Viewers who used to wait for each “Seinfield” episode on prime-time can now binge-watch a whole season of “Stranger Things” in one sitting.
Yet the rules entertainment companies follow to account for the costs of making a show have been stuck in the “Seinfeld” era—until now.
The Financial Accounting Standards Board March 6 issued an update to U.S. generally accepted accounting principles to allow entertainment companies to capitalize, or spread out the costs over several reporting periods, of making “episodic content.” The update erases the accounting distinction between the costs to make TV shows versus films, a distinction that has blurred in recent years with the advent of on-demand cable and streaming TV services.
“The change has already happened,” said Deloitte & Touche LLP partner Courtney Sachtleben. “This is just making sure the accounting reflects the economics of the industry today.”
No More Waiting for Syndication
Under outgoing accounting guidance, film production costs are capitalized. For TV show makers, however, costs must be expensed all at once—a potentially big hit to earnings—unless the production company can prove they’ll reap profits in syndication.
The difference in accounting for the two types of entertainment has long been rooted in the assumption that television shows don’t make money until they hit the re-run circuit. On-demand cable and streaming internet options upended that assumption.
“Historically, that episodic content, as we thought about it, was produced under deficit funding arrangements,” Sachtleben said. “They really needed secondary or syndication revenue to ultimately recover the costs.”
The upshot: Entertainment stalwarts like Twenty-First Century Fox Inc. and NBCUniversal Media LLC, as well as newcomers like Netflix Inc. and Amazon.com Inc. can spread out over several reporting periods the costs to make new programs instead of having to wait until there is evidence that a program will make money in syndication.
Netflix, Amazon, and the Walt Disney Co., which owns a stake in Hulu LLC, declined to comment on the accounting change, but both Netflix and Walt Disney submitted comment letters in favor of the change to FASB when the board issued the plan in proposal format.
AT&T Inc., the parent company of entertainment company WarnerMedia, also said that it supported FASB’s change. “With this ability to watch content across multiple platforms, the distinction between film is much less relevant than in the past. So, we were supportive of the proposed changes to the existing rules,” a spokesperson wrote in an e-mail to Bloomberg Tax.
The update also offers new guidance on how to assess underperforming films or TV shows for impairment, among other changes. In addition, companies must provide new disclosures about content that is either produced or licensed.
Public companies must follow the accounting change for fiscal years beginning after Dec. 15 and quarterly periods within those fiscal years. For privately held companies and other outfits, the update is effective one year later. FASB said it will allow companies to adopt the new rules ahead of time.
FASB issued the proposal through its Emerging Issues Task Force, a panel that tackles industry-specific questions and attempts to offer quick-hit solutions. FASB Chairman Russell Golden at a Feb. 27 meeting of the group’s parent organization described the issue as a “rather fun accounting question.”
To read more from Financial Accounting News pleaseOR Request Trial