Official ReleasesSOP 00-2

Spucv t'oii.'iidcratioits prevent publishing here the ap-pendix \o SOP 00-2. Since the appnidicf.<i often cm-important to imdcrslandinti SOPs. retuivrs iin' advisedto ohtitiu compklf copies. To obtiiin LI copy of.'iOP00-2 fprodua no. OI4924J.-{). cmtaci the AICPAorderliqMrtincnt at H88-717-7U77.

SOP 00-2—ACCOUNTING BYPRODUCERS OR DISTRIBUTORS OFFILMS

NOTESc.itcdicnts ot Position on .lccounting issuespresent the coni-Iusions of at te.ist two thirds ofthe Accounting Standards Executive Comniit-tcf. which is the senior technical body of theInstitute ^iiithori^ed ro speak for the histitutc inthe areas ol financial accounting and reporting.Stitement on Auditing Standards No. 69, TheMeaning i>f Present l-airly in Conformity ll'ilh Gni-irally ."{cccpfcd .-iccounting Priridptes iu llw Indepen-dent Auditm's Report, ident i f ies AKM'AStatements of Position that have been cleared hythe Financial Accountini^ St.indaids MoarJ .i'isources of established accounting principles nicategory h of the hierarchy ofgcnerjlly accept-ed accounting principles tluit it establishes.AK:1 'A nienihcrs should consider the account-ing principles in this Statement of Position if adifferent accounting treatnient of a transactionor event is not specified by a pronouncementcovered by rule 203 of the AICPA Code ofProfessional Conduct, In such circumstances,the accounting treatment specified b>- the State-ment of Position should be used, or the mem-ber should be prepared to justify- a conclusionthat another treatment better presents the sub-stance of the transaction in the circumstances,

TABLE OF CONTENTSSunini.iryForewordIntroduction and BackgroundScopeConclusions

Kevenue l^ecognition—Basic Principlesl^evenue Recognition—Details(losts and ExpensesPresentation .ind Disclosure

Ail nsj/ifj rcseri'fd. for infyrnuilioii dmm ilieproce-diircJor rnjuestin); permission lo tnak'c copies ofiniypurl oJ lhi.< work, please cill the AICPA Copyri^^liiPeruiissions Hoi line <u 20l-9.iH-.124-'!. A Copy-ri^hl Permission lictjiiesi f-mm for r-iiiiiilinii reqiirftsif •iraihihif al www.aUpa.org hy flicL'inj^ I'li ilicfopyriiihi iioiicc on any pa^e. Olheririfc, reqnesifslhntld be uriiien and mailed lo ilte PermisMUs Dt-parlment. .iiCPA. Harbonide Financial Cenier,201 I'laza Vmc. ji-rscy City, NJ 07MI-}HHt.

Amendment to Other GuidanceEffective Date and TransitionBasis for Conclusions

ScopeRevenue RecognitionC'osts and ExpensesPresentation and DisclosureEftcvtive Date and Transition

APPENDIX—ExamplesGLOSSARY

SUMMARYThis Statement of Position (SOP) providesguidance on generally accepted accountingprinciples for all kinds of films, except where•specifically noted, and is applicable to all pni-ducers or distrihutors that own or hold rights todistribute or exploit films. For purposes of thiss o p films are defined as fciture films, televisionspecials, television series, or similar products[including animated films and television pro-gramming) that arc sold, licensed, or exhibited,whether produced on film, video rape, digitalor other video recording format. The SOP re-quires, among other things, the following.• An entity should recoi^ni^e revenue from asale or licensing arrangement of a film when allof the following conditions are met,—Persuasive evidence of a sale or licensingarrangement with a customer exists.—The film is complete and. in accordance withthe terms of the arrangement, has been deliv-ered or is aviiilable for immediate and uncondi-tional deliver -.—The license period of the arrangement hasbegun and the customer can begin its exploita-tion, exhibition, or sale.—The arrangement fee is fixed or deter-minable.—Collection of the arrangement fee Ls reason-ably assured.

Ifan entity does not meet any one of thepreceding conditions, the entity should deferrecognizing revenue until all of the conditionsare met.• If a licensing arrangement covering a singlefihn provides that an entity will receive a flatfee, then the amount of that fee is consideredfixed and determinahle. In such instances, theentity should recognize the entire amount ofthe license fee as revenue when it has met all ofthe other revenue recognition conciitions.• An entity's arrangement fee may he based ona percentage or share of a customer's revenuefrom the exhibition or other exploitation of afilm. In such instances, and when the entitymeets all of the other revenue recognition con-ditions, the entity should recognize revenue asthe customer exhibits or exploits the fibu.• In certain licensing arrangements that providefor variable fees, a customer guarantee's and pays

or agrees to pay An entity a nonrefund.ibleminimum amount that is applied against thevariable fees on a lilm or films that are notcros.s-collaterali2ed. In such arrangements, theamount of the nonretimdiible uiiniminTi guar-antee is considered fixed and deierminahle. andthe entity should recogni/e rhe niininium guar-antee as revenue when it has met all of the oth-er revenue a-cognition conditions.• If a licensing arrangement provides for a non-refundable minimum guarantee that is apphedagainst variable fees from a group of films on across-collateralized basis, the amoimt of themminnim guarantee applicable to each filmcannot he objectively determined. Consequent-ly, the entity should recognize revenue as thecustomer exhibits or exploits the film. If, at theend of the license period, a portion of thenonrefundable minimum guarantee remainsunearned, an entity should recognize the re-mainicig guarantee as a-venue hy allocating it tothe individual films based on their relative per-formance under the arrangement.• The costs of producing a film and bringingthat film to market eoasist of film ci>sts, partici-pation costs, exploitation costs, and manufac-turing costs.• An entity should report film costs as a sepa-rate ,isset on its balance sheet.• An entity should amortize film costs and ac-criK' (expense) participation costs using the in-dividual-film-forecast-computation method,which amortizes or accrues (expenses) suchco.sts in the same ratio that current period actu-al revenue (numerator) bears to estimated re-m.titiing unrecognized ultimate revenue as ofthe beginning of the current fiscal year (de-nominator). An entity should begin amortiza-tion of capitalized film costs and accrual(expensing) of participation costs when a film isreleased and it begins to recognize a'veniie firimthai film.• Ultimate revenue to be included in the de-iKniiinator of the individual-tilm-forecast-coni-putation niethoci fraction is suhject to thelimiLitions sec forth in this SOI'.• It AW event or change in circumstance indi-cates that an entity should assess whether thefair value of a film is iess thar) its unaniortizedfilm costs, the entity should determine the fairvaJue of the film (the determination of whichis afTected hy estimated future exploitationcosts still to be incurred) and write ofTto theincome statement the aiiu)unt by which theunaniortized capitalized costs exceeds thefilm's fair value. An entity should not subse-quently resrore any amounts written off inprevious fiscal years.• An enfit>' should account for advertising costsin accordance with the provisions of SOP W-7,

n Adrerti^infi Costs. All other cx-

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ploitation costs, including marketing costs,should be expensed as incurred.• An entity should charge manufacturingand/or duplication costs of products for sale,such as videocasscttes and dijiitnl video discs, toexpense on a unit-specific basis wiien tlic relat-ed product reveniiL" is recognized,• This SOP is effective for financiiil statementsfor fiscal yejrs beginning after llecemher 15,2000. Earlier application is encouraged. Thecumulative effect of changes in accountingprinciples caused by adopting the provisions ofthis SOP should he included in the determiiu-tion of not income in conformity with para-graph 20 of Accounting Principles Board(APB) Opinion No. 20, Aixouriniif; Cluui^^cs.Disclosure of pro forma effects of retroactiveapplication (Al'B Opinion 20. paragraph 21) isnot required. An entity should not restate pre-viously isMied annual financial statements.

FOREWORDThe .iccounting guidance contained in thisdocument lias been cleared hy the FinancialAccounting Standards Board (FASB). The pro-cedure for clearing accounting guidance indocuments issued hy the Accounting StandardsE.xccutive Committee {AcSEC") involves tlieFASB a'viewing and discussing in public hoardmeetings (1) a prospectu.s for a project to devel-op a document, (2} a proposed exposure draftthat has been approved by at least ten of Ac-SEC s fifteen members, and (3) a proposed finaldocument that has been approved by at least tenof AcSEC! s fifteen members. The document iscleared if at least five of the seven FASB mem-bers do not object to AcSEC undertaking theproject, issuing the proposed e.xposure draft or,after considering the input received by AcSECas A result of the issuance of the exposure draft,issuing the final document.

The criteria applied by the FASU in its re-view of pmposed projects and proposed docu-ments include the following,1. The proposal does not coiitlict with currentor proposed accounting ret^uirements, unless itis a limited circumstance, usually in specializedindustry accounting, and the proposal ade-quately justifies the departure.2. l"he proposal will result in an improvementill practice.3 . rhe AICPA demonstrates the need for the

4. The henefits of the proposal are expected toexceed the costs of applying it.

In many situations, prior to clearance, theFASB will propose sui^estion.s, many of whichare included in the documents,

INTRODUCTION AND BACKGROUND1. Ill l''81, the FiiMiicial Accounting StandardsBoard (FASB) issued Statement of Financial Ac-counting Standards No. 53, iwMcidI RejMniui:<hyI'roiiita-rs and Distriivitim ofMoihti t'icinrv t'ilms.FASB Statement No. 53 extracted speciaU2edaccounting and reporting principles and prac-tices from the American Institute ot t^TtifiedPublic Accountants (AICPA) Industry Account-ing CJiiide. AiTi>iniiiii^ for \idioii Pkliirc l-ilms.and A K : P A Statement of Position (SOP) 7'J-4,Amviiiliii_^ jor .Moiioii licltirc l-ihm. and establishedfinancial accounting ,iini reporting sMndards forproducers or distributors of films,'

2. Since FASB issued FASB Statement No. 53.extensive changes have occurred in the film in-dustry Through I '^'Sl. the majority of a film srevenue resulted from distribution to movietheaters and free television. Since that time, nu-merous addition;i! forms of exploitation (such ashome video, satellite and cible television, andpay-per-view television) have come into exis-tence, and international revenue has increasedin significance. Concurrent with these changes,significant variations in the application of FASBStatement No. 53 have arisen,3 . In 1995, in response to concerns raised byconstituents, the FASB requested that the Ac-SEC of the AICPA develop an SOP providingguidance on the accounting and fmancial re-porting reciuirenients for paiducers or distribu-tors of films. In September IW«, the FASBconcluded that it would rescind FASB State-ment No, 53 when AcSEC completed its pro-ject. An entity that previously was subject tothe requirements of FASB Statement No. 53should follow the guidance in this SOP. ThisSOP and FASB Statement No. 139, Rfsch.w>tt ofI'ASB Stateincnl No. 5.i ami Aiiiffulmciil.-i tor.^SB Srnidiicins No. 6.*, 89. urn/ 121, are si-multaneously effective for fiscal years beginningafter December 15,2000.4 . AcSEC issued an exposure draft of a pro-posed SOP, Acfouriliii^ hy Producers and Distribu-wnof Films, on October Id, 1998, AcSECreceived twenty-eight comment letters in re-sponse to the exposure draft. See the sectionentitled "Basis for Conclusions" for a discus-sion of AcSEC's response to the comment let-ters received.

