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Hollywood accounting(also known as Hollywoodbookkeeping) refers to the opaque orcreative accountingmethodsused by the film, video, and television industry to budget and record profits for film projects. Expenditures can be inflated to reduce or eliminate the reportedprofitof the project, thereby reducing the amount which the corporation must pay in taxes androyaltiesor otherprofit-sharing agreements, as these are based on thenet profit.

Hollywood accounting gets its name from its prevalence in the entertainment industrythat is, in themoviestudios ofHollywoodat a time when most studios were located in Hollywood. Those affected can include writers and actors, but also production companies, producers and investors.^[1][2]A number of cases of creative accounting have been successfully pursued in court and resulted in hundreds of millions of dollars in awarded damages.

Contents

• 1Practices
• 2Examples
• 3See also
• 4References
• 5Further reading

Practices[edit]

Hollywood accounting can take several forms. In one form, asubsidiaryis formed to perform a given activity and the parent entity will extract money out of the film'srevenuein the form of charges for certain "services". For example, afilm studiohas a distribution arm as a sub-entity, which will then charge the studio a "distribution fee" essentially, the studio charging itself a sum it has total control over and hence control the profitability report of a project.^[3]

Another form of Hollywood accounting is a reverseTobashi scheme, in which the studio unjustlycross-collateralizesthe accounting of two projects and shifts losses from a flop onto a profitable project by shifting costs involving internal operations. This way, two unprofitable projects are created out of one on paper alone, primarily for the purpose of eliminating net participation liabilities. The specific schemes can range from the simple and obvious to the extremely complex. Generally, Hollywood accounting utilizes permanent creative accounting practices (such as charging an arbitrary distribution fee from one sub-entity to another) rather than temporary ones (like theRepo 105 scheme) since the measures are meant to permanently distort thebottom lineof a film project.

Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation ofoverhead:

• Production overhead: Studios, on average, calculate production overhead by using a figure around 15% of total production costs.
• Distribution overhead:Film distributorstypically keep 30% of what they receive from movie theaters ("gross rentals").
• Marketing overhead: To determine this number, studios usually choose about 10% of all advertising costs.

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

Because of the studio's ability to place arbitrary charges along theValue chain, net participation "points" (a percentage of thenet incomeas opposed to a percentage of the gross income of a film) are sometimes referred to as "monkey points". The term is attributed toEddie Murphy, who is said to have also stated that only a fool would accept net points in their contract.^[4][5]

ActressLynda CarteronThe Late Show with Joan Riverscommented "Don't ever settle for net profits. It's called 'creative accounting'."^[6]

Many insist on "gross points" (a percentage of some definition ofgrossrevenue) rather than net profit participation. This practice reduces the likelihood of a project showing a profit, as a production company will claim a portion of the reported box-office revenue was diverted directly to gross point participants. However, gross participation is a rare bargaining chip allowed by the studios and hence hard to obtain unless the person has considerable leverage in the deal - such as an A-list star, director or producer who is vital for a project.

Examples[edit]

According toLucasfilm,Return of the Jedi, despite having earned $475 million at the box office against a budget of $32.5 million, "has never gone into profit".^[7]

Art Buchwaldreceived a settlement from Paramount after his lawsuitBuchwald v. Paramount. The court found Paramount's actions "unconscionable", noting that it was impossible to believe that Eddie Murphy's 1988 comedyComing to America, which grossed $288 million, failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for $900,000,^[8]rather than have its accounting methods closely scrutinized.

ProducersMichael UslanandBenjamin Melnikerfiled abreach of contractlawsuit inLos Angeles County Superior Courton March 26, 1992. Uslan and Melniker claimed to be "the victims of a sinister campaign of fraud and coercion that has cheated them out of continuing involvement in the production of the 1989 filmBatmanand its sequels. We were denied proper credits, and deprived of any financial rewards for our indispensable creative contribution to the success ofBatman."^[9]Asuperior courtjudge rejected the lawsuit. Total revenues ofBatmanhave topped $2 billion, with Uslan claiming to have "not seen a penny more than that since our net profit participation has proved worthless."^[9]Warner Bros. offered the pair an out-of-court pay-off, a sum described by Uslan and Melniker's attorney as "two popcorns and twoCokes".^[10]

The estate ofJim GarrisonsuedWarner Bros.for their share of the profits from the movieJFK(1991), which was based on Garrison's bookOn the Trail of the Assassins.^[11]The case was settled in 1999, with Garrison's estate receiving a "very small settlement."^[12]

Winston Groom's price for the screenplay rights to his novelForrest Gumpincluded a 3% share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received only $350,000 for the rights and an additional $250,000 from the studio.^[13]

ScreenwriterEd Solomonsays that Sony claimsMen in Blackhas never broken even, despite grossing nearly $600 million against a $90 million budget.^[14]

Gone in 60 Secondsgrossed $240 million at the box office, but the studio declared a $212 million loss, primarily through Hollywood accounting as explained onNPR.^[15]The real figure is likely closer to $90 million.^[16]

Stan Lee, co-creator of the characterSpider-Man, had a contract awarding him 10% of the net profits of anything based on his characters. The filmSpider-Man(2002) made more than $800 million in revenue, but the producers claim that it did not make any profit as defined in Lee's contract, and Lee received nothing. In 2002 he filed alawsuitagainstMarvel Comics.^[17]The case was settled in January 2005, with Marvel paying $10 million to "finance past and future payments claimed by Mr. Lee."^[18]

