revenue amortisation, particularly if advertising revenues for major sports rights are a minor proportion of their total costs (e.g. less than 50%).

Prior to applying such a method, companies should consider other factors which may indicate that allocating relative value based on affiliate fees could be appropriate e.g.:

Whether the term of affiliate • arrangement is consistent with the term of contractual sports rights (e.g. both long-term in duration); or

Whether the affiliate arrangement • includes sport-related programming covenants.

Both factors provide linkage between the affiliate arrangement and significant sports rights, and reflect that these sports rights are a key factor in the negotiation of long-term affiliate contracts. Applying an affiliate revenue flow-of-revenue method is an area of judgement, for which various approaches may be acceptable based on the underlying economics.

What are the challenges in applying a flow-of-revenue method?

One of the main challenges is dealing with significant changes in estimate which can occur due to:

Difficulties in attributing key sources • of revenue to specific underlying sports rights contracts, as well as changes in the composition of programming and sports rights;

Estimating advertising rates several • years into the future; and

Unpredictability of the advertising • value of key matches due to volatility of audience sizes e.g. viewing figures for the UEFA Champions League final will rise significantly for those countries with teams playing in that match.

As a result of these complexities and the high degree of judgement involved, flow-of-revenue modelling is a challenging area, in which significant shifts in cost recognition can result based on actual performance, as per the following example of rights acquired for €135m.

20 MIAG Issue: 3

Assumes a 10% compound annual growth rate1. Only change is that in Year 2, that country’s teams performed strongly in the competition, 2. generating larger audiences The projected 19% gross margin, based on total projected revenues and contract 3. payments, is consistent for all periods

In Figure 4 above, this flow-of-revenue method results in large shifts in revenue and cost recognition from year to year, driven by the nature of teams and matches played.

When is it considered appropriate to apply a straight-line method to sports rights amortisation?

The straight-line method can be applied at two levels. First, if each season has equal economic value, then it is appropriate to allocate total costs on a straight-line basis to each season. Second, within each season, costs can be expensed either straight-line over the matches aired or on a single season flow-of-revenue method. The use of straight-line within a season is appropriate if each match within the season has consistent economic value.

If significant payments are made throughout the sports rights licence period, when is it appropriate to recognise costs in accordance with this payment schedule?

Under a “contractual payments” model, costs are recognised in accordance with the payment schedule over the sports rights licence period. To support use of this method, a strong correlation should be demonstrated between the payment schedule and flow-of-revenues derived from the sports rights. Without this direct linkage between the flow-of-revenues and payment schedule, we do not believe that this method, which is effectively akin to cash accounting, is supportable.

Overall, the accounting for the amortisation of sports rights is an area of significant estimation and judgement for which various methods may be supported. As usual, a rational amortisation method supported by the underlying economics of the transactions, consistently applied across similar types of programmes and between reporting periods, should be effective in determining an appropriate amortisation method.

Figure 4: Flow-of-revenue method for sports rights

€ millions Year 1 Year 2 Year 3 Total

Projected revenues1 50 55 61 166

Projected flow-of-revenue amortisation % 30% 33% 37% 100%

Projected flow-of-revenue cost recognition 41 45 50 135

Actual revenues2 50 80 55 185

Actual flow-of-revenue cost recognition 41(=135 *(50/166))

56(=135 *(80/191))

38(remaining)

135

Projected flow of revenue gross margin %3 19% 19% 19% 19%

Actual flow-of-revenue gross margin % 19% 30% 31% 27%

Difference 0% -11% -11% -8%

Issue 3 MIAG 21

22 MIAG Issue: 3

Acquired programming rights Foreign currency considerations

What considerations arise for acquired programming rights denominated in a foreign currency?

As explained earlier, programming assets are generally recognised in full once the licence period has commenced. The payment terms for acquired programming rights may be spread forward over part or all of the licence period. Acquired programming rights are a non-monetary asset so if acquired in a foreign currency are fixed at the spot rate at date of asset recognition and not subsequently retranslated at future reporting dates. In contrast, any associated creditor for future payments is a monetary liability so will be retranslated via the income statement at each period end until payment is made.