SCOPE5. The guidance in tlus SOP applies to all kindsof films, except where specifically noted helow,and IS applicable to all pniducers or distributorsthat own or hold rights to distribute or exploitUlnis, For purposes of this SOP, films are de-fined as feature fihns, television specials, televi-sion series, or similar products (includinganimated films and television programming)that are sold, licensed, or exhihited, whetherproduced on film, video tape, digital, or othervideo recording format, 7 his SOP does not ap-ply to the following:a. Activities or transactions within the scope ofFASB Statement No, 50. Fiiiamidl Reporii»<i inlilt: RcamI atui .Music liidii.'^lry (For example, ac-counting for the creation and distrihution ofrecorded music products is within the scope ofFASB Statement No. 50, whereas accountingfor the cost of acquiring music rights for use in.! film LS within the scope of this SOP)b. Activities or transactions within the scope ofFASB Statement No. 51. fifuvidiil Rvportiiij; byCable 'Icki'isioii CoiiiptiiiicfC. Activities or trans.ictions within the scope ofFASB Statement No, f>3, l-'iiuvidal /^I'/'orrnii; by

d. Activities or transactions within the scope ofFASB Starement No. Sfi, .-{fioiititUigfor the CostsofCompiiicr Soflinm- to Be Solil, Lcafrd. or Other-wise A'ltirkctrile. Activities or transactions within the scope ofSOP 97-2, Software Reiviiiic RciO};nitioti

' Tfnns Jeflneci in tho (glossary an- «'t in holdfjfi.- cypctill- firit [imt [hty appear in this SOI',

f. Products witliin the scope of Emerging IssuesTask Force (EITF) Issue No. %-6 , "Account-ing for the Film and Software Cosrs Associatedwith Developing Entertainment and Educa-tional Software Products"

CONCLUSIONS

Revenue Recognition—Basic Principles6. A liLeiisiiii:; .iMMiigciiicin lor a single lilm ormultiple f'lhns involves the transfer of a singleright or a group of rights. An entity may li-cense films to customers such as distributors,theaters, exhibitors, or other licensees on eitheran exclusive or nonexclusive basis in a particu-lar market and territory. The terms of licens-ing arrangements may vary significantly fromcontract to contract. In common licensingarrangements, the license fee may be fixed inamount (flat fee) or may be based on a per-centage of the customer's revenue (variablefee). When based on a percentage of a cus-tomers revenue, an arrangement may include anonrefundable minimum guarantee.which may be paid in advance or over a licenseperiod. The terms of a licensing arrangementmay allow a producer to exercise direct controlover the distribution of a film, or may transferthat control to a distrihutor, exhibitor, or otherlicensee.7. An entity should recognize revenue from asale or licensing arrangement of a film when allof the following conditions are met,a. Persuasive evidence of a sale or licensingarrangement with a customer exists.b. The film is compiete and, in accordancewith the terms of the arrangement, has beendelivered or is availahle for immediate and un-conditional dehvery.C. The license period of the arrangement hashegun and the customer can begin its exploita-tion, exhibition, or sale.d. "T"he arrangement fee is fixed or deter-minahle,e. ("ollection of the arrangeiiieiit fee is reason-ably assured.

If an entity does not meet any one of thepreceding conditions, the entity should deferrecognizing revenue until ai! of the conditionsare met.8. If an entity recognizes a receivable in it.s bal-ance sheet for advances presently due pursuantto an arrangement fbr any form of distribu-tion, exhibition, or exploitation prior to thedate of revenue recognition, or an entity re-ceives cash payments under such an arrange-ment prior to revenue recognition, it shouldalso recognize an equivalent liability for de-ferred revenue until the entity meets all of theconditions of paragraph 7. If an entity sells orotherwise transfers to a third part\- that receiv-able, the liability for deferred revenue estab-lished pursuant to the preceding sentenceshould not be reduced, and revenue for thefilm should not be recognized, until the con-ditions of paragraph 7 are met. Amountsscheduled to he received in the future pursuapitto an arrangement for any form of distribu-tion, exploitation, or exhibition should not berecognized as a receivable prior to the timethose atiiounts are presently due or have beenrecognized as revenue pursuant to paragraph 7,ife,irher.

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Revenue Recc^ition—Details

Persuasive Evidence of an Arrangement9. IVrstijdw evidi'iKc of a lifcnsiiig jrryiige-nient is provided solely hy a tontmcr or otherlegally enforceable documentation that setsforth, ac J niininiUTii, the ht^eiise period, thefilm or tiliivs affected, the rights transferred, andthe consideration to be exchanged. An entityshould not rcfognize revenue if factors raise sig-nificAin doLiht as to die ohligatioti or ability offither party to perfomi under the terms of anarrangement,10. All entity slunild have tbrms nf verifiableevidence, such as a contract, a purchase order,or an online ,nithori2a(ion, to document chemutual understanding of an arraiif^einent. Thatevidence should include correspondence re-ceived troni the customer that details the mutu-al understanding of the arniTigcment betweenthe customer and the entity, or evidence thatthe customer has acted in accordance with sucharrangement.

Delivery11. hi J licensing arrangement that retjuires thephysical delivery ofa product to a customer, aneiitit)' should not recognize roveiuie until suchdelivery is complete. It a licensing arrangementis silent ,ibout delivery, physical delivery is re-quired in onler to recognize re\'enue.12. C'ertain licensing arrangements may not re-quire iiiinieiiiate or direct physical delivery oi'ifilm to a cusionier. In lieu ot'inunediate deliv-ery, an arrangement may jirovide the customerwith iriiiiiediate and unconditional access to aCilni print held hy the entity or authorizationtor the customer to order a film laboratory tomake the film immediately atid iincotiditionallyavailable for the customer's use (a bb access let-ter). Ill Mich cases, if the film is complete andavailable for immediate delivery, the entity liasmet the conditions of panigraph V(b).13. It a licensing arrangement requires an enti-ty to make significant changes to a film after itsinitial availability to a customer, the arrange-ment does noi meet the delivery condition inparagraph 7(b). In such instances, the entitysliiiuld not recognize revenue until it makesthose significant changes and meets all of theconditions ot paragraph 7. Significant changesarc defined as diose changes that are additive toa film; that is, an arrangement requires an enti-ty' to create new or additional concent after thetilni is initially available to the customer. Forexample, reshootitig a scene or creating addi-tional special etTects are significant changes.Mere insertion or addition of preexisting filmfootage, addition of duhbing or subtitles(which by definition is done to existingfootage), removal of offensive language, refor-matting a film to fit a broadcaster's screen di-mensions, and adjustments to allow for theinsertion of coniniercials are all examples ofchanges to a film that are not signiticant anddo not preclude revenue recognition prior totheir coinpletioii. The costs incurred for sig-niticant changes should be added to filmcosts and subsequently charged to exjiensewhen an entity recognizes the related revenue:the costs expected to be incurred for insignifi-cant changes should be accrued and charged toexpense if an entity begins to recognize rev-

enue from the arrangement before incurringfhose costs.

Availability14. (."ertaiii arrangements restrict a customerfrom beginning its initial exploitation, exhibi-tion, or sale ofa film. For example, the imposi-tion ofa street date (the initial dite when homevideo products may be sold or displayed forrental) defines the period in time when a cus-tomer's exploitation rights begin. In such in-st;inces, an entity should not recognize relatedrevenue until the restriction has expired. Addi-tionally, If conflicting agreements impose re-strictions on the initial exploitation, exhibition,or sale ofa filnt by a customer in a particularterritory or market, an entity should not recog-nize revenue until the restrictions lapse and itmeets all of the other conditions of paragraph 7.

Fixed or Detertninable Fee15. Fiat Fees, If a licensing arrangement cover-ing a single film provides tbat an entirv* will re-ceive a flat fee. then the amount of that fee isconsidered fixed and determiiiable. In such in-stances, the entity should recognize the entireamount of the license fee as revenue when it hasmet all of the other conditions of p.ir.i graph 7.16. If a licensing arrangemenc provides fbr a flatfee payable with respect to multiple films (in-cluding films not yet produced or completed),an entity sliould allocate the amount ofthe feeCO each iiuiiviiUial film, by market and territorybased on relative fair values of tbe rights to ex-ploit each film under the licensing arrange-ment. An entit)' should base the allocations to afilm or films not yet pnidiiced or completed onthe amounts reflmdable if tbe entity docs notultimately complete and deliver die films to thecustomer. The entity should allocate the re-maining flat fee to completed films based on therelative fair values of the rights to exploit thosefilms pursuant to the licensing arrangement.Once made, those allocations should not besubject to later adjustment. An entity shouldrecognize amounts allocated to imlividiial filmsas revenue when it meets all of the conditionsof paragraph 7 with respect to each individualfilm by market .iiid territory. If an entit>- cannotdetermine relative fair values ofthe rights toexploit those films, then tbe fee is not fixed ordeterminable and the entity should not recog-nize revenue until it can make such a determi-nation and it meets all of the conditions ofparagraph 7.17. Paragraph 7 of FASB Statement No, 121,.^ccoiiuliiijn for ilii- Iinpiiirinnii of luuiti-Lived Afscisdihipr LiVij^-Livcd ASH'IS to Be Disposed Of, pro-vides a hierarchy of methods for determiningfair value. Because quoted market prices (themost preferred method) are usually not avail-able, an entity sbmitd estimate the f*air value oftbe rights to exploit an individual film tbat ispart ofa multiple film arrangement (as discussedin paragr.ipb ICi) by using the best informationavailable in tbe circumstances with riie objectiveof measuring tbe amount the entity believes itwould have received bad it entered into a li-cense arrangement that grants the same rightsto the film separately rather than as part ofthemultiple film arrangement. A discounted cashflows model is often used to estimate fair vakie.Paragraphs .V) to 71 of FASB Statement of Fi-

nancial Accounting Concepts No. 7,Cash Flow lufoniuilion ami Prrscnt liilue in Ac-couiilin<i Mcasim-nifiiti, pnivide guidance on thetraditional and expected cash flow approachesto present value measuR'nients. An eniitys esti-mates of cash Hows used in determining the fairvalue ofthe rights to exploit an individual filmtbat is part ofa multiple film arrangementshould be consistent with the rights granted fbrtbat film under tbe nuiltiple film arrangement(fbr example, tbe lengtb ofthe license period,and any limitations on tbe metbod. timing, orfrequency of exploitation).18. Variable Fees. An entity s arrangement teemay be ba^ed on a percentage or share ofa cus-comers revenue from the exhibition or otberexploitation ofa film. In such instances, andwhen the entity meets all of the conditions ofparagraph 7, the eiitit>' should nvognize n-veiuieas the aistomer exhibits or exploits tlie film.19. Nonrtrfutidithle Miniitiiitii Guiiraniet's, Incertain licensing arrangements tbat pRivide forvariable fees, a customer guarantees and pays oragrees to pay an entity a nonrefuiulable mini-mum amount that is applied against the variablefees on a tilm or films tbat are not cross-col-lateraltzed. In such arraiigemeiiLs, tbe amountof rbe nonrefiindable minimum guarantee isconsidered fixed and determinable, and tlie en-tity should recognize the mininunn guaranteeas revenue when it lias met all of the other con-ditions of paragraph 7.20. If a licensing arrangement provides tor anonretiindable minimum guarantee that is ap-plied against variable fees from a group of filmson a cross-collateralized basis, tbe amount of tbeminimum guarantee applicable to each film can-not be objectively determined, Ctonsequently,tbe entity should recognize revenue in sucharrangements in acconiance with die pmvisionsol paragniph IH. If, at the end of t!ie license pe-riod, a portion of tbe nonrefundable mininunnguarantee remains unearned, an entity shouldR'cognize the remaining guarantee ,is revenue byallocating it to tbe individual t'llnis based on theirrelative performance under the arrangement.

Barter Revenue21. An entity sometimes licenses programmingto television stations in exchange for a specifiedamount of advertising time on those stations.These exchanges qualify as nonmonetary ex-changes and an entity should ,uT()unt for thesekinds of exchanges in accordance with Ac-counting Principles Board Opinion (AI'U) No,29, Afcouiiliiiiifor SoiinioiicUiry ti.wluin^rs. as in-terpreted by EITF Issue No. *J3-11. "Accotmr-ing fbr Baiter Transactions Involving Bartert'redits."

