Accounting of revenues & costs in Entertainment Ind.

A common practice amongst media owners is the bundling of space across various products, programmes, channels, publications and portals. This makes the accounting of revenues or costs challenging.

The Indian media and entertainment (M&E) industry has transformed in the last 15 years. The segments within the industry include TV broadcasting, publishing, radio, new media, filmed entertainment, software production, music and events. Significant differences between Indian GAAP and IFRS, pose both accounting and business challenges.

A common practice amongst media owners is the bundling of space across various products/programmes/channels/publications/portals. The accounting of revenues or costs becomes challenging where such space is marketed for a consolidated amount. There is no specific guidance under Indian GAAP or IFRS.

Relative fair value

However, under IFRS, the practice is to use the relative fair value method to allocate the revenue amongst the various components and recognise them as the components are delivered. Under Indian GAAP, there are disparate practices, including recognising full revenue upfront with a provision for cost made for the unrecognised components.

Media companies often enter into barter transactions, for example, broadcasters exchange rights to place advertisements on each other’s channels. Under IFRS, revenue from barter transactions is recognised at the fair value only when the exchange involves dissimilar goods/services. Under Indian GAAP, there is no guidance other than for dotcom companies; therefore, disparate practices exist, including not to record the barter transaction.

Under IFRS, the revenue from the sale of broadcast, film or exhibition rights may be recognised in full upon commencement of the licence period. It is not appropriate to recognise revenue prior to the date of commencement of the licence period since it is only from this date that the licensee is able to freely exploit the rights of the licence and hence has the rewards of ownership.

When the licensor is obliged to perform any significant acts or provide any significant services subsequent to delivery of the film to the licensee — for example, to promote the film — it would be appropriate to recognise revenue as the acts or services are performed (or, as a practical matter, on a straight-line basis over the period of the licence).

No specific guidance

There is no specific guidance for this under Indian GAAP, and hence, disparate practices are followed by various entities — some recognise upfront revenue while others defer the recognition of revenue, until commencement of the exploitation period/performance of significant act.

Rights for the exhibition of a film at cinemas may be granted on the basis of a percentage of the box office receipts, in which case revenue should be recognised as the entitlement to revenue arises based on box office receipts. If the fees only become payable when the box office receipts have exceeded a minimum level, IAS 18 suggests that revenue should not be recognised until the minimum level has been achieved. Some Indian companies have recognised revenue, before the minimum threshold has been achieved.

Significant expenditure is incurred for developing multiplexes. Normally, such expenditure is capitalised as leasehold improvements under Indian GAAP and subsequent replacements and overhauling are charged off to profit and loss account if they do not increase the originally assessed standard of performance.

Under IFRS, property, plant and equipment is to be accounted for on a component basis, whereby each significant component of the leasehold improvement having a different useful life has to be capitalised and depreciated separately. Subsequent replacement or overhauling are capitalised and depreciated over its own useful life.

Leased premises

Multiplexes are generally set up in leased premises wherein the rentals are stepped up over a period of time. Straight-lining of lease rentals in an operating lease, is required both by Indian GAAP and IFRS. However, under Indian GAAP, not all companies are straight-lining because land is scoped out of AS-19.

Under IFRS, there is no exemption. The UK IFRS conversion experience indicates that straight-lining had an impact on decisions to take new leases, because future rental increases were burdening current income statement. Henceforth, decision to take on a new lease will have to be taken both in the light of commercial and IFRS requirements. Similar considerations will apply to leases that have rent-free periods.

IFRS will significantly impact revenue and profit figures and the balance-sheet. Consequently, it would impact negatively or positively, dividend distribution, executive compensation, debt covenants, taxes to be paid, etc.

It may also result in a change in operational behaviour, for example, an emerging trend is that agreement with distributors for sale of a film grants them a put back option. To be able to recognise revenue under IFRS, media companies should ensure that such put back options are not granted to the distributors.

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