PayUAnother factor is that many finance specialists retired during the pandemic, Goldstein said, exacerbating the shortage. “It’s an issue that the industry is definitely grappling and challenged with, in a big way,” he said. But at what is hollywood accounting the time, Goldberg noted that the likelihood of payouts had declined in recent decades.
- This percentage covers various corporate expenses, effectively reducing the reported profit of the individual film.
- What it all means is that rather than becoming profitable at $150 million (the actual money spent), ZakWashCo Inc. now needs to earn over $400 million before anyone expecting a royalty sees an additional cent from the movie.
- This trope is also pretty prevalent with the recording industry as well, with artists somehow ending up broke even after having a huge record that sold millions of copies.
- Another form of Hollywood accounting is a reverse tobashi scheme, in which the studio unjustly cross-collateralizes the accounting of two projects and shifts losses from a flop onto a profitable project by shifting costs involving internal operations.
Such accounting practices have pushed many writers, like fantasy author Brandon Sanderson, to create their own publishing companies (an option that may not be realistic for most start-up and mid-level authors). Hollywood accounting gets its name from its prevalence in the entertainment industry—that is, in the movie studios of Hollywood at a time when most studios were located in Hollywood. Well, this is a fairly broad topic and today many producers suffer from this practice. A primary motivation is to reduce profit participation payouts to creative talent, such as actors, writers, and directors, who often have contracts entitling them to a share of a project’s net profits. By aggressively structuring expenses, studios ensure the “net profit” calculation frequently results in a zero or negative figure, limiting or eliminating these obligations.
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With a $55 million budget, the film had a phenomenal first week of release. As a result, the film grossed approximately $24 million in the United States. Despite its successful opening and nearly $682 million in revenue, the Oscar-winning film lost $62 million. Some Hollywood writers, directors and producers have net-profit deals with studios, where they are supposed to receive a certain percentage of the net profits, but can’t because these films are losing money on paper. When actors, writers, and directors are deprived of their fair share of profits, it can take a significant emotional and financial toll. Many high-profile cases and lawsuits have been filed by individuals who feel cheated of their rightful earnings.
The executive producers of 1989’s “Batman,” Benjamin Melniker and Michael Uslan, along with the movie’s screenwriters, had a net-profit share of zero. Melniker and Uslan sued Warner Bros. and Polygram Pictures, the production companies behind the film. Some writers say creative Hollywood accounting practices mean that studios aren’t spreading the wealth.
Example Audit Clause
This is a leadership position that oversees the first-, second- and third-assistant accountants. One step higher up the ladder is the key production accountant, and that’s where you start managing the budget, maintaining financial records and ensuring the entire production is going to come in on time and on budget. The scramble for production accountants stems from a couple of factors.
- This practice has been going on for a long time, and certainly pretty much everyone in the industry must be aware of it, but at least the lawyers and agents that negotiate the contracts.
- The audit clause is only as good as the accounting terms it seeks to enforce.
- She has been a journalist for over 20 years, having joined The Times in 2019 and reported for the Financial Times, Wall Street Journal and Dow Jones Newswires, Bloomberg News and Businessweek Magazine.
Movie investment has long been held as a dirty route to tax evasion. Production-based schemes are frequently cited in court cases brought by various revenue enforcement agencies across the world when they prosecute tax evasion. Investors get caught, but the studios providing the engine room of this sordid business just keep on trucking. Writers seem to frequently be on the receiving end of these Hollywood accounting practices. Screenwriter Ed Solomon says that Sony still tells him that Men in Black is still a loss-maker despite a $600 million take on a $90 million budget. That grossed at least $288 million on a budget of $35 million yet Paramount claimed it made no profit.
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This structure allows the production company to secure financing and offload risk. Art Buchwald received a settlement from Paramount Pictures after his lawsuit Buchwald v. Paramount (1990). Paramount settled for $900,000,8 rather than have its accounting methods closely scrutinized. Many insist on “gross points” (a percentage of some definition of gross revenue) rather than net profit participation.
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If such underpayment exceeds five percent of the amount paid under any respective payment, then Studio shall reimburse Artist for all reasonable costs of such inspection thereby incurred and actually paid by Artist in connection with the applicable audit. If you’re picturing really glamorous accountants crunching numbers in the sunshine — well, that’s probably an accurate image. But Hollywood accounting is really not about location; it’s an accounting style that movie and entertainment studios use to keep a project’s profits to themselves. Hollywood accounting can make some of the top-grossing films of a given year or, indeed, of all time seem unprofitable. Negative pick-up deals are pre-arranged agreements where a distributor or studio commits to purchase the completed film for a fixed amount.
Neville Johnson has even made a career of exploiting the fact that Hollywood doesn’t want any legal authority looking too closely at their accounting books to get justice for his clients. A good way to keep a movie out of profit is to keep going back and paying different departments for work ‘owed’, and delivering bonus’ upon bonus’. If you’ve worked on the film, and are ‘in on it’ (and willing to co-operate), if the film is successful there’s a good chance you’ll receive some kind of surprise ‘bonus’ (who’s real purpose is to stop the film having to commence net-point payouts). Studios can establish reserves for future expenses or losses by making deductions for contingencies, interest, and various additional costs that are also applied to lower the profits. They can then defer revenue recognition, get some bloke in a suit that went to Harvard to pull out an amortisation schedule, and tell you all about how your net points mean nothing.
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That’s why you normally see the gross income when studios brag about how much money the next Avengers movie made, opposed to the net income. Without the audit clause, a creator may be left relying on the goodwill of a studio to produce the requisite accounting information in order to determine if the creator is being compensated fairly. Beyond that, a creator’s only avenue to compel a studio to produce its financial information may be through the discovery process during litigation or arbitration. Litigation is costly and lengthy and the last thing a creator should have to spend their time and money on to make sure they are being paid correctly. By systematically reducing reported net profits, studios retain a larger share of revenue.
What is Hollywood Accounting?
“Harry Potter and the Order of the Phoenix,” released in 2007, pulled in more than $900 million worldwide, yet a leaked accounting statement revealed that it ended up “losing” $167 million. Other movies have similarly fared badly on paper despite high grosses, like 2018’s “Bohemian Rhapsody,” which also made over $900 million but lost $51 million. See also Box-Office Bomb where the movie makes low gross revenue for real, not just on paper, though the two have gone hand in hand a few times.
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Hence, the studio can avoid or reduce payouts to talent and other profit participants. Thus, doing this leads to disputes and legal battles between studios and those involved in the project. Investors with backend participation can also experience lower or no reported returns, despite a project’s commercial success. Their agreements are often structured around net profits, meaning the same accounting practices that limit payouts to creative talent also diminish profitability for investor returns.
Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or creative accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Expenditures can be inflated to reduce or eliminate the reported profit of the project, thereby reducing the amount which the corporation must pay in taxes and royalties or other profit-sharing agreements, as these are based on net profit. Hollywood studios often use creative accounting methods to reduce reported profits.