Modifications of Arrangements22. it at any time during a licensing arrange-ment, an entity and its customer agree to ex-tend an existing arrangement (and all oftheprovisions in paragraph 7 are met), the account-ing fbr the consideration received fbr tbe exten-sion depends on whether tbe consideration is atlat fee or a variable fee. If the consideration is atlat tee, the entity should account tbr the con-sideration upon the execution ofthe extensionin accordance with the pnwisions of paragraphs15 and 16 of this SOP. if the consideration is avariable fee, the entity should follow the guid-

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OFFICIAL RELEASES

ance set forth in paragraph 18. If the comidera-tinn is a minimum guarantee, the entity shouldfollow thf guidancf set forth in paragraphs 19,UR1 2(t,23. If, at any time during a licensing arrange-ment, the parties agree to change the provisionsof the licensiiii; ;irraiigtrnicrit. otluT than by ex-tending the license period {as discussed in para-graph 22). the entity should consider therevi)-ed arrangement as a new arrangement andaccount for it in accordance with tlie provisionsof this SOl^ At the time the old <irraiigt'nient istermiTuted, the entity should accrue .md ex-pense associated costs or reverse previously re-ported revenue for refunds and concessions (anex.implc of which is agreeing to a bdow marketrate license fee), to terminate the old arrange-Tneiit, For cxainplf, if an original arrangementwas a fixed fee and the new arrangement is asmaller tlxed fee with a variable component,the entity should reduce revenue for the currentperiod for the excess of tbe original fixed feepreviously reported as revenue over the newfixed fee and earned variable component todate. It should also adjust accuinulnted film cost.iinortization and accrued participation costs at-tributable to that excess. In addition, tbe entityshould account for tbe new arrangement fee inaccorcimce witb this SOR

Returns and Price Concessions24. The contract pravisions of an arrangement,tnd an entity s policies and past actions relatedto granting concessions or accepting protluctreturns can determine whether a fee is tlxed ordetiTMiiTjnble. For jn .irrangeinent tbat includesa rigbt-of-return provision or if .ui entity's pastpractices allow for return.^, an entity must meetall of the conditions in FASB Statement No,4K, Rfiieniie Reiogtiilioit H'hi'ti Right of RcltirriBxisif, in order for it to recognize revenue.Tbose conditions include a requirement tbatthe entity can reasonably estimate tlie amountot fiiture R'turns.25. An example of bow contractual provisionsor an entit)'s customary business practices relat-ed to granting price concessions can affect thedetermination of revenue recognition is as fol-lows. In tbe bonie video business, customersmay be granted price concession); on previouslypurchased .ind unsold product if an entity sub-sequently reduces its wbolesale prices {com-monly referred to as price protection). In sucbcases, an entity should provide appropriate al-lowances at the date of revenue recognition, tfan entity is unable to reasonably and reliably es-timate future price concessions, or it signitlcaiituncertainties exist regarding an entit\'S jbihty tomaintain its prices, the corresponding revenueis not fixed or determinaMe. Consequently, tbeentity should not recognize revenue until it canmake reasonable and reliable estimates of tbe ef-fects of fijture price cbanges.

Licensing of Film-Related Products26. An entity should not recognize revenueiVnm licensing arrangements to market film-re-lated products until it reicLises tbe correspondingfilm.

Present Value27. Revenue recognized in connection witb alicensing arrangeinent sbould represent the pre-

sent value of the license fee as of the date thatan entity first recognizes the revenue, computedin accordance with APB Opinion 21. liuerest onRnrii'dhlcs and Ihyahles.

Costs and Expenses28. Tbe costs of producing a film and bringingthat film to market consist of film costs, partic-ipation costs, exploitation costs, and manu-facturing costs.

Film Costs—Capitalization29. An entit\' slioul.l report film costs as a sepa-rate asset on iLs balance sheet. An entity shouldaccount tor interest costs related to the paiduc-tion of a fdin m accordance with tbe provisionsin FASB St:uemcnt No, 34. Ciipitali^atioti of In-terest Cost.30. Production overhead, a component of filmCOSES, includes allocable costs of individuals ordepartments witb exclusive or significant re-sponsibility tor the production of films, Produc-tion overhead sbould not include .idniinistrativeand general expenses, the costs of certain overalldeals, as discussed in paragraph 31, or cbargesfor losses on properties sold or abandoned, asdiscussed in paragraph 32.31 . An entity may enter into an arrangementknown as an overall deal, wbereby it compen-sates a producer or otber creative individualfor the exclusive or preferential use ot thatparty's creative services. An entity shouldcbarge the costs of overall deals that cannot beidentified with specific projects to expense asthey are incurred over tbe related periud oftime. An entity should record a reasonableproportion of costs of overall deals as specificproject tllm costs to tbe extent those costs aredirectiy related to tbe acquisition, adaptation,or development of specific projects. If relatedto properties as discussed iii paragraph 32. anentity sbould include such amounts in tbecost of properties subject to the periodic re-view. An entity sbould not allocate to specificproject film costs amounts that it had previ-ously expensed,32. Film costs ordinarily include expendituresfor properties (such as film rigbts to books orstage plays, or original screenplays) tbat general-ly must be adapted to serve as tbe basis for theproducrion of a particular fihu. An entity willadd the cost of adaptation or development totbe cost of tbe particular property. An entitysbould periodically review properties in devel-opment to determine whether they will idti-mately be used in tbe production of a film.When an entity determines tbat a properc)- willnot be used (disposed of), it should recognizeany loss by a cbarge to tbe inconie statement. Itshould be presumed that an entity will disposeof a property (whetber by sale or abandon-ment) if it lias not been set for productionwithin three years from the time ot tbe t~irstcapitalized transaction. An entity sbould mea-sure the loss as tbe amount by wbicb the carry-iriL; amount of tbe project exceeds its fair value.Amounts written otf sbould not be subsequent-ly reestablished as assets. Unless management,having tbe authority to approve tbe action, hascommitted to a plan to sell sucb property, therebuttable presumption is tbat tbe entity willabandon tbe property and, as sucb, its fair valuesbould be zero.

33. For an episodic television series, the fol-lowing additional guidance for film costs ap-plies. Ultimate revenue for an episodictelevision series can include estimates from theinitial market and secondary markets, as dis-cussed in paragraph 39(b).' Until an entity canestablisb estimates of secondary market rev-enue in accordance witb paragraph 39(b),capitalized costs for eacb episode producedshould not exceed an amount equal to tbcamount of revenue contracted for tbatepisode. An entity sbould expense as incurredfilm costs in excess of this limitation on anepisode-by-episode basis, and an entity shouldnot restore such amounts as film cost .issets insubsequent periods. An entity sbould e."4penseall capitalized costs (including set costs) foreacb episode as it recognizes tbe related rev-enue for eacb episode. Once an entity can es-tablisb estimates of secondary market revenuein accordance witb paragraph 3y(b). the entitysbould capitalize subsetjuent film costs. An en-tity sbould amortize sncb capitalized film costsin accordance with the provisions in para-graphs 34 tbrougb 37. and it sbould evaluatesuch costs for impairment in accordance witbparagraph 44.

Film Costs Amortization; ParticipationCost Accruals34. An entity shouiil amortize tiliii costs anilaccrue (expense) participation costs using theindividual-film-tbrecast-computation method.wbicb amortizes or accrues (expenses) suchcosts in tbe same ratio that current period actu-al revenue (numerator) bears to estimated re-maining unrecognized ultimate revenue as oftbe beginning of the current tiscal year (de-nominator), Tbat is, (rt) unarnortized film costsas of tbe beginning of tbe current fiscal year aremultiplied by the individu;il-tilin-foR,'cast-coni-putation metbod traction and {/)) unaccrued(tbat is. not yet expensed) ultimate participationcosts at tbe beginning of tbe current fiscal yearare multiplied by tbe individual-film-forecast-coniputation method fraction. In tbis way, intbe absence of changes in estimates, film costsare amortized and participation costs are ac-crued (expensed) in a manner that yields a con-stant rate of profit over tbe ultimate period, asdescribed in paragraph 39(a). tor eacb film be-fore exploitation costs, tnanufactiiring costs, andotber period expenses. An entity should accruea liability for participation costs only if it isprobable tbat there will be a sacrifice of assets tosettle its obligation under tbe terms of the par-ticipation agreement. At eacb balance sheetdate, accrued participation costs should not beless tban tbe amounts tbat an entity is obligatedto pay as of tbjt date. An entity should beginamortization of capitalized film costs and accru-al (expensing) of participation costs when a filmis released And it begins to recognize revenuefrom that film,35. In tbe absence of revenue from third par-ties that is directly related to tbe exhibition orexploitation of a film, an entity sboutd make areasonably reliable estimate of the portion of

' In this fotnext, mithl nuirket is the tlr:-i iii.irkfi offx-plmUtiDH iti t:\uh territory, wlu'thcr that market is ibroadcast or table television network, (irst-ruu sj'ndicj-citin. or other. Secondary markeis are any marlceci otherthan tile initial tnaiitet.

JtlURNAL !>/• At.:LX)UNrANCV 107

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unamortized film costs tbat is representative ofthe utilization of the film in that exhibition orexploitation. An entity should expense snchamounts as it exhibits or exploits tbe film.(For example, ii cable entity that does not ac-cept advertising on its cable cbanne! may pro-duce a film and sbow it on that channel. Intbis example, the cable entity receives sub-scription fees from third parties tbat are notdirectly related to a particular film.) Consistentwitb the underlying premise of the individualfilm-forecast-coniputatioii metbod, all rev-enue should bear a representative amount oftbe amortization of film costs during tbe ulti-mates period.36. As a result of uncertainties in the estimating;process, actual results may vary from estimates.All entity should review and revise estimates ofultimate revenue and participation costs as ofeacb reporting date to retlt-ct tbe most current,tv;iilable inttirmation. If estimates are revised, anentity should determine a new denominatorthat includes only the ultimate revenue fromtbe beginniii}; of tbe fiscal year ofchaiif^e (thatIS. ultimate revenue cbanges are treatedprospectively as of the beginning of the fiscalyear of change). The numerator {revenue forthe current fiscal year) is unaffectod by thechange. An entity sbould apply tbe revised frac-tion to the net carrying amount of"unamortizedfilm costs and to tbe films unaccrued (that is.not yet expensed) ultimate participation costs asof tbe beginning of the final year, and the dif-

ference between expenses determined using thenew estimates and any amounts previously ex-pensed during tbat fistjl year sbould be cliargedor credited to tbe inconie statement in the peri-od (for example, the quarter) during whicli tlu-estimates are revised.37. Multiple seasons of an episodic televisionseries that meets the conditions of paragraphy){b) to include estimated secondary marketrevenue in tiltiniate revenue is considered to bea single product, with multiple seasons of tbeseries combined for purposes of applying tbeindividual film-forecast-computation metbod.

Ultimate Revenue38. Ultimate revenue to be included in tbe de-nominator of the indi\'idual-fihii-forecast-com-putation metbod fraction sbould includeestimates ot revenue that is expected to be rec-ognized by an entity from tbe exploitation, ex-bibition, and sale of a film in all markets andterritories, subject to tbe limitations set fortb inparagraph 39,39. Ultimate revenue should be limited by tbefollowing.a. For films other than episodic television se-ries, ultimate revenue should include estimatesover a period not to exceed ten years follow-ing tbe date of the film's initial release. Forepisodic television series, ultimate revenueshould include estimates of revenue over a pe-riod not to exceed ten years from the date ofdelivery of tbc first episode or. if still in pro-

duction, five years from the date of delivery oftbe most recent episode, if later. For previouslyreleased films acquired as part of a film library,ultimate revenue should include estimates overa period not to exceed twenty years from tbedate ot acquisition. For purposes of tbis SOH,an entity should categorize as part of a film li-brary only those individual films whose initialrelease dates were at least three years prior tothe acquisition date.b. For episodic television series, ultimate rev-enue should include estimates of secondarymarket revenue (tbat is, revenue from marketsotber tban the initial market) for producedepisodes only if an entity can demonstratethrougb Its experience or industry norms thatthe number of episodes already produced, plusthose for whicb a firm commitment e.xistsand tbe entity expects to deliver, can be li-censed successfully in the secondary market.C. Ultimate revenue should include estimates otrevenue trom a market or territory only if per-suasive evidence exists that such revenue willoccur, or if an entity can demonstrate a historyof earning sucb revt-ime in that market or terri-tory. Ultimate revenue should include esfimatesofrevenui' troin newly developnig territoriesonly if an existing arrangement pnn'ides persua-sive evidence that an entity will rcalii^e such.tmounts,

d. Ultimate revenue should include estimates ofrevenue fmm licensing arrangements with thirdparties to market film-related products only if

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persuasive evidence exists that such revenuefrom that arrangement will occur for that par-ticular filin (such as a signed contnict to receivea iionrctuudiiblc inininiiim guarantee or a non-reHinilable advance) or if an encity can demon-strate il history of earning such revenue fromthat form of arrangement.e. Ultimate revenue should mcludc estimates ofthe portion of the wholesale or retail revenuefrom an entity's sale of peripheral items (such astoys and apparel) that is attributahle to the ex-ploitation of themes, characters, or other con-tents related to a particular fihn oniy if theentity can deitionstrate a history of earningsuch revenue tHirn that form of exploitation insimitar kinds of films. For example, an entit\'may conclude that the portion of revenue fromthe sale of peripheral items that it should in-clude in ultimate revenue is an estimate ofwhat would he earned hy the entity if rightsfor such form of exploitation had heen grantedunder licensing arrangements with third par-ties. Ultimate revenue should not, however, in-clude estimates of the entire amount ofwholesale or retail revenue from an entity's saleof peripheral items.f. Ultimate revenue should not include esti-mates of revenue from iinproven or undevel-oped technologies.g. Ultimate revenue should not include esti-mates of wholesale promotion or advertisii^ re-imbursements to be received from third parties;an entity should offset such amounts against ex-ploitation costs.h. Ultimate revenue should not include esti-mates of amounts related to the sale ot filmrights for periods after those identified in para-t^raph39(a).40. An entity should not discount ultimate rev-enue to its present value except as required by[he provisions in paragraph 27. All foreign cur-rency estimates of future revenues should bebased on current spot rates. Ultimate revenueshould not include amounts representing pro-jections for future inflation.

