The Financial Accounting Standards Board’s recently issued accounting standards update on how to account for production costs for movies and television episodes provides more clarity on how to deal with financial reporting in an age when viewers have become more accustomed to streaming video online and binge watching their favorite series.
FASB issued the update in March, adjusting the way companies account for the production costs of films and episodic content produced for TV and online streaming services such as Netflix and Hulu (see FASB changes accounting for episodic TV series).
Previously, the accounting standard was based on the assumption that many TV shows would remain unprofitable until they hit the re-run circuit. The new update erases the accounting distinction between the costs incurred for TV shows and films, which has blurred in recent years as on-demand cable and streaming TV services have grown in popularity.
Financial Accounting Standards Board meeting at FASB headquarters in Norwalk, Connecticut
Deloitte recently released a paper discussing the implications of the amendments in the new standard for film and television production cost accounting, pointing to some of the key issues and potential challenges for media and entertainment companies that account for production costs under U.S. GAAP.
“This is a new standard that’s updating accounting literature that was originally written 20 or even 40 years ago,” said Darren Wilson, the telecom, media and entertainment industry sector leader for audit and assurance at Deloitte. “It’s trying to align better the significant changes that have occurred in the production and distribution models, with the evolution of the streaming video-on-demand companies out there, trying to update some of the older accounting literature to match new production and distribution models.”
Some of the main provisions of ASU 2019-02 eliminate the constraints on capitalizing episodic television content production costs, aligning the cost capitalization guidance related to episodic TV content with similar guidance for films. FASB’s Emerging Issues Task Force spearheaded some of the changes.
“The EITF started by looking at converging how costs were capitalized,” said Wilson. “There were differences in the old standards between film cost and episodic television content. That was the first piece of the standard that changed as they converged that guidance. There’s no longer a cost capitalization constraint on the episodic television content. But it also goes well beyond that. It introduces a new concept on whether content is monetized in groups or individually, and that will have an impact on how assets are amortized and how to test for impairment.”
Under the new standard, the amortization and impairment analysis for a film or license agreement for program material would require companies to determine whether the film or license agreement for program material should be assessed individually or as part of a film group.
“It converges impairment models,” said Wilson. “You had a mixed model before where licensed content was measured for impairment on a net realizable value basis, while owned content was measured using fair value and the impairment approach.”
The impairment model for licensed content accounted for in accordance with ASC 920-3502 has now been aligned with the model for produced content under the older ASC 926-20, which requires impaired assets to be written down to their fair value rather than their net realizable value.
The new accounting standards update also amends the presentation and disclosure requirements for both produced and licensed content.
“It removes some disclosure requirements,” said Wilson. “Again, we had some disconnected literature. The licensed content had very specific disclosure requirements to categorize it as current and long term on the balance sheet. And the film guidance was entirely long term. Now they’ve removed all of that. So companies will have to decide: Is it a mix of short and long term? Is it all long or is it all short?”
He anticipates the new standard will have a big impact when it takes effect next year. “We think this will have an impact on companies throughout the production and distribution ecosystem,” said Wilson. “It will be from production companies to studios to broadcasters to streaming video on demand providers. Anyone that’s making or licensing content out there will have to adopt this. Anyone that’s a public company will adopt it as of the first of the year in 2020.”
FASB’s Emerging Issues Task Force received input from a variety of different media companies pushing for changes in the old standards to reflect the new environment for video content.
“The EITF formed a working group that had folks involved from the different types of companies, from studios to broadcasters to streaming video on demand,” said Wilson. “It had the EITF members themselves, so it was a working group that was broad, that had some industry background, as well as the EITF itself.”
The new standard is likely to have an impact on how media companies monetize their TV and movie content. “Companies could recognize the amortization differently,” said Wilson. “One of the key aspects of this is a more judgmental area of this standard. Companies will have to decide how they predominantly monetize their content. Whereas before, the standard was fairly prescriptive, and if you had a filmed entertainment asset, it was an individual film forecast model, now you have the ability when you own the content to possibly put it in a group and amortize it as a group. That could change some of the amortization models run out over time. The old model on individual films was trying to match costs to the revenue of that individual film, whereas now in a group you may be spreading costs differently against a different revenue forecast that’s a group forecast versus the individual expense.”
There has been considerable controversy over the years about what’s sometimes referred to as “Hollywood accounting,” where movies that reportedly generated many millions or billions in revenue at the box office aren’t generating enough of a profit to pay off the people who were supposed to receive a percentage of the box office receipts or grosses in their contracts. However, the new accounting standard will likely do little to settle such disputes.
“The contract model and the industry constantly evolve over time, and so there are a wide range of how individuals and companies participate in films, sometimes at the gross line, sometimes in the profit lines, and depending on the cost of the film, you’ll have different profit margins in different films,” said Wilson. “This mostly centers around the asset grouping concept versus the individual concept — the convergence of a couple of aspects of this and the cost constraints and the convergence of impairment modeling between the two.”
He also doubts the new standard will force streaming video services to disclose more information about the viewership of their shows.
“Disclosure requirements have changed a little bit in the new standard, but mostly to deal with the asset grouping versus individual concept,” said Wilson. “Some of the disclosures will be separated between those assets that are predominantly monetized as a group and those that are predominantly monetized individually. But there is no requirement to go down to an individual title or provide drastically different or drastically more disclosures than in the old standards.”
He doesn’t think the new standard will have much of an impact either on whether a company will decide to continue to produce and air a particular series or not.
“The standard could impact the timing of recognition of the cost, but generally I don’t think the standard will impact the economics of an individual show,” said Wilson. “The show should remain the same. The costs of the show that were budgeted and approved and spent would remain the same pre and post the new accounting standard. The accounting standard may change how those costs are reported and when they’re expensed. For instance, the episodic television cost would be the same. It’s just the accounting literature would preclude you from capitalizing and deferring some of those costs under the old standard. Under the new standard, you’ll be able to capitalize and possibly defer those costs into a future period rather than expensing them in an earlier [period]. But it shouldn’t change the economics of that show and the amount spent and the overall economic profit of a title.”
So far, nobody seems to be rushing to adopt the new standard earlier than the effective date, but Wilson believes media companies should begin thinking about some of the upcoming changes.
“I have not seen any early adoptions of the standard,” he said. “The public companies will have to adopt the standard starting January 1st of 2020. I think what’s important for companies to do is start to think about some of the more judgmental areas that are involved in this standard. They’ll have to think about how they analyze and conclude on how they are monetizing their assets. Are they predominantly monetizing them as a group, or are they predominantly monetizing them as individual properties? They’ll have to think about how the NRV (net realizable value) models are now changing to a fair market value model, and license content. And they’ll have to think about what inputs and assumptions may change, and how do I write a new policy to address the new impairment model going forward? There are some new triggers. If they are analyzing films as a group, there are some additional impairment triggers they have to work into their policies and procedures. They’ll have to get ahead of the balance sheet classification and make a decision on ‘is it all current, is it all long term and does it continue to split?’ without a prescriptive piece of accounting literature telling you you must do it one way or the other. I think it’s important for them to consult often and early with their advisors and auditors to make sure as they’re going through those judgmental conclusions, they’re reaching conclusions within the bounds of the standard. It’s important for companies to get ahead of those judgmental aspects of the standard and start planning ahead for the adoption.”
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