A tale of
two standards
Understanding the
similarities and key differences
between US GAAP and IFRS in
media and entertainment
!@#
Whether it’s the traditional press and broadcast media, or the multitude of new media, audiences now have more choice than ever before. For media and entertainment companies,
integration and adaptability are becoming critical success factors. Ernst & Young’s Global
Media & Entertainment Center brings together a worldwide team of professionals to help
you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market
trends, identify the implications and develop points of view on relevant industry issues.
Ultimately it enables us to help you meet your goals and compete more effectively. It’s
how Ernst & Young makes a difference.
Contents
1
Setting the stage
3
Publishing
4
Filmed entertainment
6
Broadcast, television stations and cable channels
8
Cable and satellite operators
9
Music
10
Preparing for opening night
A tale of two standards
Setting the stage
Gaining global consensus for a single set of standards is a tough business, as the
media and entertainment industry is all too aware. In the mid-1970s Sony and JVC
went head-to-head in an epic battle for video standard supremacy—VHS versus
Betamax. More recently, the headline read Blu-ray versus HD DVD.
In the accounting world, the debate continues over globally accepted accounting
standards: US Generally Accepted Accounting Principles (GAAP) versus International
Financial Reporting Standards (IFRS). In an ever-evolving era of mergers and
acquisitions, diversification and globalization, the tussle to agree on a single set
of globally accepted accounting standards is becoming increasingly relevant for
media and entertainment companies, particularly those with operations in multiple
jurisdictions around the world.
A Single Standard in Development
For years the US Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB) have been supporting the concept of a single set
of high-quality standards that can be consistently applied by issuers and auditors, and
more easily understood by investors worldwide. However, as closely as they worked
to find areas of common ground, the FASB and the IASB were also committed to
their own standards. The FASB remained loyal to US GAAP, while the IASB proceeded
to develop financial reporting standards. When, in 2002 the European Union (EU)
mandated the adoption of IFRS by all EU-listed companies from 2005 onward, the
concept of international standards received a major boost.
These developments, coupled with the increasing attractiveness of the European and
Asian capital markets, led emerging and transitioning economies—Brazil, China, India,
and Russia—to announce they would adopt or converge their existing standards to
IFRS. Canada, Chile, Israel, Korea, and other established markets have also chosen to
migrate from their local GAAP standards to IFRS by 2011.
As the celebrity of IFRS grows—more than 100 countries have now adopted or
permitted IFRS, or have based their local GAAP on the principles of IFRS—and the
Securities and Exchange Commission (SEC) debates the elimination of US GAAP,
there is little doubt that IFRS will emerge as the Blu-ray of the accounting world.
A tale of two standards
1
Setting the stage (continued)
“By definitively lining up behind a single set
of high-quality global accounting standards
that everyone can use, the SEC would
bring greater efficiency to companies that
currently must pay internal and external
legal and accounting experts—including
firms like Ernst & Young—to help them sort
through accounting differences across
multiple jurisdictions. The shift would be
good for investors as well: A single set
of standards would bring a new level
of comparability and reliability for
investors who place more and more
bets in faraway places.”
– Jim Turley,
Chairman and CEO, Ernst & Young
Giving IFRS the “greenlight”
On November 15, 2007, the SEC gave
its first hint that it might greenlight IFRS
as an acceptable body of accounting
standards equivalent to US GAAP. In an
historic and unanimous ruling, the SEC
announced that foreign private issuers
(FPIs)—non-US companies listed on a
US stock exchange—who did not include
US GAAP financial statements in their
annual reports, would be permitted to file
financial statements without reconciliation
to US GAAP, provided they prepared the
statements using IFRS as promulgated by
the IASB.
In August 2007, the SEC issued a Concept
Release which sought feedback on policy
issues related to the possible use of IFRS
by domestic registrants. Ernst & Young’s
response recommended that the SEC
commit unequivocally to IFRS and to
establish a requirement for adoption by all
SEC registrants as of a date certain. In a
series of roundtables hosted by the SEC in
December 2007, a significant majority of
panelists—including representatives from
public companies, auditing firms, investor
groups, academia, rating agencies,
the legal community and government
agencies—agreed with Ernst & Young’s
position.
Some panelists went as far as to suggest
specific dates for conversion, with
several suggesting 2011 to coincide with
the planned conversion date of several
other countries, including Canada and
India. Panelists in support of this date
indicated that requiring US conversion
simultaneously with these other countries
could decrease any disruption in the
global capital markets. Many panelists also
supported the idea of providing US issuers
with an option to convert to IFRS before
the mandatory adoption date.
Action!
While the official ending has not yet been
written for the transition to IFRS for US
registrants, we believe it is only a matter
of time. Companies that have already
experienced the transition suggest that
converting to IFRS is much more than a
technical exercise. It requires fundamental
change on multiple levels, and may take
2
A tale of two standards
between 12 to 24 months to implement.
Media and entertainment companies can
start preparing now by understanding the
key differences between US GAAP and
IFRS, and the implications migrating to
IFRS may have on their financial reporting.
US GAAP versus IFRS for Media and
Entertainment
This article compares several key
differences by media and entertainment
subsector, including filmed entertainment,
broadcast, music, cable and publishing.