The 2002 filmMy Big Fat Greek Weddingwas considered hugely successful for an independent film, yet according to the studio, the film lost money.^[19]Accordingly, the cast (with the exception ofNia Vardaloswho had a separate deal) sued the studio for their part of the profits. The original producers of the film have suedGold Circle Filmsdue to Hollywood accounting practices because the studio has claimed the film, which cost less than $6 million to make and made over $350 million at the box office, lost $20 million.^[20]

Peter Jackson, director ofThe Lord of the Rings, and his studioWingnut Films, brought a lawsuit againstNew Line Cinemaafter an audit. Jackson stated this is regarding "certain accounting practices". In response, New Line stated that their rights to a film ofThe Hobbitwere time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to directThe Hobbit, as had been anticipated.^[21]Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likenesses.^[22]Similarly, the Tolkien estate sued New Line, claiming that their contract entitled them to 7.5% of the gross receipts of the $6 billion hit.^[23]According to New Line's accounts, the trilogy made "horrendous losses" and no profit at all.^[24]

Michael MooresuedBobandHarvey Weinsteinin February 2011, claiming that they had used creative accounting to deprive him of his share of profits for the filmFahrenheit 9/11. Eventually, Moore reached a settlement with the Weinsteins and the lawsuit was dropped.^[25]

AWarner Bros.receipt was leaked online, showing that the hugely successful movieHarry Potter and the Order of the Phoenixended up with a $167 million loss on paper after grossing nearly $1 billion.^[26]This is especially egregious given that, without inflation adjustment, theWizarding Worldfilm series is the third highest-grossing film series of all time both domestically and internationally, afterStar Warsand theMarvel Cinematic Universe.Harry Potter and the Deathly Hallows - Part 2remains the highest-grossing movie ever for Warner Bros.^[27]The Hollywood accounting in the Harry Potter case included a $60 million interest charge on a $400 million budget over two years - an interest rate far higher than industry standard^[28]as well as high distribution and advertising fees paid out to Warner Bros. subsidiaries and sister companies.

The Walt Disney Companylost a $270 million lawsuit in 2010 toCeladorover accounting tricks used to mask profits on theWho Wants to Be a Millionairelicensed franchise in the United States: "ABC artificially deflated fees the network should have paid the production company BVT and Disney-owned Valleycrest, which in turn decreased Celador's share of revenue. Loss of merchandising revenue was also claimed."^[29]

Don Johnsonwon a lawsuit againstRysher Entertainmentwhich had attempted to wipe profits for the showNash Bridgesoff the books in order to reduce Johnson's 50% backend stake to zero; the jury awarded Johnson $23.2 million in damages.^[30]

21st Century Foxwas found guilty of using Hollywood accounting practice to defraud the producers and stars of the procedural dramaBonesand ordered to pay $179 million in missing profits, with the ruling made public.^[31]

Despite grossing $153 million against a $26 million budget, the 2019 romantic-comedyYesterdayreportedly lost $87.8 million, according toUniversal Picturesaccounting sheets.^[32]

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Here is an amazing glimpse into the dark side of the force that is Hollywood economics. The actor who played Darth Vader still has not received residuals from the 1983 film "Return of the Jedi" because the movie, which ranks 15th in U.S. box office history, still has no technical profits to distribute.

How can a movie that grossed $475 million on a $32 million budget not turn a profit? It comes down to Tinseltown accounting. As Planet Moneyexplainedin an interview with Edward Jay Epstein in 2010, studios typically set up a separate "corporation" for each movie they produce. Like any company, it calculates profits by subtracting expenses from revenues. Erase any possible profit, the studio charges this "movie corporation" a big fee that overshadows the film's revenue. For accounting purposes, the movie is a money "loser" and there are no profits to distribute.

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Confused? Imagine you're running a lemonade stand with your buddy Steve. Your mom says you have to share half your profits with your sister. But you don't wanna! So you pretend your buddy Steve is actually a corporation -- call him Steve, Inc -- charging you rent for the stand, the spoon, etc. "Dang, mom, I don't have any profits, I had to pay it all to Steve, Inc!" you say when you come home. But the money isn't gone. It's as good as yours -- in your best friend's pocket.

So: "Return of the Jedi" is a $475 million lemonade stand.

Hollywood can't really work like this, you're thinking. But it does. Last year, the website Techdirt revealed a balance sheet from "Harry Potter and the Order of the Phoenix", which, under Hollywood accounting, ended upwith a $167 million "loss"even though it's one of the top grossing films of the last decade. Warner Bros. charged about $350 million in distribution, advertising, and interest fees to this external corporation. Here's the receipt.

This brings us back to Darth. "Return of the Jedi" made almost half a billion dollars. But Return of the Jedi, Inc, still has no profit to pay its famous villain because the movie corp has paid so much of its revenue back to the studio in distribution fees. Here's actor David Prowse, viaTechdirt:

"I get these occasional letters from Lucasfilm saying that we regret to inform you that as Return of the Jedi has never gone into profit, we've got nothing to send you. Now here we're talking about one of the biggest releases of all time," said Prowse. "I don't want to look like I'm bitching about it," he said, "but on the other hand, if there's a pot of gold somewhere that I ought to be having a share of, I would like to see it."

Most corporations try to make a profit by limiting costs. Movies corporations manage to record a loss by maximizing costs. Only in Hollywood, indeed.

Required:

1. explain what is meant byHollywood Accounting, and why it exists?
2. Explain and give an example of how a film company can inflate their costs and lower their net income for a specific movie through the use of a related entity (or entities).
3. List a 3 examples of movies that were box office smashes, but were considered "losers" on the balance sheet and income statement.
4. What do powerful stars do to make sure they get fairly paid?
5. Does the practice ofHollywood Accountingviolate GAAP / IFRS?