"Film Industry Is Confronting Likely Change in Accounting"
By MELODY PETERSEN
The nation's accounting rule makers have
tentatively approved new financial reporting
standards for the film
industry that could cost some Hollywood studios
hundreds of millions of dollars.
For more than a decade, movie studios have been able to
use the current accounting rules to create their own
special effects. Almost like magic, the rules have
allowed some studios to show profits even when films
flop. Often, they do this by postponing the recognition
of advertising or film production costs far into the
future.
The new rules -- still subject to final approval from
the Financial Accounting Standards Board and from the
American Institute of Certified Public Accountants --
would have the biggest impact on studios that have been
most aggressive in their interpretations of the
accounting rules. Those studios include Columbia
Pictures, which is owned by Sony Corp.; Paramount
Pictures, owned by Viacom Inc.; 20th Century Fox, owned
by News Corp., and Metro-Goldwyn-Mayer, owned by the
billionaire Kirk Kerkorian.
The rules would also apply to the producers of
television shows, but not to cable companies or
broadcasters, which follow other rules.
Most companies would not have to adopt the new rules
until 2000. But David Londoner, an entertainment
industry analyst at Schroder Inc. and a member of the
group that wrote the new rules, said he expected many
studios to begin following them next year.
The rules "will essentially place all film companies on
an equal footing," said Londoner, who has been pushing
for the changes for a decade. The present rules have
frustrated analysts because one movie studio cannot
easily be compared with another and because the studios
have been able to use the accounting to accelerate
revenues and delay expenses -- practices not allowed in
other industries.
"The suspicions about film accounting will finally be
eliminated," Londoner said.
Most studio executives said they could not yet comment
in detail about the proposed rules, which the Financial
Accounting Standards Board gave preliminary approval to
on Friday. But some executives disputed Londoner's
estimates that the movie industry as a whole would be
forced to write off $2 billion and each major studio
would write off $150 million to $450 million when the
new rules are in place.
"Any estimates of the impact are inaccurate, premature
and very speculative," a spokesman for Paramount
Pictures said.
Now, movie studios, unlike almost all other businesses,
can spend millions of dollars on advertising and spread
those costs over a number of years, avoiding an
immediate dent in their bottom lines. The studios have
been often able to argue that the films have useful
lives of many years, even if the movies bomb at box
offices in the United States. After all, they argue,
foreign audiences are bound to love the film and there
is always money to be made selling home videos or the
syndication rights to television.
But the studios are also able to avoid showing losses
for film projects that executives simply decide to
abandon. Under the current rules, the studios can call
the costs of those abandoned films "overhead" and
gradually charge those costs to future movies.
And when a studio sells the syndication rights to a
film or television show to another broadcaster, it can
report all of the revenue almost immediately, even
though it may be years before the cash is received, the
shows are broadcast and all of the film production
expenses are recorded.
Such syndication contracts are often worth hundreds of
millions of dollars. For example, Warner Brothers,
which is owned by Time Warner Inc., is expected to book
more than $200 million in the near future from the
syndication of the television show "Friends," Londoner
said. If the new rules were already in place, much of
that amount would not be earned this year.
The studios now have three months to comment on the
rules, which were written by a task force at the
American Institute of Certified Public Accountants.
That group and the Financial Accounting Standards Board
have been critical of the movie studios' delays in
posting advertising expenses, so it is unlikely that
the companies could argue against the proposed rule
change that would force them to write off promotional
expenses within three months.
When the new rules become effective, the companies will
have to write off most of the advertising costs that
remain on their books. And, they will also probably
have to reverse any revenue for the syndication rights
of films that have not yet been broadcast on
television.
Ted Howells, chief financial officer at Sony Pictures
Entertainment, said the company was concerned about
portions of the proposal, especially the change in the
accounting for the sale of syndication rights.
But Howells refused to comment on Londoner's estimate
that the new rules would cause Sony to take a one-time
charge of more than $250 million against its earnings
and reduce earnings for Sony's Columbia and Tri-Star
studios by as much as 10 percent in the following year.
And Sony, as have the other studios being criticized
for their aggressive accounting, says that it is doing
nothing wrong. "There is not anything in our accounting
that is in violation of current pronouncements."
Howells said.
The current accounting rules for the film industry were
written in 1981. And, at first, the rules worked, with
most studios quickly reducing revenues for the costs of
producing a film. But later, the studios began to
interpret the accounting rules in a way that allowed
them to spend lavish amounts on items like advertising
and then delay for years the effect on the bottom line.
"Everything just got out of hand," Londoner said.
The perils of this accounting were very evident at
Livent Inc., the theater company that brought shows
like "Ragtime" and "Showboat" to Broadway. Livent,
which is based in Toronto, follows Canadian accounting
rules that are very similar to those now used by the
Hollywood studios.
In recent months, Livent executives have repeatedly
surprised investors with announcements that they would
have to reduce their income by tens of millions of
dollars. Those amounts consisted of advertising and
production costs for shows that were not selling enough
tickets to recover their lavish expenses.
Several small, troubled movie studios, among them
Carolco Pictures and Orion Pictures, also took
advantage of the current rules in the 1980s to try to
inflate their profits.
Copyright 1998 The New York Times Company |