The licence fee for acquired programming can be significant, particularly for major sports rights. At times of foreign exchange volatility the translation effect can be significant and may be subject to tax.

(Refer to Figure 5 opposite: Retranslation of programming rights creditor.)

Suppose the (hypothetical) European Broadcasting Union (EBU) agrees in 2005 to pay $76m for the rights to air the historical recordings of all previous modern Olympic Games during the period from January 2010 to December 2012. The payment schedule is 50% on availability of the recordings in January 2010 and 50% at the start of January 2013 following the end of the Olympic Games year of 2012. (Assume straight-line amortisation method is adopted.)

The example in Figure 5 opposite clearly illustrates that the income statement impact of retranslating a programme creditor denominated in a foreign currency can be significant.

Can embedded derivatives arise on acquired programming rights denominated in a foreign currency?

An embedded derivative is a derivative instrument which is contained within a non-derivative host contract. Unless the derivative is “closely related” to the host contract it must be separated and measured at fair value, usually via the income statement.

Suppose the hypothetical EBU, which is headquartered in Luxembourg, successfully bids $500m in 2012 for the European rights to air the 2016 Olympics Games in Rio de Janeiro, Brazil. Payment will be in 2016 when the games take place. This transaction in USD would constitute an embedded derivative in the Euro books of the EBU unless one of these criteria is met:

The contract is denominated in the • functional currency of one of the main counterparties; or

The contract is denominated in a • “common currency” routinely used for normal transactions in the country of one of the main counterparties (as e.g. the US dollar is in the Caribbean); or

The contracts for sports rights around • the world can be shown to be routinely denominated in US dollars (as e.g. is crude oil).

Considering each criteria in turn for our example:

Neither the EBU nor the International • Olympic Committee (which is based in Lausanne, Switzerland) will have a functional currency of US dollar; and

The US dollar does not act as a common • currency in either Luxembourg or Switzerland; and

Sports rights are not routinely • denominated around the world in US dollars since many are denominated in Euros, Sterling or local currencies. (This is a very high hurdle generally reserved for crude oil and some metals.)

Since none of the criteria are met, the EBU may have an embedded derivative which should be separated from the host contract and measured at fair value. If the forward rate value of the USD against the Euro should fluctuate, this volatility will be reflected today in the EBU income statement. Note that the embedded derivative is recognised at fair value even though in this example the underlying asset (acquired programming rights) and liability ($500m) will not be recorded until the games actually take place in 2016.

In contrast, a broadcaster based in a country where the US dollar is used as a common currency could enter into a similar contract to the EBU example without triggering the need to separate out an embedded derivative. For example, the US dollar is deemed a common currency in parts of the Caribbean, the Middle East, south-east Asia, South Africa and Brazil. So broadcasters in these countries can enter into broadcasting contracts in US dollars knowing that any embedded derivative would be deemed closely related and hence not separated.

It is worth highlighting here that this is a hypothetical example. Clearly, the specific facts and circumstances in any real life situation would need to be examined with care.

Overall, the increasingly global nature of television broadcasting introduces foreign exchange complexity. Sports rights are frequently denominated in US dollars or Euros, but this frequency does not constitute “routinely” in an accounting sense. Such contracts therefore run the real risk of separable embedded derivatives if the contracts are not denominated in the functional or common currencies of the counterparties.

Issue 3 MIAG 23

Figure 5: Retranslation of programming rights creditor

Year ending Accounting entry Asset NBV $000 s/line 25% p.a.