Ultimate Participation Costs41 . Estimates of unaccnied {that is, not yet ex-pensed) ultimate participation costs are used inthe individual-fihn-forecast-computationmethod to arrive at current period participationcost expense. Such costs should be determinedusing assumptions that are consistent with anentity's estitnates of film costs, exploitationcosts, and ultimate revenue, as limited by tbeprovisions in paragraph 39. If. at any balancesheet date, the recognized participation costs li-ability exceeds the estimated unpaid ultimateparticipation costs for an individual fihn. theexcess liability should be reduced with an off-setting credit to unamortized film eosts. To tlieextent that an excess liability exceeds unamor-tized film costs for that film, it should be credit-ed to income.42. A film may continue to generate revenueafter its film costs are fully amortized. Whenrevenue is recorded on fully amortized films, anentity should accrue associated participationcosts as that revenue is recognized.

Film Costs Valuation43. The following are examples of events orchanges in circumstances that indicate that an

entity should assess whether the fair value ofafilm {whether completed or not) is less than itsunamortized tilm costs.a. An adverse change in the expected perfor-mance ofa film prior to releaseb. Acnial costs suhstantially in excess of budget-ed costsC. Substantial delays in completion or releaseschedulesd. Changes in release plans, such as a reductionin the initial release patteme. Insufficient funding or resources to completethe film and to market it etfectivelyf. Actual pertbrmance subsequent to release failsto meet tbat which had heen expected prior torelease44. It an event or change in circumstance indi-cates that an entity should assess whether thefair value ofa film is less than its unamortizedfilm costs, the entity should determine the f"airvalue ofthe film (the deter[nin.ition of which isaffected by estimated future exploitation costssoil to be incurred) and write off to the incomestatement the amount by whicli the unamor-tized capitalized costs exceeds the fihii's fair val-ue. Exploitation eosts incurred atter such awrite-off should be accounted tbr in accor-dance with the provisions of paragraph 49. Anentity should treat the reduced iimoiint of capi-talized film costs that have been written downto fair value at the close of an annual fiscal peri-od as the cost for suhseqiient accounting pur-poses, and an entity should not subsequentlyrestore any amounts previously written otT.45. As discussed in paragraph 17. a discountedcash tlows model is often used to estimate fairvalue. If applicable, future easb tlows based onthe terms of any existing contractual arrange-ments, inchiding cash tlows over existing licenseperiods without consideration ofthe linutationsset forth in paragraph ?>9. should be included.An entity should consider the tbilowing tlictors.among others, in estimating tlituro cash intlowsfora film: (a) if previously released, the filmspertbrmance in prior markets, (/') the public sperception ofthe film's story, cast, director, orproducer, (f) historical results of similar films. (</)historical results ofthe cast, director, or produc-er on prior films, and (c) running time ofthefilm. In determining a films fair value, it is alsonecessary to consider those cash outflows nec-essary to generate the film's cash intlows.Therefore, an entity- should incorporate, if ap-plicahle, its estimates of future costs to completea film, future exploitation and participationcosts, or other necessary cash outflows in its ile-termination of fair value when using a dis-counted ca.sh flows model.46. When using the traditional discounted cashtlow approach to estimate the fair value ofafilm, the relevant future cash inflows and out-tlows should represent the entit>''s estimate otthe most likely cash tlows. When determiningthe fair value ofa film using the expected c.ishflows approach, all possible relevant future cashinflows and outflows should be prohahilityweighted by period and the estimated mean oraverage by period should be used.47. When determining the fair value ofa filmusing a traditional discounted cash tlow ap-proach, the discount rate{s) should not be anentity's incremental borrowing rate{s), liabilitysettlement rate{s), or weighted average cost of

capital as those rates typically do not reflect therisks associated with a particular film. The dis-count rate(s) should consider the time value ofmoney and the expectations about possiblev.iriations in the amount or timing ofthe mostlikely cash flows and an element to reflect theprice market participants would seek for bear-ing the uncertainty inherent in such an asset aswell as other t'actors, wmetimes unidentifiable,including illiquidity and market imperfections.When determining the fair value ofa film usingthe expected cash flow approach, the discountrate(s) also would consider the time value ofmoney. Because they are reflected in the ex-pected cash tlows, there would be no adjust-ment for possible vari.itions in the amounts ortiming of those cash tlows. If not retlected inrisk-adjusted expected cash flows, an additionalelement to reflect the price tnarket participantswould seek fbr hearing the uncertainty inherentin such an asset as well as other factors, some-times unidentifiable, including illiquidity andmarket imperfections, should be added to thediscount rate(s).

Subsequent Events48. For films released before or after the date ofthe balance sheet fbr which evidence ofthepossible need fbr a write-down of uiiamortizedfilm costs occurs after the date ofthe balancesheet but before an entity issues its financialstatements, a rebunable presumption exists thatthe conditions leading to the write-off existedat the date ofthe balance sheet, in such situa-tions, an entit)' should adjust its financial state-ments tbr the efFect of any changes in estimatesresulting from the use ofthe subsequent evi-dence. An entity can overcome the rebuttablepresumption if it can demonstrate that the con-ditions leading to the write-down did not existat the date of ttie balance sheet.

Exploitation Costs49. An entity should account for advertisingcosts in accordance with the provisions ot SC I'93-7, Reiyorliiiji on Adt'ertisiiig Costs. All otherexploitation costs, including marketing costs,should he expensed as incurred.

Manufacturing Costs50. An entity should charge manufacturingjnd/or dupiication costs of products tbr sale,such as videocas.settes and digital video discs, toexpense on a unit-specific basis when tlie relatedproduct revenue is recognized. An entity should.at each balance sheet date, evaluate inventoriesof such products for net realizable value and olvsolescence exposures, with appropriate adjust-ments recorded as necessary. An enrity shouldcharge the cost of theatrical film prints to ex-pense over the peritid benefited.

Presentation and Disclosure5 1 . If an entity presents a classified balancesheet, it should classify fihn costs as noncurrenton the face ofthe balance sheet. Regardless ofwhether an entity presents a classified or un-classified balance sheet, it should disclose inthe notes to the financial statements the por-tion of the costs of its completed films that .ireexpected to be amortized during the upcom-ing operating cycle, which is presumed to hetwelve months. An entity should disclose its op-

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crating cycle if'it is other than twelve nionths.52. All entity should disclose the coiiiporu-ntsof tiirii ctists (iiuludnij; released, complett-d ;indnot released, in producrion, or in developmentor prcproductiou) separately tor theatrical filmsand direct-to-television product.53. An cdtity slmuld disclose the percentage ofimainurtized tilni costs tor released films, ex-cluding acquired film libraries, that it ex-pects toamortize within thri-e years fi^m the dite of thebahitice sheet. If that percentage is less than 81)percent, an enrky should provide additional in-lorniation, including tlic period required toreach an amortization level of 80 percent. Foracquired film libraries, an entity should disclosethe amount of remaining unamortized costs,the method ot amortization, and the remainingamortization period.

54. An eiirity should disclose the amount of ac-crued participation liabilities that it expects topay during the upcoming operating cycle.55. An entity should report cash outflows forfilm costs, parricipation costs, exploitarion costs,and inanufaLturing costs as operating activities111 the statement of cash flows, and it should in-clude the amortization of film costs in the rec-onciliation of net income to net cash Howsfrotn operating activities.56. An entity should disclose its methods of ac-counting fbr revenue, film costs, participationcosts, and exploitation costs.57. In accordance with paragraph 33 of AI'Mtipinion 2(1, Aaountiii^ Chan^t's. and paragraph26 of Al'B Opinion 28, Inicrim Fitiarinul Rfpuri-/)i,i;, an entity should disclose the efVect on in-come before extraordinary items, net income,and related per share amounts of the current fis-cal period lor a change in estimate that affectsseveral future perioils.58. An entit\' should disclose eveiiLs occurringsuhsequent to the date of the balance sheet that110 not require an adjustment to the financialstatements but that are of such a nature that dis-dosuR- of them is required to keep the financialstatements titMii being misleading.

Amendment to Other Guidance59. This amends SOl> 9}-7. The followingfootnote is added to "FASB Statement No. 53"111 the Appendix of SOi' 93-7.

In 2ll()(), the FASB rescinded FASB State-ment No. . 3 and AcSEC issued St:iP 00-2,Accounting by Producers or Distributors ofFihns. The provisions of SOI* y3-7 apply toenrities within the scope of St")P 00-2.

EFFECTIVE DATE AND TRANSITION60. Tliis SOP is efVective fbr fniaiicial state-ments for fiscal years beginning after December1. , 2000. Earlier application is encouraged.The cumulative effect of changes in accountingprinciples caused by adopting the provisions ofthis SOP should be included in the determina-tion of net inconie in conformity with para-graph 20 of AIM! Opinion 20. Disclosua- of pniforma eflects of retroactive application {APBOpinion 20, paragraph 21) is not required. Anenrity should not restate previously issued annu-al financial statements.

The provisions of this Statement neednot be applied to ittiinatcrial items.

BASIS FOR CONCLUSIONS

Scope6 1 . This SOP applies to all kinds of films, in-cluding an episodic television series. However,as a result of tlie unique nature ofan episodictelevision series, AcSEC decided to provide ad-ditional guidance in this area. In response tosome respondents to the exposure draft of theSOP, AcSBC: reorganized the SOP to clearlydistinguish between the accounting require-ments for all kinds of films and the additionalguidance fbr an episodic television series. Therequirements of this SOP do not apply to trans-actions or activities within the scope of otherauthoritative literature listed in paragraph 5.The reqniremcnts of this SOP apply to filmsexploited by the entity directiy, or licensed orsold to others. AcSEC observed that eventhough an entity may be considered to be pri-marily a film enterprise, it is still subject to gen-erally accepted accounting principles (GAAP)besides those addressed in this SOP, for exam-ple, when involved with a transaction for thelicensing of record masters, software develop-ment, and so forth.

