Accounting for TV Production Costs: Narrow Scope Project Reflects Changing Distribution Methods

On October 10, the Financial Accounting Standards Board (FASB) agreed to release for public comment a proposal from its Emerging Issues Task Force (EITF) to align the accounting for the production costs of TV shows with that for the costs of movies. The difference in the accounting for the costs of the two forms of content is based on guidance developed in the 1990s, when television shows primarily made money from being syndicated in reruns. The EITF says that that guidance is less relevant in an era of streaming content on the Internet.

What’s changing?

Under the amendment to U.S. Generally Accepted Accounting Principles (GAAP), TV producers would be allowed to account for production costs the same way filmmakers account for the costs of making movies.

The proposal would alter FASB Accounting Standards Codification (ASC) Topic 926-20, Entertainment — Films — Other Assets — Film Costs. The change would let the guidance for the cost of producing TV shows, which the FASB calls “episodic content,” be the same as the guidance for films.

Why is a change needed?

Established in the 1990s, ASC 926-20 was created based on the assumption that a high percentage of television shows fail. Production companies typically didn’t turn a profit until shows were in syndicated reruns. Therefore, the guidance allows creators of episodic content to capitalize costs only when the production company can establish estimates of so-called “secondary market revenue” (money a show will make in syndication).

“The distinct capitalization guidance for episodic content was established to address the business models and risks that were present in the production of episodic content when the guidance was originally issued,” says EITF research materials. “Since then, the Internet has changed the business environment in which media is produced and distributed by introducing new distribution channels and new industry participants. These industry changes may challenge the continued relevance of the capitalization model for episodic content.”

The EITF’s proposal is a reaction to a rapidly changing television industry. Customers no longer have to wait for a network to air a TV show in a specific time slot. Instead, today’s TV viewers can use Internet streaming services to watch single episodes or binge watch entire seasons at their discretion. The new distribution platforms significantly reduce producers’ risks for losing money on new TV shows.

What about amortization and impairment of capitalized costs?

During its September discussions, the EITF focused on the secondary effects of this decision, including whether a change in the cost capitalization guidance required changes to the amortization, impairment and disclosure requirements in ASC 926-20. EITF members decided to:

• Retain the current amortization model,
• Allow companies with transactions with no direct contracted revenue (such as those that receive subscription fees) to perform the impairment test at a group level, because impairment testing may be impractical at the individual film or TV show level, and
• Add indicators to help production companies determine when an impairment had occurred.

When will the FASB issue a proposed update?

The FASB plans to publish this exposure draft by year end. Once the proposal is released, it will be subject to a 30-day comment period. Based on those comments, the FASB will deliberate and decide on the next steps for this narrow scope project.

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