Asset NBV €000 Liability $000 Liability €000 Rate (hypothetical)

FX €000 gain/(loss)

2005 No transaction recorded

At availability in Jan 2010 Full asset + liability recorded 76,000 54,286 76,000 54,286 1.4

Dec-10 Retranslation of liability 57,000 40,714 38,000 31,667 1.2 (4,524) loss

Dec-11 Retranslation of liability 38,000 27,143 38,000 34,545 1.1 (2,879) loss

Dec-12 Retranslation of liability 19,000 3,571 38,000 29,231 1.3 5,315 gain

Dec-13 Retranslation of liability – – – – 1.2 –

Journal Entries €000

At availability in Jan 2010 Dr. B/S Programme Asset 54,286 y/e Dec 2011 Dr. P&L FX Loss 2,879

Cr. B/S Liability (54,286) Cr. B/S Liability (2,879)

To record asset once available To record retranslation of liability

y/e Dec 2010 Dr. P&L FX Loss 4,524 y/e Dec 2012 Dr. P&L FX Loss 5,315

Cr. B/S Liability (4,524) Cr. B/S Liability (5,315)

To record retranslation of liability To record retranslation of liability

24 MIAG Issue: 3

Conclusion

Exploitation of acquired programming rights is a key driver of revenue growth for the majority of broadcasters. As broadcasting evolves in response to digital transformation and market fragmentation, accounting procedures for acquired content pose new challenges for media companies.

This paper has explored the critical considerations relating to the recognition, presentation, amortisation and impairment of acquired programming rights under the applicable IFRS standards IAS 2 Inventories and IAS 38 Intangible Assets. For financial executives and their teams, accounting for acquired programming presents many challenges. Neither IAS 2 nor IAS 38 is specific to the television industry nor do they offer relevant interpretive guidance. The significant increase from digital transformation in both the number of cable/satellite channels and the variety of funding models has added complexity, as has the increasingly global nature of television broadcasting.

Companies which are adept at navigating the intricate accounting and reporting practices can tell their story in a clear and compelling manner, building public trust in their performance with stakeholders such as investors, analysts, employees, suppliers, advertisers and viewers.

The information in this paper should be used as a framework when considering how to recognise, classify and measure your acquired programming rights. The answer for complicated real life transactions will depend on the specific facts and circumstances in each case. As always, planning ahead can prevent painful surprises.

To comment on any of the issues highlighted in this paper please visit our dedicated website www.pwc.com/miag or contact your local PwC entertainment and media specialist.

“As always, planning ahead can prevent painful surprises”

Issue: 3 MIAG 25

Publications / further reading

This paper explores some of the accounting complexities related to joint ventures which can arise for media companies both under existing IFRS and in the future.

Media Industry Accounting group

November 2011

MIAG Issue: 1www.pwc.com/miag

Making sense of a complex worldAccounting for joint ventures – issues for media companies

More CEOs in Entertainment & Media (E&M) than in any other sector expect to form a new strategic alliance or joint venture in the coming year. And 57% – compared to 39% across all industries – expect the majority of their innovations to be co-developed with partners outside their organisations. This forecast increase in the scale and scope of joint ventures will expose more media companies to accounting complexities such as distinguishing between supplier arrangements, jointly controlled operations and jointly controlled entities; the treatment of net liabilities in a joint venture; retranslation of foreign joint ventures; and the contribution of assets and knowledge into a joint venture.

This paper explains the treatment of these and other items under the current standard IAS 31 Interests in joint ventures and also considers how the treatment might change under IFRS 11 Joint arrangements which is applicable for periods beginning on or after 1 January 2013.

Accounting for joint ventures – issues for media companies

MIAG Issue: 1

Delivering results Key findings in the Entertainment and Media sector

www.pwc.com/ceosurvey

15th Annual Global CEO Survey

Sector summary

This year our findings show that E&M CEOs think their businesses’ future growth depends—crucially—on responding to consumer change through innovation. Collaboration within and across the digital ecosystem will be vital for achieving this. The key element currently lacking is the right skills – a shortcoming they’re determined to address.

Entertainment & Media industry summary

15th Annual Global CEO Survey

PwC’s Global entertainment & media outlook contains detailed industry analysis and forecasts trends in the global entertainment & media industry over the next 5 years across 13 industry segments in 48 countries.

This year’s outlook focuses on the emergence of a golden age for empowered consumers, driven by the profound move to digital, which has created a “new normal” for the entertainment & media industry.

2011—2015

Global entertainment & media outlook

www.pwc.com/miag This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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