Netflix, Others’ Reporting of Production Costs Gets Review

The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...

By Denise Lugo

Netflix Inc., Hulu LLC, and other internet television program providers might get new accounting rules that could change their reported costs for producing TV series for subscription streaming services.

The main U.S. accounting rulemaker said it will modernize reporting of costs from the production of TV series’ streamed through subscription channels. The goal is for the costs to reflect the current production and distribution model.

How a company reports those costs can result in greater quarterly expenses, which could hurt earnings, and in turn, its stock price.

On-demand subscription-based TV shows like Game of Thrones and Star Trek, among others, are popular, raking in huge earnings for networks. To capitalize on consumer demand, mainstream media channels, such as CBS Corp. and NBCUniversal Media, are focusing more on that business model.

Netflix, Amazon.com Inc., Hulu, Apple Inc., and major TV and cable networks, among other smaller content producers, would find the rules extremely significant because they’re either solely focused on subscription-based TV series, or have branched into doing more along those lines, accountants said.

Production costs can reach billions of dollars. They typically include items such as location and post production costs. Other costs include special effects, directors, actors, and separate distinct expenses in creating an episode.

“For the companies that are affected, this is their core business,” Jonathan Paine, managing director at KPMG LLP, told Bloomberg Tax.

“This is one of their biggest uses of capital and so how that spend flows through the profit and loss I think is important to users of financial information.”

Netflix, Networks, Big Streaming Move

Netflix, which has over 117 million streaming membership in over 190 countries, for example has a lot of its own content. “It’s meant to be a hub to not only attract subscribers but to retain subscribers,” David Cieslak, executive vice president and chief cloud officer with RKLesolutions in Simi Valley, Calif., told Bloomberg Tax.

“When you’ve got strong original content that’s exclusive to you, customers are not going to be able to download it or view it elsewhere because it’s exclusive to your subscription; your channel,” Cieslak said. “The numbers Netflix is talking about is just mind-blowing in terms of what they’re looking to spend for that.”

Hulu and Amazon have similar subscription programs, and all traditional media companies such as CBS are getting into this business because the internet has opened up new ways to produce content and increase earnings.

Networks also set up constraints to generate more revenue from hit TV series. “When CBS rebooted Star Trek, they put the first episode out there for consumption, but if you want to see others, you have to subscribe,” KPMG’s Paine said.

Remove Capitalization Limits?

The Financial Accounting Standards Board said March 28 its special task force will consider whether to remove an accounting constraint that determines how much costs can be capitalized. The task force will determine whether companies still have the same amount of risk they had before that precludes them from capitalizing more costs.

Currently, companies are able to capitalize production costs—meaning record an asset and subsequently spread the figure out over a reporting period. Not all costs can be capitalized, however, because some programs end up being flops.

Companies therefore have a distinction for how to think about costs from film versus TV series, and those rules help them determine how much of those costs can be capitalized.

Reality series such as Keeping Up With the Kardashians and the Real Housewives of Beverly Hills, for example, would incur different costs than episodic TV series like Suits, or I Robot, practitioners said. Those shows, similar to film, can be watched in just one sitting. But the cost risks differ.

“Costs vary depending on whether or not its scripted or reality based,“ Cieslak said. “It’s not handled like film, episodic tends to not have the same kind of revenue recognition treatment that we’ve observed, they’re recognizing it when the show airs.”

To contact the reporter on this story: Denise Lugo in New York at dlugo@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Try Financial Accounting Resource Center