While not comprehensive, we believe our
areas of focus provide insight into some
of the issues media and entertainment
companies should consider in evaluating
the application of US GAAP or IFRS to a
given transaction.
In some instances there is no specific
guidance under IFRS. Following the
hierarchy of IAS 8, Accounting Policies,
Changes in Accounting Estimates and
Errors (IAS 8), in cases where a practice
is not addressed, but is dealt with in the
standards of another country that could
offer authoritative guidance, the principles
of that guidance can be considered as
GAAP under IFRS. In practice, media
and entertainment companies preparing
financial statements under IFRS often look
to US GAAP when IFRS guidelines do not
provide specific guidance.
In a recently issued publication, US
GAAP v. IFRS: The Basics, Ernst & Young
provides an overview, by accounting area,
of the similarities and the differences
of the two standards. While the US
and international standards do contain
differences, the general principles,
conceptual framework and accounting
results are often the same or similar. We
suggest reading US GAAP v. IFRS: The
Basics in conjunction with this article.
Publishing
US GAAP does not provide accounting
guidance specific to the publishing
industry. As a result, similar to IFRS,
the publishing industry looks to general
accounting pronouncements for guidance,
with the exception of guidance under IAS
18, Revenue (IAS 18), which specifically
addresses subscription revenues.
Revenue
Revenue recognition
In publishing, the majority of revenues
are generated from the sale of advertising
space, from magazine or newspaper
circulation and newsstand sales, or from
book sales. Under US GAAP, publishing
companies rely on Staff Accounting
Bulletin 104, for revenue recognition
guidance. Under IFRS, revenue recognition
is prescribed by IAS 18. For the most part,
the application of each of these standards
to these types of transactions is similar.
Under IAS 18, subscription revenue is
recognized on a straight-line basis over the
subscription period, assuming the items
involved are of similar value in each time
period. When the items vary in value from
period to period, revenue is recognized
on the basis of the sales value of the item
sold in relation to the total estimated
sales value of all items covered by the
subscription.
Barter transactions
The approach to barter transactions
for publishing is similar to that used
for recording broadcast television
transactions for both US GAAP and IFRS.
Please refer to the Broadcast, Television
Stations and Cable Channels discussion
(page 6) for further details.
Cost capitalization and
amortization
Pre-publication costs
Under both US GAAP and IFRS,
pre-publication costs (artwork, pre-press,
editorial costs, etc.) are capitalized if
there is an indication of future economic
benefit related to these costs. Under
IFRS, pre-publication costs are considered
intangible assets and must meet the
criteria of IAS 38, Intangible Assets (IAS
38), in order to be capitalized. These
criteria are defined by IAS 38, and are
different for assets generated internally or
for acquired assets. For assets generated
internally, these criteria include:
•
technical feasibility of the asset
•
intention of management and
availability of resources to complete
the asset
•
ability to use or sell the asset
•
whether the asset will generate
probable future economic benefits
•
ability to reliably measure the
expenditure
In practice, most capitalized costs relate
to dictionaries, scholastic publications
and specialty series that have a recurring
market and audience.
Under both standards, costs paid to
external third parties are capitalized. Costs
incurred internally to develop ideas, edit or
write, are expensed under US GAAP and
are capitalized under IFRS if they meet the
criteria of IAS 38.
capitalized costs would be compared to
discounted future cash flows in order to
determine the amount of write-off, if any.
As a result, IFRS may result in an earlier
impairment write-down than US GAAP.
Under IFRS, any impairment write-off or
reserve may be reversed in future periods
if it becomes evident that the advance
will be recovered. US GAAP, on the other
hand, has no such provision.
Advertising expenses
Under US GAAP, advertising expenses
should be recorded in accordance with
Statement of Position 93-7, Reporting
on Advertising Costs. Under this
provision, costs to develop or create an
advertising campaign may be capitalized
until the advertising is first used. Costs
to communicate the advertising (i.e.,
television or radio spots, newspaper
or magazine ads) are expensed as the
advertisement is aired or published.
Under IAS 38, advertising costs must be
expensed as incurred.
Under IFRS, capitalized pre-publication
costs are recognized as an expense as the
corresponding revenues are recognized,
using an amortization model that
considers the estimated future revenue
stream.
Author advances
Under both standards, advances paid
against future royalties due to authors
are capitalized as an asset and expensed
as related revenues are earned or when
future recovery appears doubtful. In
practice, however, under IFRS only author
advances related to “proven authors” and
to projects that have been designated as
“go” projects are capitalized.
Valuation and Impairment
Under US GAAP, both pre-publication
costs and author advances are reviewed
periodically for indications that the prepublication costs or author advances are
impaired or not fully recoverable based
on undiscounted cash flows. If future
recovery is doubtful, any costs should
be written off to the lower of cost or
discounted cash flows. Under IFRS, the
A tale of two standards
3
Filmed entertainment
Statement of Position 00-2, Accounting by
Producers and Distributors of Films (SOP
00-2), serves as the governing guidance
for filmed entertainment companies filing
under US GAAP. Filmed entertainment
companies preparing financial statements
under IFRS may look to SOP 00-2 when
IFRS guidelines do not provide specific
guidance and providing application of
SOP 00-2 complies with general IFRS
principles.