Revenue Recognrtion

Basic Principles62. The basic standard for revenue recognitionis set forth in paragraph 83 of FASB ConceptsStatement No. 5, Ri'a)}>nitioi> tiiui Meiisiirfmcnl itiIHiMiicitil Suik-mciiis of Ritvims hiiWrpriscs, whichprovides that "|revenue| recognition involvesconsideration of two factors, (u) being realizedor realizable and {/)) being earned, with sonic-times one and sometimes the other being themore important consideration."63. Exclusivily and Suhstatttially Alt. Para-graph 7 of the exposure dratt proposed that, inaddirion to the condirions in paragraph (> of thatexposure draft, a licensing arrangement shouldtransfer suhstantially all of the benefits and risksincident to ownership of a film on an exclusivebasis for an individual market and territory inorder for an entity to account for the transac-tion as a sale, and thus recognize revenue im-mediately. AcSEC based that concept on FASUStatement No . 13, Arcoiniliiifi for Lrnsrs, as it re-lates to the timing ol revenue recognition whendistinguishing between sales-t\'pe leases and op-erating leases. Therefore, under paragrapli 7 ofthe expiwure draft, an entity would have recog-nized revenue fVoni a nonexclusive arrangementin a manner similar to an operating lease.64. Based on the arguments presented in thecomment letters to the exposure draft, AcSECdecided that exclusivity should not be one ofthe conditions fbr revenue recognition in thefilm industry. AcSEC acknowledges tliat, underan exclusivity arrangement, the value of a filmlicense to a customer has two major compo-nents: (ij) the customer s right to use the film(in ,iccordaiice with the license arrangement)and (/)) the customers right to use the film ex-clusively in a particular market and territory(which thereby restricts the entity's right to li-cense the film to other customers). Therefore,for an exclusive license arrangement, AcSECconsider\.'d requiring bifurcation of the total li-cense fee between the two major components.Under that scenario, an entity would recognize

110 JOLlkNAl

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revenue from the fees allocated to the firstcomponent in acfordancc with the conditionsof piiraj»r.iph 6 of the exposure drjtt jnd itwould recognize reveiiut on the lees allocatedto the second component ratahly over the li-cense period.65. AcSEC rejected the bifurcation approachprimarily hecause it believes that the approachis not operational. Also, AcSEC agrees withmany of the respondents to the exposure draftwho noted that the "substantially all'" conditionof paragraph 7 w;is subjective and, if kept as arevenue recognition condition, could lead todiversity in practice. AcSEC concluded tbat tbeapproach proposed in the exposure draft wasnot operational.66. AcSEC also acknowledges the argumentsmade by some respondents to the exposuredraft who noted that exclusivity, even though itmay be part of licensing arrangements, is be-coming less meaningful as entities are exploitingfilms concurrently in the same territoriesthrough various marketing approaches, such asp.iy-per-view and home video.67. A number of respondents to the exposuredraft and AcSEC helicve that if paragraph 7 ofthe exposure draft was maintained, AcSECwould need to mure narrowly define imirkci andterritory to ensure comparability- in financial re-porting. Ultimately, AcSEC needed to choosebetween (j) attempting to provide restrictivedefinitions, which could lead to less desirablerevenue recognition in certain cia-umstajices, or{b) removing the requirements of paragraph 7of the exposure draft, which would result inearlier but more consistent revenue recognitionwithin and between entities. AcSEC believestliat it cannot and should not define tho.se termsnarrowly. AcSEC believes that tbe definitions ofmarket and territory should be sufficiently flex-ible to allow each entity to designate its marketsand territories based on the way it conductsbusiness. Accordingly, AcSEC decided not toinclude the provisions of paragraph 7 of the ex-posure draft in tbis SOP68. Customer Acceptance. Some respondents tothe exposure draft bclii'vc that customer accep-tance of a film should he an explicit conditionof revenue recognition. Those respondents be-lieve that this SOP should be consistent witbparagraph 20 of SOP 47-2. AcSEC appreciatesthe arguments of those who desire completeconsistency witb the revenue recognition crite-ria of SOP 97-2. However, because of the rapidtechnological changes of software, and for otherreasons, AcSEC believes that the difFcrcnces be-tween hcensing arrangements of software andfilms may be significant and could result in dif-ferent conclusions on revenue recognition.SOP 97-2 addresses software arrangements un-der which customer acceptance is most ottenevidenced by pbysical delivery. In the film in-dustry, physical delivery may often not occuruntil well after the point at which the cus-tomer's license period hcgins and the film iscomplete and available for immediate and un-conditional delivery at tbe customer's request.Thcrfforc, AcSEC concluded that the customeracceptance condition of this SOI' should not beidentical to tbat of SOP 97-2. AcSEC believesthat the delivery conditions set out in para-graphs 1 I through 14 of this SOP adequatelyaddress the issue of customer acceptance.

69 . Saies and Licensing. Paragraph 7 of theSOI' provides the revenue recognition condi-tions for a sale or licensing arrangement.Though most of the SOP provides guidance onwhat is commonly understood in the film in-dustry as licensing arrangements, the conditionsof paragraph 7 also apply to an entity s outrightsale of its rights to a film. If the price from thesale of a film includes a variahie element [as op-posed to a fixed fee sale), AcSEC^ acknowledgesthat the apphcation of the individuai-tilm-fore-cast-computation method results in recognizinga gain/loss that is different than that calculatedusing a traditional sales model. However. Ac-SEC believes that hy treating the accounting foran outright sale with a variable element similarto that of a license arrangement with a variahieelement, the SOP will help pa-vent diversity inpractice because entities {a) will have no ac-counting reason to structure transactions as salesversus licenses and {b) will not have to deter-mine which license arrangements are in-sub-stance sales.

Persuasive Evidence of an Arrangement70. AcSEC understands that practice ui the filmindustry varies regarding the use of contracts forthe purpose of documenting license arrange-ments. Though hceiisinj; arrangements are nor-mally documented by contracts, AcSECunderstands that sales or exploitation arrange-ments in certain sectors of the industry an." evi-denced by documentation other than acontract. For example, customer orders in di-rect home video distribution are normally evi-denced by written or on-line purchase orders.AcSEC believes that such documentation is suf-ficient to provide persuasive evidence of anarrangement. Accordingly, AcSEC concludedthat documentation other than a contract canhe sufficient evidence of an arrangement.

Delivery71. AcSEC beheves that, for most product salesand licenses, an entity sbould not recognize a-v-enue until it delivers the product to the cus-tomer. Recognition of revenue on delivery isconsistent with paragraphs 83(b) and 84 ofFASB Concepts Statement No. 5. Paragrapb83(b) provides the following guidance forrecognition of revenue.

Revenues are not recognized until earned.An entity's revenue-earning activities involvedeliivrinj^ or producing goods, rendering ser-vices, or other activities that constitute itsongoing major or central operations, andrevenues are considered to have been earnedwhen the entity has substantially accom-phshed what it must do to be entitled to thebenefits represented by the revenues. |Foot-notc omitted] [Emphasis added|

Paragraph 84 states that in recognizing revenuesand gains:

The two conditions |for revenue recogni-tion] (being realized or realizable and beingearned) are usually met by the time paiductor merchandise is delivered...to customers,and revenues...are commonly recognized attime of sale (usually meaning iieiii>ery). lEm-phasis added|

72. As discussed in paragraph 12 of this SOP,rather than a-quiring immediate or direct deliv-ery of a film print to a customer, certain licens-

ing arrangements in the film industry requireonly that an entity grant the customer immedi-ate and unconditional access to the film. Oncean entity provides access, the licensing arrange-ment obligates the customer to pay for the filmregardless of whether the customer requests orreceives the film. AcSEC betieves that when anentity makes a completed film available to a cus-tomer, it "has substantially accomplished what itmust do to be entitled to the benefits repa-seiit-ed by the revenues" (as required by paragraphS3(b) of FASU Concepts Statement No. 5). Insuch arrangements, not physically delivering thefilm (often as a result of a customer not a'quest-ing the film even though the license period hasbegun) is not a factor sutrKient to preclude rev-enue recognition. Therefore, AcSE(" believesthat an entity b.is complied with the deliveryrequirements of this SOP when the entitymakes the film available to tbe customer andmeets the other conditions of paragraph 7. Fur-tber, AcSEC believes that if the film is .u a filmlaboratory', providing the customer with uncon-ditional and immediate access to the film is aprerequisite for revenue recognition. If anarrangement is silent as to deliver ', AcSEC con-cluded that physical delivery is an inherent re-quirement of revenue a'cognidon.73. Many licensing arrangements require anentity to make changes to a film after it makesthe film available to a customer. AcSEC consid-ered the question of when changes that are re-quired after a film's initial availability shouldpreclude an entity fmm recognizing a-venue ona film. AcSEC understands that an entity willmake the changes often at a time requested bythe customer, which may or may not be iiiuiie-diately after a film is initially available to thecustomer. Tbe exposure draft stated, and Ac-SEC continues to believe, tbat an obligation tomake significant changes co a film after its initialavailability to a customer precludes tbe entityfrom recognizing revenue on the film until theentity completes those significant cb.uiges (andit meets the other conditions of paragraph 7),74. Based on comment letters received on theexposure draft, AcSEC clarified its definition ofsignificant changes to a film after its initial avail-ability to a customer. AcSEC believes thatchanges to a film aa- significant if they are addi-tive; that is, they require the creation of addi-tional content. C^hanges, such as dubbing andsubtitling, are made to existing content and,therefore, they are not significant.75. AcSEC believes that dn obligation to makeinsignificant changes to a film after its initialavailability to a customer should not precluderevenue recognition ifan entity meets al! otherconditions of paragraph 7 of this SOI*. AcSECbelieves that an obligation to make insignificantchanges does not aftect an entity's having sub-stantially accomplished what it must do to earnrevenue. AcSEC beheves that SOP 81-1, .4f-cotmtirtfi for Pcrformii}iie of Constnirdoii-'lypt' amiCertain Proituaioii'Tyj'e Contracts, supports Ac-SEC's position. Paragraph 30 of SOP 81-1states, "Under the conipleted-coiitract method,inconie is recognized only when a contract iscompleted or substantially completed." Para-graph 52 of SOP 81-1 states, "As a genera! rule,a contract may be regarded as substantiallycompleted if remaining costs and potential risksare insignificant in amount. The overriding ob-

f AfCdUNTANCY 111

jectives arc to maintain consistency in deter-mining when contracts iirc substantially com-pleted and to iivoid arbitrary acceleration ordeferral ot income."

Availability76. As discussed in paragraph 14. in certain sit-uations, Jii entity may prohibit a customer frombej;inning its initial cxpioitiition. exhibition, orsale of .1 film. One ot the more common prohi-bitions is a "street date" restriction used in con-nection with the sales or rentals ofvideocassettes. This occurs when an entity shipsvideocassettes to a customer on a certain date,but restricts sales prior to the "street date." Be-cause the customer does not have the ability toexploit, exhibit, or sell the tilm in %uch situa-tions, the conditions of paragraph 7(c) are notmet. Consequently, an entity- should not recog-nize revenue until the restriction lapses. Thisiniti;i!-use prohibition does not apply to con-tractual R-scrittions after the period of exploita-tion, exhibition, or availability for sale ofa fihnbegins (for example, a licensing arrangementthat allows a customer to air a film only onceper year over the license period).

Fixed or Determinable Fee77. Paragraph M3 ol TASB t Concepts StatementNo. 5 reads, in part, "Further guidance forrecognition of revenues and gains is intended toprovide an acceptable level of assurance oftheexistence and amounts of reveiiue and gains be-

OFFICIAL RELEASES

fore they are recognized." AcSEC believes that"an acceptable level of assurance" of theamount is attained when the amount ofthearrangement fee is fixed or determinable andthe other conditions of paragraph 7 are met. Ifthe arrangement fee is based on a percentage ofa customer's revenue, the fee does not becomefixed or determinable until the customers rev-enue is earned. Because the customer's revenueis not earned until the exhibition or other e\-ploitition ofthe tilm. AcSEC concluded that afee that is based on a percentage ofthe cus-tomer's revenue from a film should not be rec-ognized until the customer's exhibition or otherexploitation ofthe film.78. Flat Fees. In paragraph 16 of this SOV. Ac-SEC concluded th.it. ii a licensing arrangementprovides for a Hat fee with respect to multiplefilms, markets, or territories, an entity shouldallocate the tt-e to the individual films based onthe relative fair va!ue(s) ofthe rights to exploitthe tihii(s) in the respective markets Lind territo-ries. AcSEC believes that hasing the allocationon relative fair value is consistent with the ac-counting for multiple element transactions inother industries. For example, paragraph 12 ofFASB Statement No . 45. .'{irotiiirit{<i for Framhisftrc Ri'i'cmw, stiues the following.

