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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 Dev elopment cost write downs Tax incentives/credits.

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Filmed Entertainment

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  1. Filmed Entertainment 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. Recap – Life cycle of a film or TV show

  4. 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)

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

  6. Revenue 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. Ultimate 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. Cost 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. Yr. 1 revenues Ultimate revenues Yr. 2 revenues Ult revs to go Amortization calculation • Year 1 • Year 2 Ultimate costs Costs to amortize Ult costs to go Costs to amortize

  23. Yr. 1 revenues Ultimate revenues Amortization calc – Example – Yr 1 Yr. 1Ultimate Revenues (total) $ 60 Ultimate Costs (total) 40Ultimate Gross margin 20 Actual Revenues: 20 Ultimate costs Costs to amortize 20 60 40 13

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

  25. Yr. 2 revenues Ult revs to go Amortization calc – Example – Yr 2 Yr 1 Yr 2 (to go)Ultimate Revenues (total) $ 60 $ 40 Ultimate Costs (total)4027Ultimate Gross margin2013 Actual Revenues: 20 15 Actual Costs Amortized: 13 ? Ult costs to go Costs to amortize 15 40 27 10

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

  27. 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 60 55 35Ultimate Costs 404027Ultimate Gr. margin 2015 8 Actual revenues: 20 15 Actual costs amortized 13 ? Ult costs to go Costs to amortize 15 35 27 12

  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. Case Study part 2

  30. Participations

  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 revenues Ultimate revenues Participations – Example – Yr 1 Yr. 1Ultimate Revenues (total) $ 567,500 Ultimate Participation Costs 30,200 Actual Revenues: 362,000 Costs to amortize Ultimate costs 362 567.5 30.2 19.3

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

  38. Residuals

  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 revenues Ultimate revenues Residuals – Example – Yr 1 Yr. 1Ultimate Revenues (total) $ 567,500 Ultimate Residuals Costs 11,800 Actual Revenues: 362,000 Ultimate costs Costs to amortize 362 567.5 11.8 7.5

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

  48. Other 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 720-35 (SOP 93-7) • Expense as incurred or • Upon first airing

  50. Ultimate costs

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