Revenue
Revenue recognition
Under both SOP 00-2 and IAS 18, there
are five criteria that must be met for
revenue to be recognized. Both standards
require that the amount of revenue be
determinable for recognition of revenue to
take place. US GAAP requires delivery or
availability of the product for immediate
and unconditional delivery, while IFRS
requires that the significant risks and
rewards of ownership be transferred to the
buyer.
US GAAP requires evidence of an
arrangement with a customer, reasonably
assured collection of the arrangement
fee, and that the license period of the
arrangement begin prior to revenue
recognition. IFRS has no formal
requirement for delivery or that the
license period begin prior to revenue
being recognized, as long as the other
criteria have been met. As a result, in
certain licensing arrangements, it is
possible to reach a conclusion under IFRS
to recognize revenue upon signing of
the contract. However, in practice, most
companies filing under IFRS elect to follow
revenue recognition principles similar to
those articulated in SOP 00-2 and wait for
the license period to begin to recognize
revenue.
For home entertainment sales, both IFRS
and US GAAP require the estimation
of a reserve for returns or discounts at
the time revenue is recognized. Returns
reserves are recorded as a reduction to
revenues under both US GAAP and IFRS.
4
Minimum guarantees and advances
IFRS and US GAAP are, for the most part,
similar with respect to the recognition
of revenue from advances or minimum
guarantees. Both standards address
nonrefundable guarantees and suggest
that revenues can be recognized in full
when the other conditions of revenue
recognition are met. Under US GAAP, if
a seller has some ongoing obligation to
the buyer, or if the license period has not
yet begun, revenue from the minimum
guarantee should be deferred and
recognized only when the revenue criteria
have been met.
Under IFRS, minimum guarantees are
generally recognized in a manner similar
to US GAAP. However, an example
provided by IAS 18 would allow straightline recognition of minimum guarantees
over the term of the agreement in certain
circumstances, if such revenue recognition
is determined to be in accordance with the
substance of the agreement. For example,
a catalogue of films might be amortized
on a straight-line basis, if the straight-line
method fairly represents the utilization of
the asset.
Royalties
If an arrangement calls for the payment of
royalties or variable fees, both standards
require recognition of revenue only when
the royalty has been earned and when it
is probable that the fee or royalty will be
received. This frequently results in “cash
basis” recording of royalty revenues.
Gross versus net reporting of revenues
In assessing whether revenue should be
reported gross, with a separate display of
costs of sales, or on a net basis, EITF 9919, Reporting Revenue Gross as a Principal
versus Net as Asset Agent (EITF 9919), provides indicators of whether the
company acts as the principal in the
transaction. These indicators include
whether the company is the primary
obligor under the arrangement, has
latitude in establishing prices, performs
part of the service to customer, or has
inventory or credit risk. In the filmed
entertainment business, co-production
arrangements and many distribution
A tale of two standards
and licensing arrangements may require
analysis under EITF 99-19 to determine
proper reporting of revenues.
IAS 18 acknowledges that, in an agency
relationship, the amounts collected on
behalf of the principal are not considered
revenue. Instead, revenue is the amount
of the commission earned by the agent.
As “principal” is not defined under IFRS,
companies reporting under IFRS may refer
to US GAAP to assess the nature of the
relationship.
Barter transactions
Within the film and television industries,
a company may occasionally license
programming to television stations in
exchange for advertising time on those
stations. Under APB 29, Accounting
for Nonmonetary Transactions, these
transactions may qualify as nonmonetary
exchanges. Revenue and/or expenses
are recognized based on the fair value of
the assets received or transferred, if the
fair value of the asset can be measured
reliably.
Under IFRS, however, barter transactions
are regarded as transactions which
generate revenue only when the services
exchanged are dissimilar and the amount
of revenue can be measured reliably. For
example, in the filmed entertainment
industry, the exchange of television
programming for advertising time would
be considered a dissimilar transaction, and
revenue or expense would be recorded
appropriately. For a more detailed
discussion of the treatment of barter
transactions under IFRS, see page 6 in the
Broadcast, Television Station and Cable
Channels section.
Production costs
Capitalization of production costs
For the most part, US GAAP and IFRS
guidelines are similar with respect to
capitalized production costs. Two key
differences lie in the capitalization of
development costs and the capitalization
of interest.
Film costs include expenditures for
properties (such as film rights to books,
stage plays, or original screenplays),
and the cost of adapting or developing
the properties. The US standard requires
that a company periodically review
properties in development and, when it is
determined that the property will not be
used, recognize it as a loss by charging the
cumulative costs to the income statement.
It is presumed that a property will not be
used if it has not been set for production
within three years from the time of the
first capitalized transaction.
Under IFRS, film costs are considered
intangible assets. As a result, costs to
develop a project can only be capitalized
if they meet the criteria of IAS 38. Please
refer to the discussion of these criteria in
the Publishing section (page 3).
