Highlights
- Entertainment accounting is crucial for the success of productions, and you cannot have production without good accounting.
- Expertise in entertainment accounting can optimize tax benefits and minimize production costs.
- Key elements of entertainment accounting include revenue, production costs, participation costs, and more.
- Entertainment Managed Services (EMS) offers specialized accounting solutions for the industry.
For most people, the entertainment world is all glitter, spotlights, awards, and surrounding yourself with the most influential figures in the industry. However, this is not so simple. To get to the awards and red carpets, you have to do many essential jobs that support production, and one of those jobs is accounting.
This doesn’t sound very glamorous. However, well-done accounting is one of the main pillars that leads a production to success. In this blog, we will talk about the importance of entertainment accounting, its functions and regulations within a production, and how to have the best accounting services for you.
Understanding Entertainment Accounting
Before going into details, the first thing to do is understand entertainment accounting.
As the name indicates, it is an area of finance and accounting dedicated to working with actors, musicians, production companies, record labels, and all companies and people operating in the entertainment world.
This job has several branches. You can be an accounting advisor for a person or a company, manage portfolios, or do accounting for different types of productions to ensure they are always within budget and comply with regulations and laws.
The services that accounting can offer in the entertainment world are varied. Some of them are bookkeeping and tax compliance to financial management services and business plans. Those services can be offered to individual clients and companies in the industry.
Navigating Accounting Standards in Entertainment
All industries have their regulations. Therefore, the entertainment industry does not have to be any different. Especially for all production companies, record labels, and large studios, there are special regulations that they must comply with, which apply only to them as part of the industry and include rules for licensing agreements, the buildout of cable systems, film costs, music licensing, and more.
Likewise, new content consumption models, such as the rise of streaming services and the accounting for film and TV content, have also evolved. The media and entertainment sector business models have adapted to this change, and so have the accounting standards.
Some of these standards are regulated by national entities such as the Financial Accounting Standards Board (FASB) and others by industry standards such as the Accounting Standards Update No. 2019-02, which addresses the accounting for costs of films and license agreements for program materials in the entertainment industry. All these regulations must be known and followed to have accurate entertainment accounting that does not compromise projects with errors.
“If there was a category for accounting at the Oscars, we’d likely be the lead nominee.”
Entertainment Managed Services (EMS)
Decoding FASB Standards
The Financial Accounting Standards Board (FASB) is a private, non-profit organization that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations in the United States.
The FASB suggests general rules or principles known as Generally Accepted Accounting Principles (GAAP), which define how businesses and other entities must compile and present their financial statements. These standards are recognized as authoritative by the U.S. Securities and Exchange Commission (SEC), which oversees the functioning of the U.S. stock markets.
In the case of the entertainment industry, the FASB has established some standards that apply particularly to the entertainment industry, such as Statement 53, titled “Financial Reporting by Producers and Distributors of Motion Picture Films.” It outlines specific rules and principles for recognizing revenue and expenses related to film production and distribution activities. It aims to improve consistency and comparability in financial reporting within the motion picture industry.
Other Statements, such as Nos. 63, 89, and 121 are not specifically linked to the industry but affect it and must be complied with.
Statement No. 63 pertains to financial reporting by broadcasters in the entertainment industry.
Statement No. 89, issued in December 1986, is titled “Financial Reporting and Changing Prices.” It supersedes FASB Statement No. 33 and its subsequent amendments and makes the supplementary disclosure of current cost/constant purchasing power information voluntary.
Statement No. 121, titled “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” provides guidelines for accounting for the impairment of long-lived assets and for long-lived assets to be disposed of.
Recording Chart of Accounts (COA) for Entertainment
A Recording Chart of Accounts (COA) is a standardized system that records and tracks financial transactions. It usually has five main categories: Assets, Liabilities, Equity, Revenue, and Expenses. But for the entertainment industry, these categories are arranged to be relevant and relative to the production and distribution of different productions.