The franchise agreement oniinarily establish-es a single initial franchise fee as considera-tion for the traiichise rights and the initialservices to be performed hy the franchisor.Sometimes, however, the fee also mav cover

tangible property, such as signs, equipment.inventory, and land and building. In thosecircumstances, the portion ofthe fee apphca-ble to the Lingihle assets shall he based on thefair value ofthe assets.

79. The exposure draft stated that an entityshould base the allocation on an i-ulily-spnifiiand protluct-.-<i'ralk estimate of relative fair values.AcSEC decided to drop that language hecau.sethose terms do not provide substantive addi-tional guidance on determining fair value. Ac-SEC' believes that the requirement of allocationsbased t)n relative fair values is adequate.80. yariahle Fees. If a licensing arrangementbases an entity's arrangement tee on a percent-age or share ofa customer's revenue, the entity'stee does not hoconie fixed or deterniinahle un-til the customer exhibits or exploits the lilm.ilecaiise the customer's revenue is not earneduniil the exhibition or other exploitation ofthefilm. AcSEC] concluded an entity should notrecognize R'veiiue that is based on .i percentageor share ot the customer's revenue from a filmuntil the customer's exhibition or other ex-ploitation ofthe film (and the entity meets theother OMiditioiis of paragraph 7 of this SC~H').8 1 . Nonrefutidahle Minimum Guarantees(Nol Cross-CoUaleralized). The exposuredratt proposed that .in entity should accounttor licensing arrangements with guaranteednonretundable minimum amounts payableagainst variable fees covering single tilnis orcovering multiple films in which the films are

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not cmss-coUateralized in a manner siniil:ir tohow it should account for flat fees. Under thatguidance, .m entity would have refognized rev-enue when it met the conditions in both piii'a-graphs 6 and 7 ofthe exposure draft. AcSECwas concerned about allowing .ui entity to rec-ognize revenue immediately if, in f;ict, the enti-ty nKiy have heen doing nothing more thanfinancing against futtire revenue. However, theproposed requirements for revenue recognitioiiin paragraph 7 ofthe expcsure draft alleviatedAcSEC''s concern. Because AcSEC decided todelete paragraph 7 ofthe exposure draft in thisfuial SC R AcSEC believed that it was necessaryto revisit the accounting for nonretundableiiuiiimum guarantees.82. In its deliberarions, AcSEC concluded thatan entity should rt-ct^iize a nonreftjndable min-imum guarantee fee against i variable fee cover-ing a single film or covering multiple films thatare not cross-collateralized as revenue immedi-ately when the entity meets all ofthe condit!on.sof paragraph 7. AcSEC believes that the condi-tions ofpar.igrapli 7 provide an appropriatemodel tor determining whether an entity shouldrecognize revenue for a nonrefundable mini-nnun guarantee fee. AcSEt: believes that suchfees are sunilar to flat fees and flat fees with up-side revenue potential, and that an entity shouldaccount for each kind of fixed fees similarly.83. In its deliberations, AcSEC was concernedabout an entity recognizing revenue for a vari-able fee arrangemenc based on whether it couldor coukt not secure a nonrefundable mnnmuniguarantee fee. Consequently, AcSEC" consid-ered whether the SOP should require that anentity recognize all nonrefundable mlnitnumguarantee fees as revenue ratably over the li-cense period.84. If it iiad required ratable revenue recogni-tion for nonreftindable minimum guarantee teesin arrangements that ,ire not cn>ss-collateralized,AcSEC believes that such a requirement wouldconflict with how AcSEC views flat fees be-cause the economics of tlat or fixed fees andnonretundable minimum guarantee fees (on afilm or films that are not cross-collateralized) aresubstantiatly similar. Theretbre, AcSEC wouldhave had to reconsider the accounting modeltor tlat fees (and thus the revenue recognitionconditions of paragraph 7). AcSEC believes thatthis reconsideration was not necessary.85. AcSEC' understands that entities often can-not, in substance, determine the ditTerencesbetween a licensing arrangement with a flat feeplus a variable element (and thus the variableportion is an equit\' kicker) or a nonretijndableminimum guarantee fee against the variablefee. In tact, there is little, if any, economic dif-ference in those two kinds of arrangements. Ifthe SOP had required an entity to recognizealt nonrefundable minimum guarantee fees rat-ably, AcSEC believes that entities could easilystructure arrangements such that the nonvari-able element would instead be a tlat fee andrecognize the flat tee as revenue immediately(if all of tbe other conditions of paragraph 7were met).86. In reaching its conclusiotis on accountingtor revenue related to fixed tees or nonrefund-able minimum guarantees on a tilm or filmsthat are not cross-collateralized. AcSEC consid-ered various methods, inchiding applying the

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guidance applicable to minimum guarantees inFASD Scatement No. 50.87. In FASU Statement No. 50, a conclusionvvjs reached that licensors should report mini-mum guarantees as liabilities and recognize rev-enue as the license fee is earned. AcSEt^ hasbeen informed that there are differences be-tween mininuim guarantees in die film industryand nnnimuni guarantees in the music industry.Minimum guarantees in the music industrygenerally relate to the rights to distribute themusic product of an artist or artists for a specificperiod of time. Much of this product may notexist at the time the minimum giiaiaiiteearrangement is entered into. Mnnnium guaran-tees in the film industry may actually represent ;isale ol rights to exhibit a film in a particularmarket and territory during the film s useful lifein that market and territory with a potentialshare in the results above some defined amount.These arrangements are used in connectionwith customers in lieu of actual results reportedby the customer, whicli may be untimely, unre-liable, or both. Because ofthe differences be-tween the industries in the nature oftheminimum guarantees and in the circumstancesunder which they are used. AcSEC concludedthat the guidance in FASB Statement No. 50should not be applied to niiniinuni guaranteesill the film industry.

88 . Nonrefundable Minimum Guarantees(Cross'CoUateralized). AcSEC believes that the.iccountirig tor a nonrefundable mininuimguarantee fee on a group of t'llnis that an? cross-collateralued should be different than that forsuch a fee on a gn>up of films that are not cross-collateralized. In a cross-colbteralized .irrange-inent. the fee paid by a customer is dependenton the performance of all ofthe tllins in thearrangement. Therefore, the fees are not fi.vedor determinable uith respect to each film m thearrangement iiutii the customer exhibits or ex-ploits all ot the tilnis. and an entity should notimmediately recognize the entire nonretundableminimum guarantee fee .is revenue because itcantiot determine which film will earn revenueuntil exploitation occurs.89. AcSEC concluded that an excess ot'a non-refundable minimum guarantee fee over thevariable tee recognized in a cross-coUaterali2edarrangement should be recognized as revenue atthe end ofthe license period. AcSEC believesthat such an excess is not earned until the peri-od expires, and therefore, it should not be rec-ognized as revenue until tbe arrangementperiod ends.

Collectibility90. .^cSEC concluded that collectibility mustbe reasonably assured before an entity may rec-ognize revenue. This conclusion is based onparagraph 1 of Chapter 1 A of ARB No. 43,Rviliilfnn-itt and Revision ofAai'iiiiliii}> Rf.icurcliliullfiiiL!, vi'hich states the following.

F'rofit is deemed to be realized when a sale inthe ordinary course of business is effected,unless the circumstances are such that thecollection ofthe sale price is not reasonablyassured.

Licensing of Film-Related Products91. AcSEC understands that in many arrange-ments, the release ofa film is a requirement in

order for the entity to be entitled to fees fromits licensing of film-related products. Even if therelease ofa film is not a legal requirement in or-der for the entity to be entitled to such fees,AcSEC believes that, because of customer ex-pectations, the entity has an implicit obligationto release the film in order to be entitled to thefees. Therefore. AcSEC concluded that in enti-ty should not recognize revenue on such licens-ing arrangements until it releases the film.Because tees from licensing of film-reiatedproducts usually varies directly with the successot a film, the film industry' includes such fees inultimate revenue.

Distribution Arrangements92. Some respondents to the exposure draft re-quested that the SOI* addtess an entity's ac-counting for co-production and co-financingarrangements with other entities that are be-yond "standard" distribution arrangements.Such arrangements are becoming prevalent inthe film industry as entities look to share therisks (and thus the rewards) of producing anddistributing films. AcSEC believes that sucharrangements are not unique to the film indus-try (for example, real estate, construction, andpharmaceutical industries use co-productionand co-fin.incing arrangemetits), and. therefore,they are beyond the scope of this !iOI' AcSECalso beliews that the accounting for co-produc-tion and co-fitiancing arrangements is based onfacts, circumstances, and contractual agree-ments. Eor example, a shared arrangementcould be any ofthe following:a. A joint venture subject to joint venture ac-countingb. An arrangement that requires one entity toconsolidate another entity' in its financial state-mentsC. A financing arrangementd. An arrangement that is not a sale ofa copy-right but rather a sale of fiiture revenue subjectto the accounting requirements of E!TE issueNo. S8-18. "Sale of Future Il^'venues"

This is not to say that an entity' has a choiceot these methods. The determination ofthe ap-propriate method is based on the specific factsand cirefulnstances involved.

Costs atid Expenses

Film Costs—Capitalization93. In paragraph 32 of this SOI'. AcSF.C con-cluded that, if a property under developmenthas not been set for production within threeyears from the first capitalized transaction re-lated to that propert>'. it is presumed that theproperty will be disposed of. AcSEC ac-knowledges that {a) three years is arbitrary butdecided to retain that aspect of current prac-tice and {Ii) set for production is an intention-ally chosen high hurdle to evidence use ofaproperty, AcSEC also concluded that when .uientity determines that such property will bedisposed of at a loss, that loss shoiiki be recog-nized by a charge to the income statement.AcSEC considered retaining the provision ofparagraph 17 of FASB Statement No. 53,wherein the cost ofa property not used inproduction ot a film, after being held for threeyears, be charged to production overhead. Ae-SEC concluded that this would re';ult in

amortizing overhead costs that were iieitlierdirectly nor indirectly related to a film, andtheretbre. AcSEC rejected that approach. Ad-ditionally, AcSEC decided that in measuritigimpairment for capitalized costs of propertynot set tor production within three years ofthe first capitalized transaction, the rebuttablepresumption should be that the property willbe disposed ot by .ibandonment (not used) .mdas such has a fair value of zero. AcSEC' con-cluded that an entity could overcome this pre-sumption onty if management, having theauthority to approve the action, had commit-ted to a plan to sell such property. AcSEC be-lieves this provision will minimize the risk ofreporting, for long periods, capitalized coststhat do not have discernihle future- benefits andenhance comparability within the industry,

Film Costs—Capitalization (EpisodicTelevision Series)94. AcSEC concluded that, for an episodictelevision series that has not yet met the condi-tions for including secondary market revenue inultimate revenue, film costs for each episode inexcess ot contracted for revenue should be ex-pensed immediately. AcSEC understands thatentities produce a series knowing that the serii-swill lose money in the early years. Although thesuccess rate of producing a successful series isrelatively low, entities are willing to incur suchlosses because some pereentage of episodic tele-vision series will become successful and gener-.ite sigjiificant profits.95 . What an entity is trying to develop is .mepisodic television series that will generate rev-enue from secondary markets. In order tor it tobecome feasible to obtain secondary marketrevenue tWim a television series, an entity mustproduce a minimum number of episodes. Be-cause many contracts between an entity and theiiiifial exhibitor (for example, a network) a'sultill the entity receiving less in fees than the costsnecessary to develop the series, AcSEC viewsthe arrangement as a partially funded researehand development effort to "create" a series thatwill gaui public acceptance.96. However, given the uncertainty ofthe po-tential tor secondary markets in the early yearsofa series, AcSEC^ beheves that it is uiappmpri-ate for an enfity to report, as an asset, film costsfor each episode in excess of revenue contractedfor that episode. AcSEC believes that this un-certainty exists until an entity meets the condi-tions of paragraph 3'>(b).97. AcSEC considered .ind rejected requiringentities to recogTn?e the total loss expected forthe number of episodes that the entity expectsto deliver under a contract. AcSEC consideredparagraph K of FASB Statement No. 5. whichrequires accrual ofa loss contingency if (<i) in-formation available prior to issuance ofthe fi-nancial statements indicates that it is probablethat an asset has been impaired or a liability hasbeen incurred at the date of the financial state-ments, and (/)) the ainoutit ofthe loss can bereasonably estimated. AcSEC~ understands that,although the terms ofcontractu.il arrangementsbetween a television network and an entity inthe tilm industry for delivery of an episodictelevision series may be binding and noncan-cellable in form, in practice these contracts of-ten are amended or canceled in the initial years

114 ACCOUNTANCY 21MKI

of the series. If a series docs not achievesucces.s quickly, the network may wish to cancelthe series notwichstaiidiiig previously estah-tished contractuiil arrangements. Also, bccausi,'producers normally incur losses while produc-ing episodes in the early years, it is often intheir hest interests to cancel a series if secondary'market exhihicion or exploitation is unlikely. Asa result of the discussion in this and precedingparagraphs, AcSEC bebeves that for a new se-ries in development, notwithstanding a con-tract, the probability criterion of FASBStatement No. 5 has not heen met. More im-portant, given its views in paragraph 95 that thedevelopment of a series is akin co a partiallyfunded research and development effort, Ac-SEC conciudc-d that FASB SLitement No. 5 ac-crual criteria and disclosures are not applicable.98 . Once the criteria for considering sec-ondary market revenue are met and the sec-ondary market revenue is included in ultimaterevenue. AcSEC believes that an entity shouldcapitalize all film costs for an episodic product(without regard to initial market revenue limi-tations on each episode). AcSEC believes thatwhen an entity is in this situation, che uncer-tainties surrounding whether a series will besuccessful are sufficiently minimized and.therefore, the probability of the recoverabilityof any additional film costs above contracced-for-reveniic is high enough such that an entity'should not immediately expense costs in excesso t c o n tra c ted -for-reven u e.