The criteria relating to the ability to
generate future economic benefits are
usually difficult to prove for development
costs as they occur at a very early stage
in the production of the project. This is
why such costs are expensed as incurred
under IFRS if they do not meet the
criteria. Generally companies consider the
“greenlight” date as being the point where
it is evident that all criteria are met.
Acquired costs are more frequently
capitalized since the conditions to be
met are less stringent. IAS 38 criteria for
capitalizing acquired assets require only
that it be probable that expected future
economic benefits from the asset will flow
to the entity and that the cost of the asset
can be reliably measured. Therefore, in
practice, acquired rights are almost always
capitalized under IFRS.
In terms of capitalized interest, US GAAP
requires it. At present, IAS 23, Borrowing
Costs (IAS 23), allows companies to
either capitalize or expense interest
costs associated with film and television
productions. In practice, under IFRS,
interest is generally not capitalized to
production costs. However in March 2007,
IAS 23 was revised in this area and the
revised standard, which is elective prior to
1 January 2009, makes capitalization of
interest mandatory for accounting periods
beginning after that date.
Amortization of capitalized production
costs
When it comes to amortization of
capitalized production costs, US GAAP
offers specific guidance; IFRS does not.
Under US GAAP, film costs are amortized
using the individual film forecast (IFF)
method. The IFF method requires the
estimation of future “ultimate” revenues
and ultimate costs.
Although IFRS offers no specific guidance
for amortization of capitalized film costs,
it does address amortization of intangible
assets and indicates that the amortization
method should reflect the pattern of
consumption of the revenue that the
intangible asset provides.
Other costs
Participations and residuals
IFRS does not specifically address
participations and residuals. As a result,
companies reporting under IFRS record
these costs using principles similar to
those provided by US GAAP.
Advertising, marketing and exploitation
costs
Generally speaking, advertising, marketing
and exploitation costs are expensed as
incurred under both US GAAP and IFRS.
Because of the overriding premise that the
principles of other relevant GAAP can be
applied when IFRS does not specifically
address an issue, in practice, under IFRS,
film costs are amortized using a method
consistent with the IFF method.
Valuation and impairment
Assessing impairment of capitalized
film costs is similar for both US GAAP
and IFRS. Under SOP 00-2, if an event
or a change in circumstances indicates
that a company should assess whether
the fair value of a film is less than its
unamortized film costs, the company
should determine the fair value of the
film and write off any excess of carrying
value over the calculated fair value of
the film. IFRS requires that impairment
be assessed if there is an “impairment
indicator” and provides guidelines for
determining the recoverable amount.
Both US GAAP and IFRS require that the
fair or recoverable amount be calculated
using estimated future cash inflows and
appropriate discount rates. Under certain
circumstances, IFRS allows for the reversal
of impairment write-downs if it becomes
evident that the value of the asset will
be recovered. SOP 00-2 provides that an
entity should not subsequently restore
any amounts written off, once capitalized
production costs have been written down
to fair value at the close of an annual fiscal
period.
A tale of two standards
5
Broadcast, television stations
and cable channels
FAS 63, Financial Reporting by
Broadcasters (FAS 63), serves as the US
GAAP standard for financial accounting
and reporting for broadcasters. This
standard, along with various revenue
recognition guidance, provides the
basic accounting principles applied by
broadcasters for revenue recognition, cost
capitalization and cost recognition.
Broadcast companies preparing financial
statements under IFRS may look to FAS 63
when IFRS guidelines do not provide
specific guidance and providing application
of FAS 63 complies with general IFRS
principles.
Revenue
Revenue recognition
Revenue recognition principles for
broadcasters under US GAAP and IFRS are
similar. Advertising revenue is recognized
at the time the advertising is aired. If
several spots are purchased for one fee,
the revenue is allocated to each of the
spots on a systematic and rational basis.
Subscription revenues are recognized
ratably over the subscription period and
pay-per-view revenues are recognized
at the time the programming is aired.
However, the accounting for barter
transactions requires closer examination.
Barter transactions
Barter transactions can consist of
the provision of advertising services
in exchange for the supply of other
advertising services, or the provision of
advertising in exchange for goods and
services. Under US GAAP, advertisingfor-advertising barter transactions
are recognized if the fair value of
the advertising surrendered in the
transaction can be determined based on
the company’s own historical practice of
receiving cash for similar advertising from
buyers unrelated to the counterparty in
the barter transaction. In many cases,
broadcasting spots are pre-emptable, or
aired at the discretion of the advertiser.
Thus, under US GAAP, there is some
difficulty in recognizing revenue, and
therefore significant judgment when
assigning a value to those spots is
required. Barter transactions involving
the exchange of advertising for goods
or services, such as the exchange of
6
advertising for programming content,
should be based on the fair value of
the goods or services exchanged in
accordance with APB 29. An exception
to this rule, however, occurs when a
network provides primetime network
programming to an affiliate station in
exchange for advertising time. Under this
scenario, no revenues or programming
costs are recorded by the affiliate station;
however, the network would record
advertising revenues and amortization of
programming costs.
