Hollywood accounting can be every bit as creative as a good movie script. At least, thatis what some —\yotion Picture Project lawyers and journalists seem to be telling us. According to news reports, the hit movie Forrest Gum which won “best picture” honors at the Academy Awards, claimed a worldwide theatrical gross of $6 million in the first 18 months after its release. That amount excludes videocassette and soundtrack revenues, nor does it include licensin n Forrest Gump products such as wristwatches, ping-pong —~

paddles, and shri s. Yet, according to Paramount Studios, the film project lost $62 million oe On a box office gross of $382 million during its first year. eS Sree ee Forrest Gump is one of a string of hit movies to report a loss. Other losers include Batman, Rain Man, Dick Tracy, Ghostbusters, Alien, On Golden Pond, Fatal Attraction, and Coming to America. Each of these motion pictures grossed well over $100 million, but in each case, costs were reportedly higher than revenues.

How can the studios be losing so much money on their most successful projects? Sometimes what is referred to as a loss is not really a loss at all. Typically, profits are calculated based-on contracts between the studios and the film’s “net profit participants.” In a typical net profit participation contract,

“profit” is gross studio revenues after deducting:

» Accounting

(L0 1,7)

™ “Negative costs”—production costs and payments to “gross participants” (who receive a percentage of gross studio revenues).

Studio overhead (some of which is allocated to the film as a percentage of the gross revenue).

Promotion and distribution costs.

Advertising overhead (which is computed as a percentage of promotion and distribution costs).

A distribution fee paid directly to the studio.

Interest on the unrecovered costs (losses), whether or not the film was financed with debt accounted for as a project or job. Ne profit participation is a contract for compensation between the studio and certain individuals.

Winston Groom, the author of Forrest Gump, retained an attorney to obtain a share of the profits from the film, although Paramount reported a loss. Groom was paid $350,000 for the movie rights to the book and is entitled to 3 percent of the film’s net profits. Paramount says it expects Forrest Gump to eventually show a profit and has advanced Groom $250,000 against his net profit participation.

At issue in the lawsuit is the way the studios calculate net profit. Critics argue that some of the costs

(such as the distribution fee) are not really costs at all; instead, they are studio profits disguised as costs.

Overhead allocations, such as studio overhead and advertising overhead, are based on arbitrary allocations, which, some have argued, are much higher than the actual overhead costs that are assignable to the film. In addition, whether the net profit participants should lose compensation because of cost overruns is questionable; they are largely under the control of the director, the stars, and the studio.

~~ Will Paramount ever report a profit for Forrest Gump? That depends on how you define “profit”

and whose perspective you take. Actor Tom Hanks and director Robert Zemeckis have already made more than $20 million each, including a share of the gross. But from the point of view of the net profit participants (e.g., Winston Groom), the film might never show a profit.

Required Examine the following net profit participant statement of profit and loss.

a. What amount of box office gross revenues is required before Forrest Gump earns a profit according to the net profit participation contract?

b. What amount of box office gross revenues is required before Forrest Gump earns a profit for Paramount?

c. Is Paramount’s calculation of net profit fair to the net profit participants?