New accounting regs to spark biz writeoffs

Adjustments may total more than $4.4 billion

NEW YORK — A new set of film biz accounting rules skedded for approval next month will spark a wave of industrywide writeoffs totaling at least $4.4 billion, according to Schroder & Co.’s David Londoner, a longtime entertainment analyst who helped draft the new rules over 12 laborious years.

While the regs won’t fundamentally change the way studios do business, they will update decades-old accounting practices and bring showbiz norms more into line with those of other industries. Financial results won’t be as easily managed and therefore could become more volatile. But they will present a much more accurate picture of a studio’s finances, according to several members of the seven-person Task Force on Motion Picture and Television Accounting.

Londoner figures that Sony’s Columbia TriStar will lead the pack in terms of writeoffs, with an estimated charge to earnings of $900 million. Viacom’s Paramount and News Corp.’s 20th Century Fox will write off an estimated $750 million, while Warner Bros./New Line could take a $650 million hit.

Walt Disney/Miramax and Seagram’s Universal are each heading for a $550 million charge. MGM, which hasn’t made too many pics in recent years, will show the most modest writeoff of $250 million.

Non-cash, one-time

But, as Londoner said, “The numbers keep going up.” They’re already about 50% higher than he originally expected. He stressed that the charges are non-cash, one-time items. “It’s not money going out the door, just changes in the valuation of the assets,” he said. He noted, however, that a $4.4 billion writeoff, non-cash or not, isn’t insignificant for an industry that earned $2 billion in both 1997 and 1998 and about $1.1 billion last year.

The writeoffs will come as studios readjust their balance sheets to fall in line with stricter regs for booking movie revenues and amortization and as they fully expense their previously capitalized advertising and development costs.

Some of the changes:

  • Advertising and marketing costs will be expensed as incurred, not capitalized over many years during the full life of the film. The effect will be to produce operating losses sooner in a film’s cycle. Even for pics that will be profitable, the cost of advertising will result in losses before the film is released. This was the most contentious issue and the reason it took so long to reach agreement on the new rules.

  • Amortization of production costs will be completed by year 10, not beyond, and continue to be taken in proportion to revenue recognition.

  • Development projects will be expensed when the project is abandoned, not added to the overhead pool and amortized along with released films. These costs may stay on the books for no longer than three years.

  • Companies will be required to break down their film cost assets into four categories: released, completed, in production and in development or pre-production. In addition, they will have to distinguish between film and television projects.

Level the field

The changes were sparked in large part by a handful of mid-sized film producers (Vestron and Cannon come to mind) that surprised investors in the 1980s by declaring bankruptcy despite having posted a stream of profits. Wall Streeters are less likely to be blindsided with the new regs in place. The rules also level the playing field. After all, General Motors expenses advertising as it’s incurred.

The task force, now in its third incarnation, recommended the changes to the Financial Accounting Standards Board, which is expected to approve them on May 10. Aside from Londoner, the task force included execs from Warner Bros., Fox and the nation’s largest accounting firms.

Londoner cautioned that the studios’ main methods of smoothing earnings bumps — strategically timing library releases and dating syndication contracts — won’t change. “If a company expects a weak quarter far enough in advance, it can still accelerate a homevideo release or negotiate or extend a syndication contract for that period,” he said.

Companies must adopt the new regs and take their writeoffs during the fiscal year that starts after last Dec. 15, but earlier compliance is encouraged. Time Warner, for instance, may take its one-time charge in the current second quarter.

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