Under IFRS, barter transactions are
regarded as transactions which generate
revenue only when the services exchanged
are dissimilar and the amount of revenue
can be measured reliably. At issue,
however, is that IFRS does not provide
a definition of a similar or dissimilar
transaction. Therefore, there is diversity
in practice among broadcast and
television stations and cable channels
in the application of IFRS guidance. For
example, an exchange of advertising
services for advertising services is not a
transaction that would generate revenue
or expense under IFRS. However, an
exchange of advertising services for
programming content would be considered
a dissimilar transaction and revenues
or programming rights costs would be
recorded accordingly. It is worth noting,
however, that if a barter transaction
crosses two accounting periods and,
at the close of the financial period,
the completion or fulfillment of the
transaction is “unbalanced,” the entity
must record an asset or liability in the
financial statements.
Multiple-element arrangements
In the broadcasting industry, multipleelement arrangements can include the
sale of Internet ad time and broadcasting
ad time on television or radio.
Under EITF 00-21, Revenue Arrangements
with Multiple Deliverables, if a company
enters into a sales contract where multiple
elements are sold at the same time to
the same customer, the company must
evaluate whether the delivered element
has stand-alone value to the customer.
If there is objective fair value evidence
for the undelivered item, and if the
A tale of two standards
arrangement includes a general right of
return relative to the delivered element,
and delivery of the undelivered item is
considered probable and substantially
in control of the vendor, the multiple
elements would be accounted for
separately. Otherwise the delivered
element is combined with the undelivered
element and accounted for as a single unit
of accounting.
Under IFRS, in certain circumstances, it is
necessary to apply the recognition criteria
to the seperately identifiable components
of a single transaction in order to reflect
the substance of the transaction. The
recognition criteria are applied to two or
more transactions together when they are
linked in such a way that the commercial
effect cannot be understood without
reference to the series of transactions as
a whole. Since IFRS does not have detailed
guidance, companies applying IFRS look
to other acceptable accounting principles
in other countries, including US GAAP,
to determine the accounting for multiple
element arrangements. A difference may
arise however, in terms of allocating the
value of the transaction between the
various elements. Under US GAAP, the
value allocated to the first element may
be “capped” based on the amount of
cash received or the value of previous,
similar stand-alone transactions. IAS 18
requires the allocation of the elements
to be based on the relative fair values of
the elements. These transactions require
careful, in-depth analysis to determine
the appropriate treatment under both
standards.
Gross versus net reporting of revenues
Assessing gross versus net reporting of
revenues in the broadcasting industry is
similar to the approach used for filmed
entertainment under both US GAAP
and IFRS. Please refer to the filmed
entertainment section for further detail on
key differences.
Cost capitalization and
amortization
Programming rights
Programming rights are generally
recognized in the financial statements
as a separate asset on the balance
sheet, allocated between current and
long-term assets. Generally, capitalized
costs should be amortized based on the
estimated number of future showings.
Licenses providing unlimited showings
of programs with similar characteristics
may be amortized over the period of the
agreement if the estimated number of
future showings is not determinable. For
program series and other syndicated
products, an accelerated method of
amortization may be used if the first
showing is more valuable to a station than
reruns.
No major differences in amortization of
the asset exist between US GAAP and
IFRS.
However, an issue may arise in
determining when to record the
programming asset and related liability
relating to a sports event, due to the
fact that contracts may be entered into
and executed well in advance of the
event being aired. Under US GAAP, live
programs are generally recorded and
expensed when aired. Under IFRS, two
diverse views exist:
•
Record an asset and liability at the
earlier of the opening of the sports
broadcasting period or upon first
payment; or
•
Record the asset and liability at the
signing of the contract irrespective
of the date of the payment or the
occurrence of the sporting event
Paragraph 91 of the IFRS Framework
highlights that “in practice, obligations
under contracts that are equally
proportionately unperformed (for
example, liabilities for inventory ordered
but not yet received) are generally not
recognized as liabilities in the financial
statements.” When a contract is signed,
no payment has been made, no service
has been rendered and the transaction is
equally unperformed by both parties in the
contract. Therefore, no debt and no asset
should be recorded by the broadcaster at
this stage, but rather an off balance sheet
commitment has to be recorded.
The support for the second view is
that at the signing of the contract the
broadcaster is ensured the right to air the
future sporting event from which future
economic benefits are expected, and, as
the price is determined in the contract, the
criteria to record an asset under the IFRS
Framework have been fulfilled.
Each case needs to be carefully analyzed
based on the individual circumstances of
the transaction.
In addition, some companies reporting
under IFRS consider broadcasting rights
to be defined as intangible assets, while
others classify the rights as inventories.
Regardless of the balance sheet
classification, under IFRS broadcasting
rights are recognized in the profit and loss
statement consistently with US GAAP.
Valuation and impairment
Capitalized programming rights and
licenses must be periodically assessed
for impairment under both US GAAP and
IFRS. Under FAS 63, the unamortized
programming rights are evaluated
for impairment based on the lower
of unamortized cost or net realizable
value on a program by program, series,
package, or daypart basis—as appropriate.
Under IFRS, if an impairment indicator
exists, a comparison is made between
the carrying value of the asset with the
discounted estimated future cash flows
associated with the asset. As a result,
IFRS may result in earlier impairment
write-downs than US GAAP. Also, under
certain circumstances, IFRS allows for
the reversal of impairment write-downs in
future periods if it becomes evident that
the value of the asset will be recovered.
