Tuesday, October 4, 2011

Hollywood accounting

Hollywood accounting (also known as Hollywood bookkeeping)[1] refers to the opaque accounting methods used by Hollywood to budget and record profits for film projects. Expenditures can be inflated to reduce or eliminate the profit of the project thereby reducing the amount which the corporation must pay in royalties or other profit-sharing agreements based on the net profit.

Creative accountants

Hollywood accounting gets its name from its prevalence in the entertainment industry — that is, in the movie studios of Hollywood. Those affected can range from the writers[2] to the actors.[3]
John D. MacDonald's novel Free Fall in Crimson (1981) references Hollywood accounting in its dialogue:
"Darling! This is the Industry! The really creative people are the accountants. A big studio got over half the profit, after setting breakeven at about three times the cost, taking twenty-five percent of income as an overhead charge, and taking thirty percent of income as a distribution charge, plus rental fees, and prime interest on what they advanced."

How it works

Hollywood accounting can take several forms. In one form, a subsidiary is formed to perform a given activity and the parent entity will extract money out of the subsidiary not in terms of profits but in the form of charges for certain "services". The specific schemes can range from the simple and obvious to the extremely complex.
Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of overhead:
§  Production overhead – Studios, on average, calculate production overhead by using a figure around 15% of total production costs.
§  Distribution overhead – Film distributors typically keep 30% of what they receive from movie theaters ("gross rentals").
§  Marketing overhead – To determine this number, studios usually choose about 10% of all advertising costs.
All of the above means of calculating overhead are highly controversial, even within the accounting profession. Namely, these percentages are assigned without much regard to how, in reality, these estimates relate to actual overhead costs. In short, this method does not, by any rational standard, attempt to adequately trace overhead costs.
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net profit, and the "losers" include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman, which all took in huge amounts in box office and video sales.
Because of this, net points are sometimes referred to as "monkey points," a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract.[5][6]
All of this shows why so many big-name actors insist on "gross points" (a percentage of some definition of gross revenue) rather than net profit participation. This practice reduces the likelihood of a project showing a profit, as a production company will claim a portion of the reported box-office revenue was diverted directly to gross point participants.

Examples

Winston Groom's price for the screenplay rights to his novel Forrest Gump included a share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received nothing.[7] That being so, he has refused to sell the screenplay rights to the novel's sequel, stating that he "cannot in good conscience allow money to be wasted on a failure".
Stan Lee filed and won a lawsuit after the producers of the movie Spider-Man did not give him a portion of the gross revenue.[8]
The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK, which was based on Garrison's book On the Trail of the Assassins.[9]
Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount's use of Hollywood accounting. The court found Paramount's actions "unconscionable", noting that it was impossible to believe that a movie (1988's Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.
The film My Big Fat Greek Wedding was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of Nia Vardalos who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued Gold Circle Films due to Hollywood accounting practices because the studio has claimed the film lost $20 million.[10]
Hollywood accounting is not limited to movies. An example is the Warner Bros. television series Babylon 5 created by J. Michael Straczynski. Straczynski, who wrote 90% of the episodes in addition to producing the show, would receive a generous cut of profits if not for Hollywood accounting.[citation needed] The series, which was profitable in each of its five seasons from 1993–1998, has garnered more than US$1 billion for Warner Bros., most recently US$500 million in DVD sales alone. But in the last profit statement given to Straczynski, Warner Bros. claimed the property was $80 million in debt. "Basically", says Straczynski, "by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5's profits."[11]
Peter Jackson, director of The Lord of the Rings, and his studio Wingnut Films, brought a lawsuit against New Line Cinema after "an audit... on part of the income of The Fellowship of the Ring." Jackson stated this is regarding "certain accounting practices," which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of The Hobbit were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct The Hobbit, as had been anticipated.[12] Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness.[13] Similarly, the Tolkien estate has sued New Line, claiming that while their contract entitled them to 7.5% of the gross receipts, the film studio has refused to pay them any share of the $6 billion hit.[14]
A WB receipt was leaked online, showing that the hugely successful movie Harry Potter and the Order of the Phoenix ended up with a $167 million loss on paper.[15]
Michael Moore is suing Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11. 

Production accounting

Production accounting is a filmmaking term, used especially in Hollywood, referring to the project accounting of the cost of a film project. As with construction accounting, salient issues are the accurate allocation of workers' time to specific projects (usually requiring each worker to fill out a weekly timesheet), and the correct assessment of indirect costs such as employee benefits.
Specialized software to support production accounting has been developed.

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