AcSEC and FASB Issue Proposals on Film Industry Accounting

By Anthony J. Mancusco, CPA

The AICPA's Accounting Standards Executive Committee (AcSEC) and the Financial Accounting Standards Board recently issued concurrent proposals on accounting by producers and distributors of motion picture films. Comments for both are due on January 18, 1999.

AcSEC's proposed Statement of Position (SOP), Accounting by Producers and Distributors of Films, would apply to all producers and distributors that own or hold rights to distribute or exploit films. The SOP would replace FASB Statement 53, Financial Reporting by Producers and Distributors of Motion Picture Films.

The proposed SOP discusses certain disclosures and requires the following:

* If certain conditions are met, the licensing of film products be reported as sales if substantially all of the fair value for a market or territory has been transferred to the customer on an exclusive basis. Certain fees in license arrangements, including many television arrangements, would not qualify for immediate revenue recognition upon the signing of arrangements.

* Immediate revenue recognition if an arrangement may cause an entity to make significant changes to a film after its delivery. However, insignificant changes would not preclude revenue recognition.

* Participations and residuals be accrued in total and included in film costs based on the estimated ultimate gross revenues of a film.

* Capitalization of early release and prerelease exploitation costs of theatrical products, with a limited amortization period.

* A specific approach for loss recognition on episodic television products. (AcSEC considered and rejected requiring immediate loss recognition for the total loss expected based on the number of episodes expected to be delivered.)

* A property that has not been set for production within three years from the time of the first capitalized transaction should be considered disposed of with the related losses charged directly to income. The proposal includes a rebuttable presumption that a property to be disposed of by abandonment has zero fair value.

* Entities to review all existing contracts to determine if they meet the revenue recognition requirements, revise ultimate gross revenues, adjust production costs to remove unamortized exploitation costs for films that are no longer in the theatrical release phase in a territory, and adjust production costs to remove the effect of abandoned projects that were capitalized.

One of the underlying conclusions in the proposed SOP is that films are more like long-lived assets than inventory. Impairment, therefore, would be recognized and measured in accordance with FASB Statement 21, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. Cash flows representing additions to film costs would be reported as cash flows from investing activities, and film costs would be classified as noncurrent assets in a classified balance sheet.

If enacted, the SOP will be effective for financial statements for fiscal years beginning after December 15, 1999, with earlier adoption encouraged. See www.aicpa.org for a copy of the proposal.

FASB Actions

As a result of the AcSEC proposal, FASB proposed to rescind FASB Statement 53, Financial Reporting by Producers and Distributors of Motion Picture Films, and also to amend FASB Statements 89, Financial Reporting and Changing Prices, and 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of.

FASB had received requests to revisit Statement 53 in light of the changes that had occurred in the motion picture industry since the board issued the statement in 1981. FASB asked the AICPA to develop an SOP (described above) to provide guidance for producers and distributors of motion picture films on accounting and reporting requirements.