Key Elements: Revenue, Film Costs, Participation Costs, and More
For the entertainment industry, applying a standardized framework for organizing and categorizing financial information, enabling accurate recording, reporting, and analysis of financial data is very important. Especially since the sources of financing and expenses can vary, analyzing the elements that make up the Chart of Accounts (COA) can clarify how income and expenses are tracked during the useful life of any production.
The first thing to be clear about is that the different income and expense accounts of the productions must be kept separate and try to keep them up to date. If everything is done in a single account, there may be errors, and the reports will be much more difficult.
These are the main accounts that must be made for any entertainment production:
- Production costs: This account records the costs of producing the film, series, or album. This could include pre-production, production, and post-production costs and other costs directly associated with creating the entertainment product.
- Participation costs: In this account, you will record the costs paid to musicians, actors, directors, producers, and others who have negotiated contracts that allow them to participate in a film’s profits.
- Manufacturing costs: These are the costs of producing physical objects such as DVDs, records, or other merchandise. These costs must also be considered.
- Revenue: They are the profits that the product produces. To keep in mind, you must consider the source of that profit.
- Deferred revenue: This account is for revenue that has been received but not yet earned. For example, if you receive payment for a film that is still in production, this would be recorded as deferred revenue.
- Cost of sales and services: These are the distribution and marketing costs of entertainment products.
- Other expenses: These have nothing to do with production per se. Administrative, travel, and other costs not directly associated with production.
- Interest: If you have taken out loans to finance your production, you must record the interest expenses.
- Non-monetary transactions: In this case, not everything in accounting is money. Goods and services that are received without exchanging money must also be considered a non-monetary transaction.
- Subsequent events: This account is for events that occur after the official production reporting period, for example, a re-release sometime later.
- Finally, remember that different types of productions may have different entertainment accounting needs, so this model is an example and can be adapted for accurate financial reporting.
In the entertainment world, numbers aren’t just figures. They tell the story behind the scenes
Entertainment Taxes Unveiled
Finally, an essential element for entertainment accounting complies with the law, especially the payment of taxes.
Taxes in this industry are different since they have to do with the different aspects of the sector.
As we saw in the previous section, musical and audiovisual productions have different incomes and expenses, and many of these are governed by different taxes at the local and national levels. These are some examples of Entertainment industry taxes:
- Sales tax: Most states impose a sales tax on the sale or rental of tangible personal property, including DVDs, Blu-rays, and other physical media. The sales tax rate and specific exemptions vary by state.
- State film production incentives: While not a tax per se, many states offer tax incentives, credits, or rebates to attract film and television production within their borders. These incentives can include tax credits for qualified production expenditures, sales tax exemptions on production-related purchases, and other financial incentives.
- Federal Communications Commission (FCC) Fees: The FCC imposes regulatory fees on certain entities engaged in broadcasting, cable television, satellite communications, and other telecommunications services.
- Copyright Royalties: While not a tax in the traditional sense, copyright royalties are payments made by users of copyrighted works, including audiovisual content, for the right to use those works. These royalties are typically administered by collecting societies or licensing organizations such as ASCAP, BMI, and the Motion Picture Licensing Corporation (MPLC).
Since the entertainment industry is one of the most regulated, your accountant and those who manage your money must take advantage of the many tax breaks available. This can help a lot with production costs.
For this reason, it is advisable to leave the accounting functions to experts in the industry who know the intricacies of the legislation and can offer you advice on EMS. We are delighted to be one of the best in entertainment accounting and deliver you the best service.
Elevate Your Productions with EMS Production Accounting
Accounting does not have awards, but we are sure that if it did, we would be nominated. At Entertainment Managed Services (EMS), with 18 years of experience, we provide comprehensive business solutions to the entertainment industry, being at the forefront of payroll processing for feature films, television, and commercial productions.
We provide production accounting on location and in-house for TV and filmmaking projects of any size, from indie films to major recording studios, streaming services, and networks in Hollywood.
Let EMS be your trusted partner. Contact us today, and let us crunch the numbers for you while you get back to business.