OFFICIAL RELEASES

Film Costs Amortization99. AcSEC continues co believe that the indi-vidual-film-forecast-computa tion method is themost appropriate method for expensing filmcosts in the film industry. AcSEC believes thatthis method best associates the costs of film pro-duction with the related revenue earned.

Participation Cost Accruals100. The accounting for participation andresidual costs (referred to collectively as partici-pation costs) was a complex issue for AcSEC.AcSEC considered various approaches to ac-counting for these costs.101. One Event Creates Obligation. The expo-sure draft proposed that an entity accrue totalexpected participation costs and report thoseamounts as film costs and related participationhabilities. That approach was based on AcSEC'shelief that participation costs are a form of de-ferred compensation for individuals who pro-vide services in the production of a film.Deferred compensation ordinarily is accrued inthe periods when the recipients provide ser-vices. In this view, the generation of revenue isthe confirming event that fixes che estimatedamount payable, similar to a defined comrihu-tion plan that caDs for concribucions for periodsafter An individual retires or terminates, tn addi-tion, AcSEC concluded in che exposure draftthat the proposed accounting for participationcosts is consistent with FASB Statement No. 5,because the services provided by t!ie partici-

pants under contract represent a past event thatgives ri.se to a liability.102. Two Events Create Obligation. AcSECalso considered the views of those who believethat two events are needed to recognize a par-ticipation liability: (ii) the participants' pertor-mance. and (/)) the film earning the minimumcumulative revenue or profit required to trij^jerpayments to participants. Proponents of thisviewpoint believe that, even though the partici-pants' pertbrmance ha.s already occurred as thefilm was cR-ated. no participation li.ihilities willbecome due unless [he film earns the minimumcumulative revenue or pnifit.103. Current Practice. Further, based on com-ments made by respondents to [he exposuredraft, AcSEC considered arguments suggestingthat the SOP should maintain current practice,which is similar to how entities in other indus-tries report royalty fees on licensed products.Those comment letters indicated that entities inother induscries do not accrue liabilities (br thecotal expected royalty fees they will pay on theproduces they license, even though they mayhave completed all of the manufacturing effortsand [he total amount to be paid is reliably mea-surable. Rather, chose entities recoai ilic royaltyexpense as a cosc of the sale or license as theyearn revenue on tlie pmducLs to which die royal-ties relate. This is a form ot the two events liabili-ty recognition approach wich the second eventbeing earning che Tvvenue tixim sales ot'products.104. AcSEC believes that the arguments sup-

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20011 JOURNAL of ACCOUNTANCY 115

OFFICIAL RELEASES

porting all three approaches have merit and canbe supported by analogies to authoritative liter-ature. Deciding the appropriateness ot the oneversus two event approaches would have hadiiiiplii'-itions beyond the scope of this SOP and.therefore. AcSEC decided to maintain currentpractice in accounting tbr participation costs.Current practice requires that, during the ulti-inates period, an entity should accrue and ex-pense participation costs in each reportingperiod hy multiplying unaccrued (that is. notyet expensed) ultimate participation costs by theratio of current period actual revenue to esti-mated remaining unrecognized ultimate rev-enue as ofthe beginning ofthe current fiscalyear. The requirement to limit the period of ul-timate participation costs to that for ultimaterevenue maintains consistency within the SOHAhhough the reported liability at any giventime ditftTS under the three approaches. AcSECnotes that the income statement results undercurrent practice are not significantly differentfrom the results under the approach proposed inthe exposure tlraft.

105. AcSEC was also informed that certainusers of film entities' financial statements preferthe accrued participation liability under currentpractice compared to that under tho approachprescribed by the exposure draft. Those usersindicated that they would factor participationcosts assets out of their analyses. AcSEC foundthis helpful in arriving at its conclusion, as dis-cussed in the previous paragraph,106. AcSEC understands that a participation•n r.ingement may require an actor to help pro-mote the release ofa film in a particular marketor territory. AcSEC believes that such an activityand related costs relate to the exploitation ofafilm. AcSEC considered and rejected requiringan entit)' to identify and separate the portion ofcosts in .1 participation arrangement that relatesto exploitation activities. AcSEC believes thatsuch a requirement is not practicable becauseoverall participation costs arc typically not bro-ken down by the specific efforts required oftheactor in a participation arrangement, hi addition.AcSEC believes that the benefits of separatingthe costs ofthe exploitation efforts are minirii.il.

Changes in Estimates107. Till' exposure draft proposed that an enti-ty account for the effects of changes in estimatesof revenue and costs prospectively, starting withthe beginning ofthe period of change. FASBStatement No. 53 required that an entity ac-count for the effects of changes in estimatesprospectively. starting with the beginning ofthefiscal year of change. Many respondents to theexposure draft favored the FASB Statement No.53 approach for changes in estimates. They be-lieve (and AcSEC concurs) that the exposuredrafts approach would have encouraged entitiesto make aggressive estimates of ultimate revenuebecause revised estimates would be accountedfor prospectively from the period of change.108. This SOP etVectively maintains the ap-proach required by FASB Statement No. 53.AcSEC believes that rbe film industry and usersof tinancial statements find that this approachserves their needs, and AcSEC did not have acompelling reason to change current practice.109. AcSEC considered requiring a cumulativeetlect catch-up adjustment through the income

statement, which would have required an entityto go back beyond the fiscal year of change.However, AcSEC rejected this approach pri-marily because ofthe expected difficulties ofimplementiEig this requirement, for example,the need to track impairment write-downs on afi!m-by-filni basis and adjust previous estimatesfor those write-downs.110. The one exception to the changes in esti-mate guidance is when the recognized partici-pation costs liability exceeds the estimatedunpaid ultimate participation costs for an indi-vidual film. Because the individual-film-fore-cast-computation method does not provide amechanism to reduce recognized liabilities insuch situations, paragraph 41 requires a reduc-tion in the reported participation hability andunamortized film costs under such circum-stances. Because ofthe interaction of this calcu-lation with the amortization of film costscalculation (which is based on estimates), Ae-SEC concluded that the offset to the reductionin the liability should be first used to reduceunamortized film costs before impacting an en-tity's income statement.

Ultimate Revenue111. In paragraphs 3H and 39 of this SOP. Ac-SEC reached conclusions that limit the amountot revenue that an entity should include in ulti-mate revenue. AcSEC concluded that estimatedultimate revenue should inelude only those rev-enues that arc expected to be recognized withina limited period. In addition, AcSEC conclud-ed that entities should not include certain formsof more speculative revenue in ultimate rev-enue. AcSEC believes that tbe guidance in thisSOP will help promote comparability amongentities within die industry;112. AcSEC acknowledges that the ten-yearprovision is arbitrary and that many films havelives that extend beyond ten years. AcSEC isconcerned, however, about diversity that hasarisen in the industry with respect to the esri-niation of ultimate revenue. AcSEC concludedthat such a limitation is needed to providegreater comparability within the industry. Ac-SEC also notes that, in most instances, the sig-nificant majoriry ofa film's revenue will havebeen earned within the ten-year period.113. One exception to tbe ten-year pRwision isfor a successful episodic television series that hasbeen in production tbr at least five years. In theseinstances, AcSEC decided that entities shouldinclude in ultimate revenue all revenue ex-pectedto be recognized through five years from thedate of delivery ofthe most recent episode.114. Another exception to the ten-year provi-sion is fur acquisitions of previously releasedtilms as part ofa film library. In many such ac-quisitions, the ultimate revenue used to assignacquisition cost or value to the films will begenerated over periods exceeding ten years. Ac-SEC believes that in such situations, the samerevenue u.sed to value the acquired films shouldbe used to apply tbe individual-film-forecast-computation method. However, to addressconcerns similar to those discussed in paragraph112, AcSEC concluded that it should place alimitation on the revenue that an entity shouldinclude in the determination of ultimate rev-enue. AcSEC has been intbrmed that in apply-ing AIMJ Opinion l(i. Bmiiicss Comhiiuilioit.s. in

the film industry, twenty years is the life mostoften assigned to a film lihrar>'.115. AcSEC believes that an amortization peri-od longer than ten years for films in a library isappropriate because ofthe differences betweensucb films and new films exploited individually.In almost all cases, a new film that is exploitedindividually will earn the vast majority of itsrevenue within the first few years, tbilowed by arelatively long stream of lower, more level rev-enue over the remainder of its lite. However, afdm that is included in a film library has experi-enced its initial cycle in all markets and, there-tbre. has entered into the period of more stable,lower level revenue. AcSEC's decision that afilm must have had .iii initi.-i! release date at le.istthree years prior to the acquisition date to beincluded in a film library is arbitrary, but Ac-SEC believes that its decision will help ensurecomparabilit)' in practice.

116. Paragraph 2*J(d) ofthe exposure draft pm-posed that ultimate revenue should exchide allrevenue from the manufacture and sale of pe-ripheral items. However, AcSEC' decided thatthe limitations on ultimate revenue should bethe same for both sales of peripheral items andlicensing arrangements with third parties fbrperipheral items. Therefore, this SOP requiresthat ;m entity include in ultimate revenue theportion ofthe estimated revenue tVom the saleof peripheral items that is attributable to the ex-hibition or exploitation ofa particular tilm.

