Hollywood accounting

In accountancy, Hollywood accounting is the practice of distributing the profit earned by a large project to corporate entities which, though distinct from the one responsible for the project itself, are typically owned by the same people. This has the net result of reducing the project's reported profit by a substantial margin, sometimes even eliminating it altogether. This may be for income tax reasons, but more often it is to reduce the amount which the corporation must pay in royalties or other profit-sharing agreements.

Creative accountants

Hollywood accounting gets its name from the frequency with which it is alleged to be practiced in the entertainment industry — that is, in the movie studios of Hollywood. Stereotypically, the creators of material which is adapted into screenplays fall victim to Hollywood accounting.

In John D. MacDonald's novel Free Fall in Crimson (1981), an actress says to hero Travis McGee:

"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." (page 163 of the December 1981 Fawcett paperback edition)

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 determine about 10% of all advertising costs.

All of the above means of calculating overhead are highly controversial, even within the accounting industry. 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.

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. The saying in Hollywood is "a percentage of the net is a percentage of nothing."

On the other hand it should be noted that the costs bearing on a movie are many and diverse, and only a fraction of gross revenues ever goes back to the studios. This explains why companies such as Orion Pictures and Carolco went into bankruptcy soon after completing such successful films as The Silence of the Lambs and Terminator 2, respectively .

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. As such, 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 cheated him out of his share of the profits of the movie.

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.

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 also sued Playtone, HBO and Gold Circle Films due to Hollywood accounting practices because the studios have claimed that the film had actually lost $20 million.

According to his publisher's website , fantasy novelist Peter S. Beagle is owed a substantial amount of money by Granada Media International, the current owner of the animated movie based on Beagle's book The Last Unicorn. Beagle's contract entitles him to 5% of the net profits in the animated property, and 5% of the gross revenues from any film-related merchandising. Granada apparently claims that the movie cost more to make than it took in, that it earned no money between 1986 and their acquisition of it in 1999, and the compounded interest on the loss adds up to several times what it cost to make. Beagle is currently attempting to raise sufficient funds to challenge Granada in court.

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. 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."

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 has 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. 15 actors also are suing New Line Cinema claiming that they have never received their 5% of revenue from merchandise sold in relaton to the movie, which contains their likeness.

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.

References

• "Profit Participation Claims: Initiating Audits in the Film/Television Business," by Joseph D. Schleimer, Esq., Entertainment Law & Finance (October, 1996)
• "A Model Audit Clause for Use in Motion Picture Participation Agreements,"

by Joseph D. Schleimer, Esq., UCLA Entertainment Law Symposium, 1996

• "Sills & Adelmann Model Audit Clause," by Joseph D. Schleimer, Esq.

Steven Sills, C.P.A. and William Adelmann, C.P.A., UCLA Entertainment Law Symposium, 1996

• "Strategies for Litigating Net-Profit Accounting Suits," by Stan Soocher and Joseph D. Schleimer, Esq., New York Law Journal, September 27, 1996
• Engel, Ross and Bruce Ikawa. "Where's the Profit?" Management Accounting, January 1997.

See also

• WGA screenwriting credit system
• Creative accounting