Movie Accounting
An analysis is done of the accounting methods employed in the world of glitz, glamour, fame and money in other words the movie industry to assess the increasing disparity between the techniques adopted by them to arrive at the financial statement figures as opposed to those stated in the "Generally Accepted Accounting Practices."
The standards and regulations of the accounting world have been twisted to give them an entirely different meaning in the light of movie accounting. This is majorly done by distributors and studios in order to show the failure of a particular project and their by deprive the profit participants of their lawful share as per the contractual agreement.
Applications to real life scenarios have been quoted to demonstrate how movie accounting is incorporated within the financial statements. It can be concluded that this form of accounting is not only illegal but also unethical. However studios and distributors will continue to adopt these practices as the power resides in a handful of parties who have the major say in negotiating contracts.
Introduction
It is rather surprising to hear that a movie that has done so well commercially could face a loss. However in recent times this is becoming the norm of the movie industry. Movie accounting is the process of adopting creative accounting practices for reporting profits in a manner such that expenditures are inflated and revenues are reduced their by decreasing the reported NET PROFIT and ultimately reducing the royalty and profit sharing payments.
Movie Accounting refers to accounting practices of studio/distributors that ranges from adoption of dishonest practices to making up fictitious companies that are used to transfer profits in the name of "service charges." As rightly said by John D. MacDonald's in his novel Free Fall in Crimson (1981) above movie accounting:
"Darling! This is the Industry! The really creative people are the accountants. A big studio got over half the profit, after setting breakeven at about three times the cost, taking twenty-five percent of income as an overhead charge, and taking thirty percent of income as a distribution charge, plus rental fees, and prime interest on what they advanced."
How Movie Accounting works?
Movie accounting can take various forms for example the most popular one is the formation of a special purpose subsidiary whereby the parent company transfers revenue from the subsidiary by charging service fees for various activities undertaken. Or fictitious entities are created whereby instead of showing the total revenues earned from DVDs and home rentals a transfer of revenues in form of "royalty payments" is made from one entity to another resulting in lower net profits for the profit participants.
Studios that have various production and distribution channels can manipulate the license fee among their associated entities so that profit participants receive a lesser share than the fair market value.
These schemes can range from being simplistic to complex but many of them revolve around the concept of overhead. An estimation of the studios general overheads is required in operating a studio. This amount is then charged off as an expense of the film or Television show. The studios calculate 15% of total production costs as production overheads followed by 30% of gross rentals as distribution overheads and finally 10% of advertising costs are assumed to be marketing overheads. All these are deducted from gross receipts to arrive at the final net profit figure.
All these calculations are made on an arbitrary basis and do not adequately trace overhead costs to actual activities undertaken. The extreme overestimation of overheads mean that it does not come as a surprise when only 5% of movies officially show net profit while major block buster's report losses.
The wide usage of such a method is further stressed by the fact that many actors demand to have a percentage of gross revenue as opposed to having a percentage of net revenue because there is virtually no net profit remaining once the studio and the movie makers take out their shares.
All in all, studios get millions while conveying to the profit takers that the film is a money "loser" as far as accounting is concerned.
Contrasting GAAP and Movie Accounting
The financial information presented to the users of account must adhere to certain standards and guidelines and should be a free of biasness or any inconsistency. The guidelines are stated in General Accepted Accounting Principles and every entity must adhere to them when issuing financial statements.
These include the principle of regularity or consistency, principle of non-compensation, principle of prudence, principle of continuity,...
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