Film Costs Valuation117. In the exposure draft and in this SOI*. Ac-SEC concluded that, for impairment purposes, along-lived asset model is more consistent withthe manner in which an entity will exploit afilm than is an inventory model. K^venue maybe earned fh>m a film over a long period. Addi-tionally, a tilm is sold or licensed repeatedly byan entity in different markets and territories (un-like inventory, which is sold once}. Theretbre,AcSEC concluded that an entity should use thetair value ofa film when measuring impairment.118. AcSEC decided that an entity''s measure-ment of impairment ofa particular lilm shouldbe triggered by events or circumstances that in-dicate that the fair value ofa film may be lessthan its carrying amount. AcSEC believes thatan entity rarely would get to the step of mea-suring impairment ofa film if the trigger (thatis. recognition test) was a comparison of esti-mated future cash fiows (undiscounted andwithout interest charges) to unamortized tilmcosts. As a resL'lt. AcSEC concluded that tbeapproach in this SOI' is preferable.119. In determining the fair v.ihie ofa film, Ac-SEC! observed that the underlying premise oftheindividual-film-tbR'cast-computation method isan entity's ability to reliably estimate diture rev-enues. Theretbre. AcSEC~ observed that the esti-mates ofthe most likely futuiv cash intlows usedin determining the fair value ofa tilm would in-clude those estimates used in the determinationofa tllms ultimate revenue in addition to otheramoLints. as discussed in paragraph 45.120. Many respondents lo the exposure draftbelieve that tilms should not tollow a long-livedasset model. They believe that the majority offilm costs are amortized within the first fewye.irs ofa film's life.121. lii'spoiidents favoring an alternative model

116 J O U K N A L ,> / A C C O U N T A N C Y A i i y u s t 2 I I I ) ( )

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believe that a film entity is in business to produceand license films, and that, films "are held for salein thf ordinary course of business," as discussedin paragraph 2 of chapter 4 of Accounting Re-searcb tiullftiii (AKB) No. 43, Ri-sr,ucini-nl amiRfvisiiyii oJ Accoiitiliu^ Research Biillcrius.122. AcSEC believes that tbe arguments forbotb models bave merit. AcSEC is less con-cerned witb eboosingan asset model fbr filmsrban it is with ensuring cbat users of financialstatements rei-eive relevant information. AcSEC^believes tbat users want and need film entitiesto report {a) tbe portion of film cost:; that willbe amortized in tbe next operating cycle and(/)) film costs, participation costs, exploitationcosts, and manufacturing costs as casb flowsfrom operating activities ratber tban from in-vesting activities. Accordingly, this SOP retjuiresentities to report tbe information tiiat AcSECbelieves users need. AcSEC also believes tbattbe recjuired treatment of casb flows is consis-tent witb paragraphs 86 and 87 of FASB State-nient No. 'J5, Suiti-iwni if Cash Flows.

Exploitation Costs123. In tbe exposure draft, AcSEC noted thattbe film industry's pattern of incurring exploita-tion cosLs differs significantly from tbe pattern inother industries. A bigh proportion (perhaps asmucb as 80 percent) of tbe total litbtime exploita-tion costs incurred by an entity with respect to afilm is incurred in connection with the release ofa film into domestic and international tbeatTic:ilmarkets. An entity will incur tbe most significantamount of expenditures on or before tbe firstweekend to "open" die film domestically.124. Tbe exposure draft discussed many differ-ent accounting alternatives fbr exploitation costsand presented AcSEC's original position oneacb alternative. Tbose arguments are not re-stated in tbis SOP; ratber, this basis for conclu-sions addresses wby AcSEC ultimately decidedtbat an entity sbould account for exploitationcosts in accordance witb tbe provisions of SOP93-7 and wby AcSEC changed its positiontroni tbe exposure draft (which was that onlyinitial theatrical exploitation costs would becapitalized and amortized over a period not toexceed tbree niontbs; ali otber exploitationnAts would be expensed ;LS incurred).125. Wben SOP ^3-7 was issued, fibn entitieswere excluded from its scope because tbe SOPcould not change the provisions in FASB State-ment No. 53 (wbicb falls into level a in the bi-erarcby of GAAP. as discussed in Statement onAuditing Standards (SAS) No, 69, llic Meaningql IV>TH( l-airly in Contunnily With Genemlly Ac-cepied Acroiiiuiiig Ihindpks in the Indepaidftu Au-ditor's Report). However, because the FASB willrescind FASB Statement No. 53 upon tbe ef-fective date of this SOP, AcSEC was able to de-bate wbcther SOP 93-7 sbould apply to films.126. The accounting for exploitation costs wasLl difficult issue tor AcSEC. AcSEC believes tbatthe accounting proposed in tbe exposure drafthas merit. However, AcSEC's position in tbeexposure draft was a compromise between par-ties that preterrett (a) capitalization and amorti-zation ofcxploitatioii costs fbr all markets andterritories, {h) amortization periods longer thantbree months, (c) capitalization and expensing atfirst showing of'a film, or {il) inclusion of'filmentities in the scope ofSOP 93-7.

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127. Based on its review of the coninieni let-ters, AcSEC took a fresh look at its posititMi inthe exposure draft. Some respondents, indiidinga number of [iroducers of fiinis, stated that these l f should require that entities expcnsf ex-ploitation costs in .iccordance with SOP '>3-7.Many supporters of the position in the exposuredraft acknowledged that this solution is not wellsupported by existing authoritative accountinghteraturc. AcSEC helieves that SOP 93-7 is themost definitive guidance for exploitation costs,AcSEC ultimately could not rationalize why anentity should account for such costs incurred inthe film nidustry ditTerencly from how entitiesaccount for the same costs incura-d in other in-dustries. AcSEC concluded that the guiduice inthis SOI* should bo similar to how other indus-tries account for similar costs. For a further dis-cussion on the rationale for the accountingrequirements in SOP ':)3-7. entities may reviewthe hasis for conclusion' i[i that SOP.

Presentation and Disclosure128. Paragraph 51 requires disilosun; of the por-tion of the ct)sts of completed Hlnis that are ex-pected to be amortized during the upcomingopeniting cytle. This requia-d disclosure' respondstc the needs of users of financial information.129. AcSEC' believes that most entities will havean operating cycle of twelve months. However.AcSEC also believes that certain entities in thefilm industry may produce a small number offilnis and th;U the production period for those

entities may exceed twelve months. Therefore,in accordance with paragraph 5 of Chapter 3Aof ARIl No. 43. AcSEC concluded that entitiesshould be allowed to designate an operating cy-cle of greater than twelve months when factsand circiimsuncesjustit\- a loiigcr period.130. Public companies arc required to disclose intheir annual filings with the U.S. Securities andExchange Commission (SEC) the balances ofunamortized capitalized fiLn coits, excluding filmlibraries, whose amortization within three yearsof the reporting tiate would not t onsunie 60 per-cent of the unamortized capicilized tiJm costs andthe estimated time period to achieve 60-percentaccunuilated amortization. Users of financialstatements have indicated that this is useilil infor-mation, but given changes m the film industryand the requirement to appiy SOP 43-7 to ex-ploitation costs, an H(l-percent threshold providesmore relevant information. AcSEC' agreed anddecided to require this disclosure for all entities,131. AcSEC' decided to require disclosures ofmethoLls of accounting to ensure diat the SOP isconsistent with paragraph 12{b) of .^*B Opinion22, Disclo.fiin' ol Amounting Poluies, u'hich rec|uiresdisclosure of "Principles and metliods peculiar tothe iiidustr\' in whicii the reporting enfity oper-ates, even it ^uch principles and methods arepredominately followed in that industry."

Effective Date and Transition132. AcSEC believes tbat the advantages ofretroactive application in prior periods of the

provisions of this SOP would not outweigh tin-disadvantages. Accordingly. AcSHC concludedthat the cumulative cftoct of changes caused byadopting the provisions of this SOP should benuhuied in the deiermniation of net inconie.In addition, AcSEt" extended the effective dateof the SOP by one year from the date proposedin the exposure draft to give entities more tinieto comply with the provisions of the SC>P

GLOSSARVThis glossary contains definitions of terms orphrases as used in this SOPCross-collateralized. An arrangement thatgrants a licensee distribution rights to multiplefilms, territories and/or markets to a licensee,and the exploitation results for all applicablefilms, territories and/or markets are aggregatedby this licensee far purposes of determiningamounts payable to the licensor under thearrangement.Distributor. An enterprise or individual thatowns or holds the rights to distribute films. Forpurposes of this SOP the definition of distribu-tor of a film does not include, for example.those entities that function solely as broadcast-ers, retail outlets (such as video stores), ormovie theaters.Entity. Producer or distributor that owns orholds the rights to distribute or exploit films inone or more markets and territories.Exploitation costs. All direct costs {includingmarketing, advertising, publicity, promotion.

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;iiid Other distribution expenses) incurred inconnection with the distribution of a film.Film costs. Film costs include all direct nega-tive costs incurred in the pliysicil production of"a film, as well as allocationii of pniducrion over-head and capitalized interest in accordance wiihFASB Statement No. 34. Examples of directnegative costs include costs of story jnd sce-nario; compensation of cast, directors, produc-ers, extras, and miscellaneous staff: costs of setconstruction and operations, wardrobe, and ac-cessories; costs of sound synchronization; rentalfacilities on location; and postproduction costssucli .(s nnisic, special effects, and editing.Film prints. Those materials, prodiiced onbehalf of a film distributor for delivery Co atheatre or other similar venue, that containthe completed audio and video elements of afilm. Such materials are used by the theatreor other similar venue to exhibit the film toits customers.Finn commitment . An agreement v^ith athird parry th,it is binding on both parties. Theagreement specifies ali significant terms, includ-ing items to be exchanged, consideration, andtiming of the transaction. The ajireement in-cludes a disincentive for nonpertbrmance that issufficiently I.irge to ensure the expected perfor-mance. In the context of episotiic television se-ries, a firm cominitment for future productionshcniid includi- only episodes to be deliveredwithin one year from the date of the estimate ofultimate revenue.Market. .A distribution channel within a cer-tain itTiitory. Examples of markets include the-atrical exhibition, home video, pay television,free television, and the licensing of film-relatedproducts.Nonrefundable minimum guarantee.Amount paid or payable by a customer in avariable fee arrangement that guarantees an en-tity a minimum fee on that arrangement. Sucha guarantee applies to (ii) an amount paid by acustomer immediately and {li) an amount thatthe customer has a legally hinding commitmentto pay over a license period.Participation costs. Parties involved in theproduction of a film may be compensated inpart by contingent payments based on the i'l-nancial results of a film pursuant to contractualfornmlas (participations) and by contingentamounts due under provisions of collective bar-gaining agreements (residuals). Such parties arecollectively referred to as participants, and suchcosts are referred to coUectively as participationcosts. Participations may be given to creativetalent, such as actors or writers, or to entitiesfrom wliDui distribution rights are licensed.Producer. An individual or an entity that pro-duces and has a financial interest in films for ex-hibition in movie theaters, on television, orelsewhere.Revenue. Revenue earned hy an entity from itsdirect distribution, exploitarion. or licensing of afilm, before deduction for any of the entity's di-rect coses of distribution. For markets and terri-tories in which an entity's fully orjoindy-ownedfilms are distributed hy third parties, revenue isthe net amounts payable to the entity by thirdparty distributors. H.evenue is reduced by apprtvpriate allowances, estimated returns, price con-cevsions. or similar adjiLstments. as applicable.Sale. The transfer of control of the master copy

of a film and all the associated rights that goalong with it (that is. an entity sells and gives upall rights to a film). An entity should determinea gain or loss on the sale of a film in accordancewith the revenue recognition and cost amorti-zation requirements of this SOHSet for production. As used in this SOP, thisterm means (.i) management, with the relevantauthority, implicitly or explicidy authorizes amicommits to funding the production ot a film;(b) active preproduction has begun; and (f) thestart of principal photography is expected tobegin within six nionths.Territory. A geographic area in which a film isexploited. In most cases, a territory consists of acountry. However, in certain insLinces, a terri-tory may be defined as countries with a com-mon language.

Accounting Standards Executive Committee(1998-1999)

David B. Kaplan. ChairAlbert G. AdkinsMark M. BieLsteinCassandra A. CampJoseph H. CappalongaJohn T. CiesielskiRobert O. DaleJoseph F GrazianoKay L. KrauseLouis W Matusiak. Jr.David M. MorrisBenjamin S. NeuhauscnPaula C:. PaiiikMark V. SeverMary Stone

Accounting Standards Executive Committee(1999-20001

I )avid B. Kaplan. C.Vwi>Albert G. AdkinsMary B. BarthMark M. BielstcinVil R. BittonCassandra A. CampJohn T. CiesielskiRobert O. DaleJoseph R OiizianoDavid W HinshawRay L. KrauseDavid M. MorrisBenjamm S. NeuhausenPaiiLi C. PanikMark V. Sever

Motion Pictures Task ForceLouis W Matusiak.Jr.. (IHiiinPeter C~yffkaReginald G. HarpurJames F. Harrington1 Albert Keen anDavid LondonerJohn Nendick

AICPA StaffEliaibeth A. Fender Daniel J. NollDirector Tcchniail MaiwgcrAcamMing Standards Accounting Slandarth

The task force and staff gratefully acknowledgedie contributions made to the development ofthis Statement of Position by John Giesecke.Pfter C. Halt, and Francis E. Scheuerell, Jr. •

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