Download - Filmed Entertainment
FILMED ENTERTAINMENT
Revenue and cost recognition
Agenda
• Revenue recognition• Ultimate revenues• Cost amortization• Participations and residual expense• Other expenses• Impaired films and TV shows• Development cost write downs• Tax incentives/credits
RECAP – LIFE CYCLE OF A FILM OR TV SHOW
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(months)6 1812 30 36
Theatrical
Home Entertainment (DVD, Blu-ray)
Free TV (network & syndicated)
PPV/VOD
243 9 15 21 27 33
Pay TV
Current release windows of a filmLicensing and Merchandising
Digital Media
TV show markets
• Network• Cable• Home entertainment• Syndicated TV• New media D
igita
l M
edia
REVENUE RECOGNITION
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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
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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
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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
• Year 2
Ultimate costs
Costs toamortize
Yr. 1 revenuesUltimate revenues
Ult costs to go
Costs toamortize
Yr. 2 revenues Ult revs to go
Yr. 1Ultimate Revenues (total) $ 60Ultimate Costs (total) 40Ultimate Gross margin 20Actual Revenues: 20
Ultimate costs
Costs toamortize
Yr. 1 revenuesUltimate revenues
2060
40 13
Amortization calc – Example – Yr 1
Recording amortization – Year 1Cost of revenues (Amortization expense) $13
Capitalized film costs (Accumulated amort) $13
Record Year 1 amortization expense
Yr 1 Yr 2 (to go)Ultimate Revenues (total) $ 60 $ 40Ultimate Costs (total) 40 27Ultimate Gross margin 20 13 Actual Revenues: 20 15Actual Costs Amortized: 13 ?
Ult costs to go
Costs toamortize
Yr. 2 revenues Ult revs to go
1540
27 10
Amortization calc – Example – Yr 2
Recording amortization – Year 2Cost of revenues (Amortization expense) $10
Capitalized film costs (Accumulated amort) $10
Record Year 2 amortization expense
Ult costs to go
Costs toamortize
Yr. 2 revenues Ult revs to go
1535
27 12
Amortization calc – Example – Yr 2 (revised ultimate)
Yr. 1 Ult Yr. 2 Ult Yr. 2 (to go) (revised) (revised)
Ultimate Revenues 60 55 35Ultimate Costs 40 40 27Ultimate Gr. margin 20 15 8Actual revenues: 20 15Actual costs amortized 13 ?
Recording amortization – Year 2 (revised ultimate)
Cost of revenues (Amortization expense) $12Capitalized film costs (Accumulated amort) $12
Record Year 2 amortization expense – revised ultimate
CASE STUDY PART 2
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PARTICIPATIONS
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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
REVENUES YR 1% $ Total Ultimate Revenues 567,500$
30% 49,500 Domestic Theatrical 165,000 38% 72,200 International Theatrical 190,000 n/a - Domestic HE (@ 20%) 85,000 17,000 n/a - Int'l HE (@ 20%) 50,000 10,000
30% 4,350 Pay Television 14,500 25% 2,500 Network 10,000 35% 6,300 Domestic Syndication 18,000 40% 10,800 Int'l Syndication 27,000
451,500 LESS: Residuals and other deductions (11,800)
ADJ USTED GROSS RECEIPTS (AGR) 439,700
Production Costs: (209,500) P&A: (160,000)
BREAK EVEN (BE) (369,500) AGR in excess of BE 70,200 Distribution Fees (145,650)
NET RECEIPTS (75,450)$
DIST FEES
Sample participation calculation
MALE STAR (Gross)2% AGR 8,794$ LESS: Advance (250)
8,544 FEMALE STAR (Gross)
1% AGR to BE 3,695 3% AGR after BE 2,106 LESS: Advance (500)
5,301 DIRECTOR (Gross)
2% Adjusted Gross up to $100 million 2,000 3% Adjusted Gross over $100 million 10,191
12,191 WRITER (Net Receipts)
2% of Net Receipts -