However, FAS 63 provides that a writedown from unamortized cost to a lower
estimated net realizable value establishes
a new cost basis.
the rights to broadcast programming over
the airwaves. Similar payments are made
to various governments by broadcasters
outside of the US as well. Under US GAAP,
payments for FCC licenses are capitalized
and in many cases treated as an indefinitelived asset. In non-US jurisdictions,
payments may include an initial, up-front
payment, as well as annual or periodic
payments. IFRS requires that the total
amount to be paid under the contract be
estimated and discounted to the fair value
at the time the contract is recorded. The
fair value of all payments to be made
under the contract should be capitalized
as an intangible asset and amortized
in accordance with IAS 38. Under this
provision, the amortization method should
reflect the pattern of consumption of the
revenue that the intangible asset provides.
In practice, capitalized costs related to
broadcasting rights are amortized ratably
over the life of the contract.
Sometimes, a new cable programming
provider may pay an incentive fee to
a cable television operator to carry a
new cable channel. These payments
are capitalized by the cable channel
and amortized based on the terms of
the contract: either based on estimated
subscriber revenues or over the period
covered by the contract. The amortization
expense for these launch incentive fees is
recorded as a reduction to revenue under
both US GAAP and IFRS.
Other matters
In the US, payments are made
by broadcasters to the Federal
Communications Commission (FCC) for
A tale of two standards
7
Cable and satellite operators
FAS 51, Financial Reporting by Cable
Television Companies (as amended) (FAS
51), serves as the US GAAP standard
for financial accounting and reporting of
costs, expenses, and revenues applicable
to the construction and operation of cable
television systems.
Cable television companies preparing
financial statements under IFRS may look
to FAS 51 when IFRS guidelines do not
provide specific guidance and providing
application of FAS 51 complies with
general IFRS principles.
Revenue
Revenue recognition
Revenues for cable television companies
are earned from a variety of sources,
including subscription fees for video, highspeed data transmission, and telephone
service, advertising, installation fees,
customer premise equipment (CPE)
rental revenues, and multiple-element
arrangements.
Under both US GAAP and IFRS,
subscription fees are recognized as
the services are provided or over the
subscription term. Advertising revenues
are recognized as the ads are aired.
Under US GAAP, installation fee revenues
are generally recognized up to the amount
of costs incurred for the installation
with any excess revenue deferred and
amortized over the estimated customer
life.
In contrast, IFRS considers whether the
installation costs are a separate element.
If the installation is considered a separate
element and can be reliably estimated,
no deferral occurs. If the installation is
not considered a separate element, the
entire amount of revenue earned from the
installation is deferred and amortized over
the estimated customer life.
Multiple-element arrangements
The treatment of multiple-element
arrangements for cable is the same as
that for broadcasting under both US GAAP
and IFRS. Please refer to the Broadcast,
Television Stations and Cable Channels
section (page 6) for further details.
8
Cost capitalization and
amortization
Costs
Cable television companies incur various
costs including, among others, costs of the
plant to build the cable system, the cost
of the drop from the street to the house,
costs to sign up new customers, cost of
CPE (e.g., converter boxes, modems,
DVRs) and programming costs. US GAAP
and IFRS treat costs similarly in most
circumstances. A cable television plant
is depreciated over its useful life, while
the cost of the drop is depreciated over
its physical life (e.g., 6 to 10 years) not
to exceed the life of the plant. Costs to
sign on new customers are treated as
marketing costs and expensed. CPE not
sold to the customer is depreciated over
a short period such as three to five years.
Costs for programming are recorded based
on the underlying contractual agreements
with the programming vendors (such as
a rate per subscriber) and expensed as
incurred.
Another typical ongoing “cost” of a
cable TV company is the amortization
of various definite-lived intangible
assets, including acquired customer
relationships, purchased contract rights
(otherwise known as purchased right-of
ways or “door fees”) and costs incurred
in connection with the renewals of
franchise agreements. These definitelived intangible assets are amortized over
their respective contract lives, except for
customer relationship intangibles, which
are amortized over the average term of
the customer connection.
A key difference lies in the capitalization
of interest costs. US GAAP requires
capitalization of interests costs during
the construction period of a cable plant
asset. IAS 23, on the other hand, allows
companies to either capitalize interest
or expense as incurred. In practice, most
companies elect not to capitalize interest.
As discussed for Filmed Entertainment on
page 5, IAS 23 has been recently revised
and capitalization of interest is elective
prior to 1 January 2009, at which time
the capitalization of interest becomes
mandatory.
A tale of two standards
Franchise fees
In the US, franchise fees are typically paid
to the local municipality and frequently
passed on to customers. Generally,
however, franchise fees are due to the
municipality whether the customer pays
or not. Fees charged to the customer are
reported as gross revenue while the costs
paid to the municipality are reported as
gross costs. In many jurisdictions outside
the U.S., these fees are not always levied
by the local municipality.
