On Nov. 7, 2018, the Financial Accounting Standards Board (FASB) issued a Proposed Accounting Standards Update (ASU) that would change the way the entertainment industry accounts for production costs of an episodic television series to be more aligned with the accounting for production costs of films.
Under current GAAP, production costs for episodic television series are only capitalized up to the amount of revenue that is contracted for each episode in the initial market until persuasive evidence exists that revenues from secondary markets will occur/or until the entity can demonstrate a history of earning such revenue in secondary markets.
This new standard would allow for all production costs to be capitalized and would also require an entity to reassess estimates of the use of the filmed content in the context of the entity’s film library if it is expected to be monetized with other films and license agreements (film group) instead of being predominantly monetized on its own.
Under the proposal, an entity would be required to test films and license agreements for program material for impairment at a film-group level when the film or license agreement is predominantly monetized with other films and license agreements. Additionally, the proposed amendments would:
- Add examples of events or changes in circumstances that indicate that an entity should assess a film group for impairment
- Add examples of events or changes in circumstances that indicate that an entity should asses an individual film for impairment after its release
- Align the impairment model in Subtopic 920-350 (Entertainment Accounting for Broadcasters over capitalized costs) with the fair value model in Subtopic 926-20 (Entertainment Accounting for Film Costs)
In summary, the new Proposed ASU will allow entities who produce episodic television series to capitalize more costs, which will increase assets and decrease initial expenses. This can greatly benefit the financial reporting, increase net income and be more consistent with how entities account for motion pictures and films (subject to increased assessments over the valuation of the capitalized properties). Additionally, as with most proposals, there will be additional new financial statement disclosures that are required about the content that is produced and licensed.
Comments on this proposal can be submitted through Dec. 7, 2018 at FASB’s website. Additionally, if you have any questions regarding the implications or impact of this new Proposed ASU, the Entertainment and Media Practice at GHJ is happy to assist in any way we can.