SUPPORTING CAST (Gross)1% Adjusted Gross over $100 million 3,397 3,397
SUPPORTING CAST (Net)2% of Net Receipts -
ADVANCESMale Star 250 Female Star 500
750 ULTIMATE PARTICIPATIONS 30,183$
Year 1Participation calculation example
Yr. 1Ultimate Revenues (total) $ 567,500Ultimate Participation Costs 30,200
Actual Revenues: 362,000
Ultimate costs
Costs toamortize
Yr. 1 revenuesUltimate revenues
362567.5
30.2 19.3
Participations – Example – Yr 1
Recording participationsCosts of revenues (Participation exp) $19.3 Accrued participations $19.3
Record Year 1 participation expense and related liability
RESIDUALS
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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
Percentages used for residual calculation:
Pay/ HE HE BasicGuild Free TV 1st $1M > $1M Cable
SAG 3.60 4.50 5.40 3.60DGA 1.20 1.50 1.80 1.20WGA 1.20 1.50 1.80 1.20AFM 1.00 1.00 1.00 1.00IATSE 5.40 6.75 8.10 5.40Pension rate 0.45 0.56 0.68 NAP/R Tax 0.59 0.73 0.88 NA
Potential residual rate 13.44 16.54 19.66 12.40
Residual rates – Motion pictures
Percentages used for residual calculation:
Network Syndi- Pay/ HE BasicGuild Re-run cation Free TV 1st $1M cable
2 50% 2 40%SAG/AFTRA 3 40% 3 30% 3.6 4.5/5.4 6.0DGA 4-6 25% 4-6 25% 1.2 1.5/1.8 2.0WGA 7-10 15% 7-10 15% 1.2 1.5/1.8 2.0
11-12 10% 11-12 10%13+ 5% 13+ 5%
AFM NA NA 1.0 1.0/1.0 NAIATSE NA NA 5.4 6.75/8.1 NA
(% of appl. minimum) (same % as films)
Residual rates – TV shows
Residuals – Overview
• Pro-ration for filming outside the U.S.• Some states are “right-to-work” states (non-
union)• SAG/AFTRA applies no matter where actor works• Range from 12.5% - 20% of revenues generated in
ancillary markets• Fringe benefits (payroll tax, pension, health &
welfare benefits) can add another 25% surcharge to residual payments
Residuals – Guild audits
• Guilds conduct periodic audits of film and TV producers
• Specialized firms do most audits• Industry-wide litigation regarding various
practices employed by film producers when calculating residuals– Percentage of home entertainment revenues
subject to residual payments– Allocation of minimum guarantees
Residuals calculationResiduals Ultimate
Yr 1Pay TV 14,500$ Network & Basic Cable 10,000 Domestic Syndication 18,000 Int'l Syn 27,000 Total Free & Pay TV Ult Rev 48,211 Rate (all guilds) 13.44%Sub Total Ultimate Residuals 6,480
Domestic HE @ 20% 85,000 17,000 Int'l HE @ 20% 50,000 10,000 Total Video 27,000 All Video 1st $1M 1,000 Rate (all guilds) 16.54%Ultimates Residuals HV $1M 165 Video > $1M 26,000 Rate (all guilds) 19.66%Ultimates Residuals HV > $1M 5,112
Total Ultimate Residuals 11,757$
Yr. 1Ultimate Revenues (total) $ 567,500Ultimate Residuals Costs 11,800
Actual Revenues: 362,000
Ultimate costs
Costs toamortize
Yr. 1 revenuesUltimate revenues
362567.5
11.8 7.5
Residuals – Example – Yr 1
Recording residualsCosts of revenues (Residuals expense) $ 7.5 Accrued residuals $ 7.5
Record Year 1 residuals expense and related liability
OTHER EXPENSES
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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
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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
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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 FILMS AND TV SHOWS
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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
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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)?
CASE STUDY PART 3
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