Case 99-7

Class Act

Class Act, an SEC registrant, is a leading integrated producer and presenter of live theatrical productions. During the fourth quarter of 1997, Class Act entered into the following agreement:

Agreement

Class Act currently owns the rights to the critically acclaimed Broadway show Pencil Pushers. Due to the enormous success of Pencil Pushers, Class Act has entered into an agreement with Broadway Venues for the display of the show. Under the agreement, Class Act granted Broadway Venues, an unrelated and financially sound theatrical venue operator, the exclusive right within the U.S. to arrange and schedule a tour of Pencil Pushers at various theaters owned by Broadway Venues. Broadway Venues derives its revenues through the sale of tickets for theatrical performances at its venues. It believes that having the rights to book the critically acclaimed Pencil Pushers will not only be lucrative in terms of ticket sales for these performances, but will also result in enhanced sales of season tickets covering less desired shows (as individuals will purchase season tickets to ensure availability of tickets to Pencil Pushers). Agreements of this type have not been typical in the industry, but may become more frequent in the future due to the shortage of Broadway shows suitable for touring. Class Act currently has three touring productions of Pencil Pushers (i.e., production companies operated by Class Act) touring various other countries and each of these productions has been successfully touring for some time.

The agreement provides that Broadway Venues will be entitled to schedule the presentation of the tour for not less than 30 play weeks a year for a four-year period, commencing with the opening of the tour. The agreement also stipulates that Class Act will share in the tour gate receipts (i.e., Class Act will be entitled to 65% of gate receipts, while the remaining 35% will revert to Broadway Venues). It should be noted that this concept of "splitting" the gate receipts, included in the agreement, is a standard arrangement between theaters and producers of such shows and has not been affected by the agreement to sell the booking rights. As part of the agreement, Class Act has agreed that such production will be a fully rehearsed and directed first class touring production. Class Act has both the intent and the ability to use one, or a combination of, its three existing productions of Pencil Pushers to satisfy the requirements of its agreement with Broadway Venues.

In consideration for the agreement, Broadway Venues has agreed to pay Class Act a sum of $5 million. Of this amount, $1 million was paid by Broadway Venues to Class Act upon signing of the agreement in 1997. The remaining amount is to be paid in periodic installments and payment is expected to be completed within twelve months of signing the agreement. The agreement stipulates that the tour shall not commence until August 1998. This provision provides Broadway Venues the needed flexibility to arrange the tour and resolve scheduling conflicts, etc. The agreement is silent as to whether any payments are refundable if the tour never commences.

As of the audit report date in February 1998, an additional $2 million of the $5 million has been collected. Collectibility of the remaining funds is deemed probable based on the historical success of existing Pencil Pushers' production tours. Additionally, future costs to be incurred by Class Act (e.g., production payroll) will be offset by Class Act's 65% portion of the normal gate receipt revenues.

Class Act has concluded that the full agreement consideration of $5 million should be recorded as revenue upon signing the agreement (ignore any discounting impacts). Class Act further concludes that allocable gate receipts should be recorded when the productions are displayed.

Required:

When should revenue associated with the above agreement be recognized by Class Act?