Accounting and Global Piracy

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1.Executive Summary

Global piracy is a problem that the software and music industry are facing nowadays. The industries are claiming that significant losses are suffered in regards to these piracies all over the world. In response to this problem, many companies in the industry are trying to track and uncover the practices of piracy. Many different organizations also work together side by side with these companies in order to fight piracy, some of those organizations are Recording Industry Associations of America (RIAA), and International Federation of the Phonograph Industry (IFPI). The companies also try to ‘estimate’ the lost of sale figures that are growing exponentially over the last few years. The lost of sale figures is the total amount of customer that buys pirated cds which instead are able to buy original copies.

These different actions will certainly create costs and expenses for the company that needs to be paid for, and these costs needs to be recorded in the financial statements of the company itself. The dilemma in this case is the method we are going to use to input these numbers into the statement. The numbers can be input into the statement either as an asset in the balance sheet or as an expense in the profit and loss statement. The way that these numbers are input to the statements depend on how actions are taken, the criteria of the actions, future benefits of the actions, and also the period of time the action will take place. These criteria and methods will be discussed in depth in the extent of this paper.

The purpose of this paper is to examine the importance of facing the piracy problem in the music industry and also to explore it from the accounting point of view so that the audience can get a clear understanding on how to treat ‘costs’ relating to actions in facing piracy. This paper will also identify what defines and determine an item to be an asset and an expense. Its criteria will also be thoroughly discussed. Also the paper will also try to provide scenarios in order to compare the ‘cost’ incurred by the company with the criteria of an asset or an expense in order to be able to distinguish whether the ‘cost’ is an asset or an expense. So, this paper will hopefully provide a clear understanding on how ‘costs’ regarding actions on piracy are perceived through the eyes of accounting. 2.CD (Compact Disc) Piracy

Oxford Advanced Learner’s Dictionary of Current English defines piracy as the act of someone who infringes another’s copyright, who broadcasts without a license, usurps trading rights, etc; to use reproduce (a book, a recording, another’s work, etc) without authority and for one’s profit. When we talk about compact disc piracy, it includes anything on a compact disc or DVD that are ripped off by copyright pirates. Throughout the world, the top ten music piracy countries are as follows (determined by the rates of piracy):

1.Paraguay (99%) 6. Mexico (60%) 2.China (85%) 7. Pakistan (59%) 3.Indonesia (80%) 8. India (56%)
4.Ukraine (68%) 9. Brazil (52%)
5.Russia (66%) 10. Spain (24%)
Source IFPI 2005

It is obvious that CD piracy, which includes music and software piracy, creates a great loss to the artist or the programmer of the music or software. Artists and programmers should get royalty money whenever their music or software are bought by customers and so through piracy they don’t receive any of this. On top of that, the recording labels and manufacturers of software also don’t receive revenue when their CDs are pirated. Governments all around the world has tried and created anti-piracy and copyright laws to protect artists and manufacturers, although it is proven that many of these laws are adequate but the enforcement of these laws are still not at best. Different organizations such as the International Federation of the Phonographic Industry (IFPI), Recording...
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