When a television network buys the rights to show a series for film, the cost of the
Question:
When a television network buys the rights to show a series for film, the cost of the rights are treated as assets on the balance sheet as “program rights.” Several years ago ABC’s practice was to “expense” 80% of the cost in the period when the show first appears on the air. Subsequently, ABC reduced the first period expense to 75%. A financial analyst who follows the TV industry commented that the change could increase profits for ABC by as much as $50 million, which could turn a loss into a profit and boost earnings thereafter. REQUIRED:
a. Briefly state the matching principle, and explain how, in general, it should be applied in cases like the one described above.
b. Consider the positions of ABC’s stockholders, creditors, management, and auditors, and discuss how the matching principle may be very difficult to apply.
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