Accounting For Completed Film Inventory

Vivek Kumar | Movies | December 6, 2006 at 12:55 pm

Hi Folks,

This post is slightly different. Here I am wearing my 9 to 5 CPA cap,
but with a film perspective. I ‘m sure all the filmmakers have
completed films lying with you’ll which differ in value over time,
impairing as the days go by, but can also revive in value due to
environmental changes. For all of you’ll who are incorporated as
LLC’s, C or S corp or event LLP’s, there might be a need to value
your inventory of completed films. Hence when doing so please apply
the following standard (applicable to US based entitites or those
looking to present their financials to US based entities).

SOP 00-2, Film Questions and Answers

The AICPA staff, helped by industry experts, released the following
technical questions and answers (Q&As) on financial accounting and
reporting issues related to Statement of Position (SOP) 00-2,
Accounting by Producers or Distributors of Films. The staff may
continue to issue Q&As on SOP 00-2 as issues arise. Q&As will be
housed in the AICPA publication titled Technical Practice Aids,
copies of which are available through the AICPA order department at
(888) 777-7077. In addition, the Q&As will be placed in the
accounting standards part of the AICPA Web site
(www.aicpa.org/members/div/acctstd/general/othitem.htm).
Questions on these Q&As may be sent to Dan Noll via e-mail
(dnoll@aicpa.org).

TPA 6970.01 – Changes in film impairment estimates during quarters
within a fiscal year (Part I)

Inquiry — Company A produced a film that is subject to the
requirements of SOP 00-2, Accounting by Producers or Distributors of
Films. In accordance with paragraphs 43-47 of SOP 00-2, Company A
determined at the end of the first quarter of 20X1 that the film was
impaired. Company A wrote down the films cost basis by $2 million,
which represents the amount that the films net book value exceeded
the films fair value. Company A determined the films fair value by
using a discounted cash flow model. At the end of the second quarter
of 20X1, Company A determines based on updated information that the
films estimated net cash flows will be greater than anticipated at
the end of the first quarter. Is the change in the estimated net cash
flows a circumstance under SOP 00-2 that requires Company A to
restore all or a portion of the films cost basis that was written off
in the first quarter of 20X1?

Reply — Yes. Paragraph 36 of SOP 00-2 requires that changes in
estimates during the fiscal year be applied retroactively from the
beginning of the fiscal year.

In this situation, Company A would use the new information regarding
the films estimated net cash flows gathered in the second quarter as
if it were available in the first quarter to determine what the
amount of the impairment loss would have been in the first quarter.
Company A would record this adjustment to the impairment loss in the
second quarter. Company A also would adjust the films cost
amortization for the first and second quarters to reflect the revised
impairment loss. Company A should not restate the first quarter. In
accordance with paragraph 44 of SOP 00-2, the amount of the
impairment write down restored cannot result in the adjusted net book
value exceeding the films fair value at the end of the second
quarter. For example, if the revised first quarter calculation
indicates that the impairment loss was only $1 million at the end of
the first quarter, the actual adjustment at the end of the second
quarter would be different than the $1 million because of the effect
on the films cost amortization using the individual-film-forecast-
computation method, and possibly the films fair value at the end of
the second quarter. In addition, restorations of impairment write
downs on a film should not exceed previous impairment write downs
taken on that film.

Paragraph 57 of SOP 00-2 requires that Company A disclose the effect
of the change in estimate in the period that the change occurred. For
public registrants, the Management Discussion and Analysis should
address material restorations of prior impairment write downs.

Note that had the change in estimated net cash flows occurred in the
subsequent fiscal year, paragraph 44 of SOP 00-2 would prohibit
Company A from adjusting the impairment write down taken in 20X1.

TPA 6970.02 – Changes in film impairment estimates during quarters
within a fiscal year (Part II)

Inquiry — Assume the same facts in TPA 6970.01 with the following
exception. The films actual net cash inflow for the second quarter
was as expected by Company A at the end of the first quarter. Company
A, as expected, spent most of its advertising budget to promote the
film during the second quarter. The films estimated net cash inflow
for subsequent periods also did not change. As a result of the
advertising expenditures, using a discounted cash flow model at the
end of the second quarter, the films fair value increased from the
amount determined at the end of the first quarter. Is that a
circumstance under SOP 00-2, Accounting by Producers or Distributors
of Films, for which Company A should restore all or a portion of the
films cost basis that was previously written off in the first quarter
of 20X1?

Reply — No. In this situation the films estimated net cash flows did
not change from those used to estimate the films fair value at the
end of the first quarter. Accordingly, the guidance in paragraph 36
of SOP 00-2 is not applicable.

The AICPA is the premier national professional association for
CPAs in the U.S.

Sincerely,

Vivek “nothing creative about this one just pure facts” Kumar

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