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F ILMED E NTERTAINMENT Revenue and cost recognition.

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Presentation on theme: "F ILMED E NTERTAINMENT Revenue and cost recognition."— Presentation transcript:

1 F ILMED E NTERTAINMENT Revenue and cost recognition

2 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

3 R ECAP – L IFE CYCLE OF A FILM OR TV SHOW

4 (months) Theatrical Home Entertainment (DVD, Blu-ray) Free TV (network & syndicated) PPV/VOD Pay TV Current release windows of a film Licensing and Merchandising Digital Media

5 TV show markets Network Cable Home entertainment Syndicated TV New media Digital Media

6 R EVENUE RECOGNITION

7 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

8 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

9 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

10 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

11 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)

12 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

13 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

14 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

15 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

16 Revenue recognition – other considerations Cross collateralization – If cannot allocate, recognized on an “earn out” basis

17 U LTIMATE REVENUES

18 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

19 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

20 C OST AMORTIZATION

21 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

22 Amortization calculation Year 1 Year 2 Ultimate costs Costs to amortize Yr. 1 revenues Ultimate revenues Ult costs to go Costs to amortize Yr. 2 revenues Ult revs to go

23 Yr. 1 Ultimate Revenues (total)$ 60 Ultimate Costs (total)40 Ultimate Gross margin20 Actual Revenues:20 Ultimate costs Costs to amortize Yr. 1 revenues Ultimate revenues Amortization calc – Example – Yr 1

24 Recording amortization – Year 1 Cost of revenues (Amortization expense) $13 Capitalized film costs(Accumulated amort) $13 Record Year 1 amortization expense

25 Yr 1 Yr 2 (to go) Ultimate Revenues (total) $ 60 $ 40 Ultimate Costs (total)4027 Ultimate Gross margin20 13 Actual Revenues:20 15 Actual Costs Amortized:13 ? Ult costs to go Costs to amortize Yr. 2 revenues Ult revs to go Amortization calc – Example – Yr 2

26 Recording amortization – Year 2 Cost of revenues (Amortization expense) $10 Capitalized film costs(Accumulated amort) $10 Record Year 2 amortization expense

27 Ult costs to go Costs to amortize Yr. 2 revenues Ult revs to go Amortization calc – Example – Yr 2 (revised ultimate) Yr. 1 UltYr. 2 UltYr. 2 (to go) (revised) (revised) Ultimate Revenues Ultimate Costs Ultimate Gr. margin Actual revenues:2015 Actual costs amortized13 ?

28 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

29 C ASE S TUDY PART 2

30 P ARTICIPATIONS

31 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)

32 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

33 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

34 Sample participation calculation

35 Participation calculation example

36 Yr. 1 Ultimate Revenues (total)$ 567,500 Ultimate Participation Costs 30,200 Actual Revenues:362,000 Ultimate costs Costs to amortize Yr. 1 revenues Ultimate revenues Participations – Example – Yr 1

37 Recording participations Costs of revenues (Participation exp)$19.3 Accrued participations$19.3 Record Year 1 participation expense and related liability

38 R ESIDUALS

39 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

40 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

41 Residual rates – Motion pictures

42 Residual rates – TV shows

43 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

44 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

45 Residuals calculation

46 Yr. 1 Ultimate Revenues (total)$ 567,500 Ultimate Residuals Costs 11,800 Actual Revenues:362,000 Ultimate costs Costs to amortize Yr. 1 revenues Ultimate revenues Residuals – Example – Yr 1

47 Recording residuals Costs of revenues (Residuals expense)$ 7.5 Accrued residuals$ 7.5 Record Year 1 residuals expense and related liability

48 O THER EXPENSES

49 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 (SOP 93-7) – Expense as incurred or – Upon first airing

50 U LTIMATE COSTS

51 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

52 T AX INCENTIVES AND C REDITS

53 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

54 I MPAIRED FILMS AND TV S HOWS

55 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

56 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

57 D EVELOPMENT COST WRITE DOWNS

58 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)?

59 C ASE S TUDY P ART 3


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