ASC 926: Accounting for Films and Entertainment

Accounting for the costs and revenues of film and entertainment projects is governed by Accounting Standards Codification (ASC) 926. This standard, part of U.S. Generally Accepted Accounting Principles (U.S. GAAP), provides a uniform framework for the film industry’s distinct financial aspects. ASC 926 establishes a standardized approach for a business model involving significant upfront investment with uncertain future returns. By prescribing how to account for production costs, recognize revenue, and report financial results, the standard provides investors with a clearer view of a film entity’s financial performance.

Scope and Applicability of Film Accounting Standards

The guidelines within ASC 926 are directed at entities that produce and distribute films, including major motion picture studios, independent producers, and companies creating content for various platforms. The standard’s reach extends across formats like feature films, direct-to-video movies, and episodic content for television or online platforms.

The standard covers the complete lifecycle of film production. In 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-02, which broadened the scope to better align the accounting for episodic series with that of feature films.

However, ASC 926 does not apply to all entities in the entertainment industry. Broadcasters or television networks that merely acquire temporary exhibition rights for a film are excluded, as their accounting falls under different guidance. The defining factor for the applicability of ASC 926 is the ownership of the film asset and bearing the financial risks of its production.

Capitalization of Film Costs

A principle of ASC 926 is the capitalization of film costs, where certain expenditures are treated as an asset on the balance sheet rather than being immediately expensed. This asset represents the investment in creating a future economic benefit. The process of capitalization begins when a project is deemed viable and the entity commits to its production.

Development Costs

The initial phase of a film’s life involves development, where ideas are cultivated and scripts are prepared. Costs incurred during this stage, such as payments for story rights, scriptwriting fees, and other pre-production planning activities, are capitalized.

Pre-Production and Production Costs

Once a film enters pre-production and principal photography begins, a wide array of direct costs are capitalized. These include the salaries of the cast, director, and production crew, along with costs for set design, wardrobe, equipment rentals, and location fees.

Post-Production Costs

After filming is complete, the project moves into post-production, and these costs are also capitalized. This category includes expenses for visual effects (VFX), film and sound editing, color correction, and the creation of the musical score.

Production Overhead

Beyond direct costs, ASC 926 allows for the capitalization of production overhead. These are indirect costs necessary for production, such as a portion of the salaries of studio executives who oversee multiple productions or rent for studio facilities. A systematic and rational method must be used to allocate these overhead costs to individual film projects. In contrast, costs related to marketing, distribution, and general corporate administration are expensed as they are incurred.

Amortization and Impairment of Capitalized Costs

After a film is released and begins to generate revenue, the capitalized costs must be systematically expensed over the film’s useful life through amortization. This process is designed to match the costs of the film with the revenues it produces, using specific methods prescribed by ASC 926.

Amortization

The method for expensing capitalized film costs depends on how the film is monetized. For films monetized individually, the “individual-film-forecast-computation” method is used. This technique amortizes costs in proportion to the revenue earned in a given period relative to the film’s total expected revenue. For films monetized as part of a group, the entity must use a reasonable method that is representative of the pattern of use of the film group. For example, a film with $10 million in capitalized costs that generates $5 million in revenue in its first year, with a total estimated ultimate revenue of $25 million, would have a first-year amortization expense of $2 million (($5 million / $25 million) $10 million).

Impairment

Film assets must also be regularly tested for impairment, which is a write-down of the asset’s value if it is no longer expected to be profitable. An impairment test is triggered by events like poor box office performance, delays in the release schedule, or significant budget overruns. Testing is performed at the lowest level for which identifiable cash flows are largely independent, which for a film in a “film group,” is at the group level. When an impairment test is necessary, the entity must determine the asset’s fair value, often using a discounted cash flow model. If this fair value is lower than the unamortized cost, an impairment loss is recognized for the difference.

Principles of Revenue Recognition

The principles of revenue recognition for contracts with customers in the film industry are governed by ASC 606. This standard superseded the previous industry-specific revenue guidance in ASC 926. Under ASC 606, revenue is recognized when a company transfers control of goods or services to a customer, with timing varying by distribution channel.

Theatrical Distribution

For films released in theaters, revenue from box office receipts is recognized as it is earned. The producer or distributor receives reports from theaters detailing ticket sales, and this revenue is recorded during the theatrical run.

Home Entertainment

Revenue from home entertainment, which includes sales of physical media like DVDs and electronic sell-through (digital purchases), is recognized upon the sale to the consumer. For physical media, this involves estimates for returns from retailers.

Licensing and Streaming

A significant source of revenue is licensing agreements with television networks and streaming platforms. Revenue from these arrangements is recognized when the license period begins and the content is made available to the licensee. For a multi-year deal, revenue is recognized over the term of the license, not as a lump sum when the contract is signed.

Required Financial Statement Disclosures

U.S. GAAP mandates specific disclosures in a company’s financial statements to provide transparency regarding its investment in and performance of film assets. The financial statements or accompanying footnotes must disclose:

• The total amount of capitalized film costs reported on the balance sheet.
• The amortization method used.
• The total amortization expense recorded for the period.
• The aggregate amount of impairment losses recognized during the period.
• The amount of cash paid for participations and residuals, which are contingent payments to talent based on a film’s financial success.