INSIGHT: The New Accounting for Film Costs and Program Material License Agreements

On March 6, 2019, the FASB issued Accounting Standards Update (ASU) 2019-02 to amend accounting for production costs associated with film and episodic television content. The new guidance comes as a response to significant changes within media and entertainment (M&E) production and distribution models—how media content is produced, acquired, and ultimately monetized.

For example, the evolution of direct-to-consumer streaming services has placed less emphasis on any given film or television series and more emphasis on the library of content, which may include both owned (produced) content and licensed content.

This Insight summarizes ASU 2019-02 and offers insights on how M&E companies can navigate the implementation.

Overview of the ASU

ASU 2019-02 aligns the accounting for production costs of episodic television series with the accounting for production costs of films by removing the capitalization constraint, which is a change from the previous accounting literature.

The ASU’s amendments also address the subsequent amortization and impairment of capitalized film and licensed content costs by requiring entities to first determine how they intend to monetize the film or licensed content (i.e., determine the film group).

The ASU defines a film group as the unit of account used for impairment testing for a film or a license agreement for program material when the film or license agreement is expected to be predominantly monetized with other films and/or license agreements instead of being predominantly monetized on its own. A film group represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other films and/or license agreements.

The ASU also amends certain requirements in Accounting Standards Codification 920 regarding the accounting for licensed content by broadcasters. Previously, if the programming usefulness of a program was revised downward, a broadcaster would write down unamortized programming costs to their net realizable value. The ASU aligns the impairment model for licensed content with that of owned content, so upon adopting the ASU, entities will need to determine the fair value of their licensed content when recording an impairment.

We believe that most of the changes in the accounting guidance as a result of ASU 2019-02 will be pervasive across the production and distribution ecosystem in the M&E industry. The changes are expected to affect production companies, studios, broadcasters, and providers of streaming video on demand (SVOD). The convergence of impairment models may have more of an impact on the SVOD providers given the historical content licensing business model.

Key Accounting Issues to Consider

Removal of cost capitalization constraint for episodic TV content. The ASU requires entities to capitalize relevant production costs as they are incurred (in the absence of impairment indicators). Legacy U.S. generally accepted accounting principles (GAAP) required capitalized costs to be constrained (1) until there was persuasive evidence of a secondary market and (2) up to the amount of contracted future revenues. The change will allow production costs that were previously expensed to be capitalized.

Asset grouping based on predominance of monetization. Entities will need to use judgment to determine whether their film and other content, such as episodic television production assets, are individual assets or group-level assets. The ASU states that entities should make this determination by examining how they predominantly monetize their content assets. The monetization strategy may be made individually on a title-by-title basis or at a group level—together with other film and episodic television content, which may also include licensed content accounted for under ASC 920.

This determination is vital because it will affect the level at which capitalized film and other content costs are amortized, as well as the establishment of the unit of account when entities are testing these capitalized costs for impairment. Entities should consider the entire life of the assets when determining the predominant monetization strategy of a film or of other content, and the strategy should not be reassessed without a significant change to it, such as “adding a previously unplanned significant distribution channel.”

If the entity concludes that its capitalized film and other content costs (or some subset thereof) are predominantly monetized as a group, it will amortize such costs on a reasonable basis that is reflective of the pattern of usage. For each reporting period, the entity will have to consider whether its estimated use of the asset has changed. Any changes should be reflected prospectively over the remaining estimated life of the asset. In addition, the entity must disclose information regarding the change in estimate.

Evaluation for impairment. Entities are still required under the ASU to test unamortized film and other content costs for impairment “whenever events or changes in circumstances indicate that the fair value of a film . . . or a film group . . . may be less than its unamortized costs.” If the entity concludes that it has group-level assets, it will be required to test for impairment at the film group level.

The ASU revises the impairment indicators for individual film assets and provides new impairment indicators for film groups. The ASU also amends the impairment guidance in ASC 920-350 for licensed content so it aligns with the fair value model for owned content. Accordingly, for licensed content that is not part of a film group, the ASU states that if “the programming usefulness of a program, series, package, or daypart are revised downward,” any unamortized capitalized costs should be written down to fair value.

Removal of the asset classification guidance. Entities will need to use judgment to determine how to appropriately classify capitalized costs for producing and licensing content on the balance sheet as either current or noncurrent, because the ASU eliminates the historical classification guidance within ASC 926-20 and ASC 920-350.

Key Takeaway—Increased Use of Judgment is Required

As hinted at above, management will need to exercise significant judgment in applying certain of the ASU’s requirements, including those related to the identification of the appropriate asset groups for film and television content assets (i.e., the determination of the predominance of how these assets are monetized), the monitoring of impairment, and the determination of appropriate asset classification on the balance sheet. It is important for M&E entities to consider how ASU 2019-02 specifically applies to them so that they can prepare for any changes in film and television cost capitalization and disclosures within the financial statements.

Although ASU 2019-02 is not effective until annual reporting periods beginning after Dec. 15, 2019—with a maximum deferral of one year for nonpublic entities that apply U.S. GAAP—M&E entities should start carefully examining the ASU and assessing the impact it may have on their accounting policies, procedures, systems, and processes.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Darren is an Audit & Assurance partner at Deloitte & Touche LLP and leads the firm’s Telecom, Media & Entertainment (TM&E) Audit & Assurance practice. He is an audit & assurance partner focused on the integrated audits of multinational Securities and Exchange Commission registrants.

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