In March 2019, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU) that amends and clarifies the accounting for production costs for films and episodic content produced for television and streaming services.
In past several years, the production and distribution models used in the entertainment industry have changed significantly, one of the main changes was the adoption of subscription-based revenue models for online streaming services.
Based on the reactions of industry and key stakeholders of the organizations that use subscription-based revenue models, the current accounting capitalization guidance doesn’t properly reflect the results and does not give the right information.
Based on FASB Chairman Russell G. Golden “the new standard converges the guidance for films and episodic content. This better reflects the economics of an episodic television series and improves the information provided to investors about the various types of produced and licensed content”.
The current accounting guidance has differing capitalization requirements for content production:
- For films, production costs are capitalized.
- For episodic content(for example, a TV series), production costs are capitalized subject to a constraint based on contracted revenues in the initial and secondary markets.
The amendments in this Update improve GAAP by aligning the accounting for production costs of episodic television series with the accounting for production costs of films.
In addition, the amendments require that an entity test a film or license agreement within the scope of Subtopic 920-350 for impairment at the film group level, when the film or license agreement is predominantly monetized with other films and/or license agreements. This improvement addresses application issues with existing guidance as a result of changes in the industry and better reflects the economics of how certain entities monetize their content.
The amendments in the standard also:
- amend presentation requirements;
- require that an organization provide new disclosures about content that is either produced or licensed; and
- address cash flow classification for license agreements.
For public companies, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other organizations, the standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted.
For the full ASU text see www.FASB.org.
The article is part of dReport – May 2019, Accounting news.