Movie Accounting

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Movie Accounting

By Steven Anderson
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Movie Accounting

By Steven Anderson
MGMT 505
MGMT 505

* Contents

1. Introduction
2. Movie Life Cycle in Business Terms
2.1. The Pitch – Literary Property
2.2.2. The Budget as an indicator of revenue
2.3. Principle Photography
2.3.1. Completion Guarantor
2.4. Post-Production
2.4.1 Negative Cost
2.5.Distribution
2.5.1. Distribution Expenses
2.5.2 Theatrical Distribution
2.5.3 Non-Theatrical
2.5.3Pay –TV
2.5.4 TV
2.5.5 Merchandise, Music, etc.
2.6Participation
2.7 Net Profits
2.7.1 Net profit by GAAP Method – SOP 00-2
2.7.1.1 Capitalization of Costs
2.7.1.2 Income Recognition
2.7.1.3 Film Amortization
2.7.2 Net Profit used for tax purposes
2.7.3 Net Profit used for Profit Participants
2.7.4 Net Profit for internal use and Equity Holders
2.8 The Audit
2.9 End of Movie cycle
3. Issues over accounting practices.
3.1 The budget valuation and its effect on the bottom line
3.1.1 Incentive to make budget bigger to make more money?
3.2 Negative Cost and its effect on the bottom line
3.2.1 Abandoned Projects
3.2.2 Fringe Benefits
3.2.3 Participants and deferments
3.3 Distribution expense
3.4 Profit Sharing Contracts and Fairness for net point players 3.4.1 History of Profit Sharing Contracts.
3.4.2 Gross Point contracts
3.4.3 Net Point Contracts
3.4.1 Buchwald vs. Paramount Case
3.5 Who is responsible for the success of the movie?

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Movie Accounting

1.1. Introduction:
Hollywood has long been a love obsession of Americans. Since the nickelodeons of early 1900s to the major blockbusters of the summer, going to the movie theater has always been an American pass time. At the same time, Hollywood is synonymous with the idea of wealth and money. The movie stars get paid millions of dollars per movie. Executive producers make millions of dollars a year. Sounds like an industry with a lot going on, right? Believe it or not only 5% of films reported in recent years report a net profit (Cones, 1997, p. 5). So why is it that most movies don’t even make a net profit? When we open the newspaper or go online to find a movie to watch, we see next the movie that Skyfall has grossed $246 million in theaters. Surely that must be enough to pay Daniel Craig and his team of producers, but it’s not as simple as that. To better understand how movies don’t make money, it’s first important to understand the life cycle of a movie and how it makes its money.

2. Movie Life Cycle in Business Terms:
Every movie begins with one thing, an idea, a story. This story is the seed of a multi-million dollar project that will take months to plan and produce and cause millions of people to get paid over many years to come. That idea is sold to a production company, made into a movie, sold to a distributor, licensed to theaters and non-theaters both domestic and abroad, merchandising is sold, music is sold, the movie is sold to pay TV, sold to wholesalers, sold to more TV, finally to be sold to free TV. There are so many potentials for future cash flows.

2.1. The Pitch – Literary Property
Before the movie is made, it needs to be pitched to a producer. Producers listen to thousands and thousands of stories, some are elaborate scripts typed by the most prolific writers, others may be a list of funny names and ideas written on a cocktail napkin both could be bought by the producer. After acquiring a bunch of stories and the rights to them, the producer will pick which one he or she thinks will be best, get the financing required, and green-light it, giving it the OK to start in pre-production.

2.2. Pre-Production
The pre-production process is about a 2-6 month long process where everything about the movie is planned out. The cast is hired, the director is hired, the locations are booked,...
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