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Resources on overcoming challenges of the new revenue recognition standard and impact on Media & Entertainment companies. The following Media and entertainment sub sectors will face accounting challenges when it comes to revenue recognition: television, film, advertising, publishing, music, internet, video games, radio, sports, business information, amusement parks, casinos, gaming, and theatre.
Newspapers: Newspapers receive their lion’s share of revenue from advertisers. Advertising revenue (the largest being retail) is reported per FASB Concepts Statement (CON) No. 5, Recognition and Measurement in Financial Statements of Business Enterprises; that is, when it is realized and earned. Advertising revenue is earned at the on-sale date of the newspaper — after all, the advertisement isn’t viewed until the paper “hits the streets.” It is at this point that the advertising revenue, net of the provisions for rebates, allowances, adjustments, discounts, etc., is booked.
Subscription revenue is the classic unearned revenue case. Once again, only upon actual distribution does the newspaper earn and therefore recognize its revenue. Gross subscription revenue is the amount earned after adjustments for refunds and uncollected credit subscriptions. This net figure is further adjusted for commissions. Generally, the revenue is earned over the life of the subscription. So a 12-month subscription triggers net revenue of 1/12 in the first month and 11/12 remains as deferred or unearned revenue. Newsstand sales, less a return provision, are recognized at the on-sale date.
Periodicals: Magazines are similar to newspapers except for the frequency of publication. They, too, have two primary revenue streams with advertising being the largest. Like newspapers, periodicals recognize net revenue (gross revenue less adjustments for commissions, discounts, etc.) at the on-sale date or at the periodical’s cover date.
Subscription revenue is unearned revenue and is recognized on a net proportionate basis over the life of the subscription. Adjustments are made to gross revenue for refunds and allowance for doubtful accounts. Again, like newspapers, periodicals recognize newsstand sales, adjusted for returns, at the on-sale date.
Any e-sales or sales of video-type services are recognized when earned, in the period of rendering the service. Other minor revenue sources include reprints, advertising copy, and ancillary sales to subscriber lists. All of these are recognized under CON 5, when earned.
Non-Print Entertainment Media
Cable TV Broadcasting: The non-print entertainment media present unique accounting challenges. While most of these challenges arise on the cost and expense side, the FASB thought it wise to issue a specific pronouncement on CATV. FASB Statement No. 51, Financial Reporting by Cable Television Companies, addresses the pre-maturity period (when a CATV system is partially in use and partially under construction), hookup fees, and franchise applications.
Pre-maturity Period: Revenue from subscribers is recognized as earned generally over a period of two years or less.
Hookup Revenues: Initial hookup fees charged to subscribers should be recognized to the extent of direct selling costs; that is, the costs incurred to obtain and set up new subscribers. The other hookup fees are deferred and amortized to income over the estimated average subscriber connection period.
Franchise Applications: No revenue is generated by the application to the local government to obtain a CATV franchise in a local market. But treatment of the costs is a matter that should be reviewed in Statement 51.
Motion Pictures: Initially this segment had its own accounting pronouncement, FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films, which was rescinded by FASB Statement No. 139, Rescission of FASB Statement No. 53 and amendments to FASB Statements No. 63, 89 and 121. However, AICPA Statement of Position (SOP) No. 79-4, Accounting for Motion Picture Films, and AICPA SOP No. 00-2, Accounting by Producers or Distributors of Films, remain in force. The guidelines for accounting for motion pictures are therefore found in the accounting literature at SOP 79-4 and FASB Statement No. 63, Financial Reporting by Broadcasters, which addresses license agreements.
The principal source of revenue for the motion picture producer and distributor is generally the licensing fees obtained by granting the exhibitor the right to show the film. The exhibitor could be a chain of theatres or other media. Following are the revenue recognition rules for the various means of exhibiting motion pictures.
Theatres: Recognize revenue at the time of exhibition unless nonrefundable guarantees are paid by the exhibitor (which may happen with a “hot” film when the exhibitor bears little risk), in which case revenue is recognized upon execution of the license agreement, provided all of the following criteria are met.
The license fee is known and collected or the cost can be reasonably determined and collected.
The licensee has accepted the film in accordance with the license agreement.
The film is available for its first showing.
Video Cassettes, DVDs, and Other Such Media:Recognize revenue upon delivery of the cassettes, DVDs, etc.
CATV, Network TV, and Syndication: Recognize revenue upon contract execution and availability of the film for telecast (see the preceding three criteria under theatres).
Many “made for TV” movies or initial pilots of series are produced and licensed in domestic and foreign markets concurrently. Syndication, cassettes, etc., follow on the heels of a pilot if a successful series results. Revenue from the series based on a TV licensing agreement is recognized in the year that the series is first available for telecast and the contract is executed.
The initial series of “The Sopranos” was produced and licensed in domestic and foreign markets concurrently. In 2004, its fifth season, the preceding four series were in limited syndication and ancillary markets such as DVD sales. Arguably, the revenue from each series could be recognized in the year that the specific series first became available for telecast (2004 for the fifth series) and the contract was executed.
Music Production: Like motion picture production and distribution, record and music production has its own accounting pronouncements. FASB Statement No. 50, Financial Reporting in the Record and Music Industry, deals with the myriad licensing issues in music production.
The general rule for revenue recognition for the owner of the record (digital) master or music copyright is that if the license agreement is an outright sale of rights and collection of the license fee reasonably assured, then the licensor recognizes the fee as revenue. Specifically, a sale of rights occurs if all the following conditions are met.
The licensor executed a non-cancelable agreement.
The licensor has agreed to a fixed fee.
The licensor has received the rights without restriction as to exercise.
The licensor has met all significant obligations to furnish the property.
So the owner (licensor) of a record/digital master or a music copyright wants to leverage his or her investment via the licensing agreement. Typically in such arrangements, a licensee will pay a minimum guarantee to licensor for the right to sell or distribute the property. Such a minimum guarantee is unearned (deferred) revenue and is earned and recognized under the licensing agreement. Absent a clear indication in the agreement, the revenue is recognized on a proportional basis over the life of the agreement.
Excerpted by permission. Copyright 2007, Specialty Technical Publishers.