Overall, IFRS and US GAAP are similar
in their approaches to evaluating the
presentation of franchise fees in the profit
and loss statement. Further discussion
of the application of gross versus net
revenue reporting can be found in the
Filmed Entertainment section.
Launch incentive fees
Accounting for launch incentive fees is
consistent between the US GAAP and
IFRS. Launch incentive fees are paid by
cable programming providers to the cable
television company upon the launch of a
new cable channel. Fees received by the
cable television operators are recorded
as a deferred marketing credit and offset
against any costs incurred to launch the
cable network. To the extent that costs are
not incurred to offset the cash received,
the remaining deferred credit is amortized
and recorded as an offset to programming
expense over the term of the underlying
cable programming agreement.
Music
FAS 50, Financial Reporting in the
Record and Music Industry, serves as the
governing guidance for US GAAP. This
standard provides specific guidance for
revenue recognition, artist compensation
costs, and record master costs. Following
the hierarchy of IAS 8, music companies
preparing financial statements under IFRS
may look to FAS 50 when IFRS guidelines
do not provide specific guidance and
providing application of FAS 50 complies
with general IFRS principles.
date. In practice, under IFRS, revenues
are recognized when ownership of the
title changes provided this date is not
significantly different from the shipment
date. Otherwise, an argument could be
made to delay revenue recognition until
release or until title changes, even though
shipment has occurred. Determination of
the revenue recognition date under IFRS
requires careful analysis by the company
to determine whether all revenue
recognition criteria have been met.
Revenue
Licensing arrangements
Under US GAAP, licensing revenues may
be recognized if a noncancelable contract
has been signed, a fee has been agreed
upon, the rights have been delivered
to the licensee, who is free to exercise
them, and the licensor has no remaining
significant obligation to furnish music or
records.
Under both US GAAP and IFRS,
appropriate consideration must be given
to estimating return reserves at the
time the revenue is recognized. Returns
reserves are recorded as a reduction to
revenues under both US GAAP and IFRS.
As with the recognition of revenues for
filmed entertainment, IFRS does not
require delivery or availability. In practice,
however, companies reporting under
IFRS typically record licensing revenues
at the beginning of the licensing period,
assuming all other criteria for revenue
recognition have been met.
Recorded music
In practice, under US GAAP revenues
are generally recognized upon shipment
(with appropriate consideration given to
FOB terms). In rare instances, revenue
recognition may be delayed if shipment
is made significantly in advance of the
release date.
Under IFRS, there is no precise guidance
with respect to whether revenue should
be recognized upon shipment or release
date. However, IFRS’s guidance on
revenue recognition requires that the
significant risks and rewards of ownership
be transferred to the buyer. It also
requires that the seller cannot retain
continuing managerial involvement or
effective control over the goods sold.
Under this requirement, a release date
that is stipulated by the seller may
constitute “effective control” and, thus,
delay revenue recognition until release
Advances and minimum guarantees
Minimum guarantees should be recognized
as a liability and recognized as revenue
as the license fee is earned under the
agreement. If the licensor cannot
otherwise determine the amount of
the license fee earned, the minimum
guarantee should be recognized equally
over the remaining performance period or
license term.
Under IFRS, revenues can be recognized in
full when the other conditions of revenue
recognition are met. Music companies
filing under IFRS generally recognize
revenues from advances and minimum
guarantees at the beginning of the license
period.
Cost capitalization and
amortization
Artist advances
There is some disparity in practice
between US GAAP and IFRS with respect
to royalties advanced to artists. Under US
GAAP, an artist advance royalty can be
capitalized only if past performance and
current popularity of the artist to whom
the advance is paid provide a sound basis
for estimating that the amount of the
advance will be recoverable from future
royalties to be earned by the artist. In
other words, an artist must be “proven”
before capitalization of advance royalties
is permitted. Once capitalized, advances
are recouped, or charged to expense, as
A tale of two standards
subsequent royalties are earned by the
artist. IFRS does not require proof of an
artist’s past success. As a result, advances
are capitalized as prepaid expenses,
with appropriate reserves against the
advance for any amounts estimated to
be unrecoverable from future earnings.
Prepaid artist advances are recouped from
future earnings by the artist and recorded
as expenses as recouped.
Record masters
US GAAP stipulates that the cost of
a record master borne by the record
company can be capitalized only if the
artist is “proven.” The amount capitalized
should be amortized over the estimated
life of the recorded performance, using
a method that reasonably relates the
amount to the net revenue expected to be
realized.
IFRS does not offer specific guidance
in this area. In practice, the costs of the
record masters borne by the company
are generally expensed. However, if
it is determined that the cost of the
record master is recoupable, such cost
may be capitalized and is subject to the
impairment review discussed below.
Valuation and impairment
Both US GAAP and IFRS require that
capitalized artist advances and record
masters be periodically reviewed for
impairment. The guidance of FAS 50
indicates that any impairment write-down
be determined by reference to subsequent
royalties (in the case of artist advances)
or future sales (in the case of capitalized
record masters)—both reflecting
undiscounted cash flows. Under IFRS,
the calculation of an impairment writedown would be similar to US GAAP, except
that IFRS would utilize discounted future
cash flows in the calculation of the future
royalties.As a result, IFRS may result in
earlier impairment write-downs than US
GAAP.
Under IFRS, impairment write-offs or
reserves may be reversed in future periods
if it becomes evident that the advance
or record master will be recovered. FAS
50 does not provide specific guidance in
this area, and there is some diversity in
practice.
9
Preparing for opening night
While the red carpet has yet to be rolled out, media and entertainment companies would
do well to begin thinking about IFRS adoption. One of the first key steps in that process,
say those who have already experienced the transition, is understanding the differences
between US GAAP and IFRS. While we have outlined some of the more obvious
differences in this article, other differences will be more subtle.
Those who have already experienced the transition to IFRS speak of underestimating the
amount of time and effort involved. US media and entertainment companies can achieve
a competitive advantage by studying the lessons learned by their European peers:
understand the differences, make decisions early, identify and implement technology
processes, and educate all stakeholders involved.
We have encouraged the SEC to set a date certain for transition from US GAAP to
IFRS for domestic registrants. By taking a proactive interest and learning from the
experiences of others, US media and entertainment companies have an opportunity to
shine on opening night.
Stay tuned for future articles in our US GAAP versus IFRS series, where we will be
discussing impairment, as well as the accounting challenges associated with new media.
10
A tale of two standards
Ernst & Young contacts
Global Media &
Entertainment Center
Global Area Leaders and
Advisory Panel Members
John Nendick
Farokh T. Balsara
Global Sector Leader
Los Angeles, CA
+ 1 213 977 3188
john.nendick@ey.com
Mumbai, India
+ 91 22 40356550
farokh.balsara@in.ey.com
Karen Angel
New York, NY
+ 1 212 773 3423
mark.besca@ey.com
Global Implementation
Director
Los Angeles, CA
+ 1 213 977 5809
karen.angel@ey.com
Beth Bemis
Global Markets Leader
Los Angeles, CA
+ 1 213 977 3208
beth.bemis@ey.com
Heather Briggs
M&E Senior Manager
Los Angeles, CA
+ 1 213 977 4219
heather.briggs@ey.com
Mike Fischer
M&E Assurance Advisory
Business Services
New York, NY
+ 1 212 773 7553
michael.fischer@ey.com
Feisal Nanji
Sector Resident
New York, NY
+ 1 212 773 2370
feisal.nanji@ey.com
Yooli Ryoo
Mark Besca
Neal Clarance
Vancouver, British Columbia
+ 1 604 648 3601
neal.g.clarance@ca.ey.com
Alan Flitcroft
London, England
+ 44 20 7951 3494
aflitcroft@uk.ey.com
Noriharu Fujita
Tokyo, Japan
+81 3 3503 1113
fujita-nrhr@shinnihon.or.jp
Gerhard Mueller
Munich, Germany
+ 49 89 14331 13108
gerhard.mueller@de.ey.com
Bruno Perrin
Paris, France
+ 33 1 46 93 65 43
bruno.perrin@fr.ey.com
Bryan Zekulich
Sydney, Australia
+ 61 2 9248 5833
bryan.zekulich@au.ey.com
Knowledge Manager
Los Angeles, CA
+ 1 213 977 4218
yooli.ryoo@ey.com
Pam Walker
Events Coordinator
Los Angeles, CA
+ 1 213 977 3046
pam.walker@ey.com
A tale of two standards
Global Service Line
Leaders and Advisory
Panel Members
Alan Luchs
Global M&E Tax Leader
+ 1 212 773 4380
alan.luchs@ey.com
Paul Macaluso
Advisory Panel Members
Steve Almassy
Global Technology Leader
+1 408 947 5533
stephen.almassy@ey.com
Howard Bass
+ 1 212 773 4841
howard.bass@ey.com
Global M&E Transaction
Advisory Services Leader
+ 1 213 240 7040
paul.macaluso@ey.com
Glenn Burr
Chris Pimlott
Global Telecommunications Leader
+ 33 1 46 93 62 05
vincent.de.la.bachelerie@fr.ey.com
Global M&E Tax Leader
+ 1 213 977 7721
chris.pimlott@ey.com
Gregg Sutherland
Global M&E Finance and
Performance Management
Leader
+ 1 720 931 4435
gregg.sutherland@ey.com
+ 1 213 977 3378
glenn.burr@ey.com
Vincent De La Bachelerie
Bud McDonald
+ 1 203 674 3510
bud.mcdonald@ey.com
Kevin Reilly
+ 1 212 773 2074
kevin.reilly@ey.com
Tim Teagle
+1 213 977 3216
tim.teagle@ey.com
Kenneth Walker
+ 1 818 703 4748
kenneth.walker@ey.com
Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction
and advisory services. Worldwide, our 130,000 people are
united by our shared values and an unwavering commitment
to quality. We make a difference by helping our people, our
clients and our wider communities achieve potential.
For more information, please visit www.ey.com
© 2008 EYGM Limited.
All Rights Reserved.
EYG No. EA0013
Ernst & Young refers to the global organization of member firms
of Ernst & Young Global Limited, each of which is a separate legal
entity. Ernst & Young Global Limited, a UK company limited by
guarantee, does not provide services to clients.
www.ey.com