ASC 405-926
Entertainment—Films
405 Liabilities
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ASC 405-926 governs how film production and distribution entities accrue participation costs — amounts owed to third parties such as actors and writers — and costs of insignificant post-release changes to a film. Participation costs are accrued using the individual-film-forecast-computation method (current period actual revenue over estimated remaining unrecognized ultimate revenue at the beginning of the fiscal year), but only when it is probable an entity will sacrifice assets to settle the obligation, and never for less than amounts currently payable. If the recorded participation liability exceeds estimated unpaid ultimate participation costs, the excess reduces unamortized film costs first, then goes to income.
Key points (7)
- Participation costs are accrued using the individual-film-forecast-computation method, applying the fraction of current period actual revenue over estimated remaining unrecognized ultimate revenue as of the beginning of the fiscal year to unaccrued ultimate participation costs (405-926-25-1).
- A participation liability is accrued only if it is probable there will be a sacrifice of assets to settle the obligation, and accrued participation costs at each balance sheet date shall not be less than amounts the entity is obligated to pay as of that date (405-926-25-2).
- Accrual begins when the film is released and the entity begins recognizing revenue from that film, and continues on fully amortized films as revenue is recognized (405-926-25-3; 405-926-25-5).
- Estimates of unaccrued ultimate participation costs must use assumptions consistent with the entity's estimates of film costs, exploitation costs, and ultimate revenue, as limited by 926-20-35-5 and 926-20-35-11 (405-926-25-4).
- Costs expected for changes to a film that are not significant under a licensing arrangement are accrued and charged to expense if revenue recognition begins before the costs are incurred (405-926-25-6).
- Any recognized participation liability in excess of estimated unpaid ultimate participation costs is reduced with an offsetting credit to unamortized film costs, and only the remainder beyond unamortized film costs is credited to income (405-926-35-1; Example 1 at 926-405-55-1).
- Disclose the amount of accrued participation liabilities expected to be paid during the upcoming operating cycle and the methods of accounting for participation costs (405-926-50-1; 405-926-50-2).
For students. The classic trap is treating participation costs as ratably expensed or as payable-based; instead they follow the same revenue-based forecast ratio as film cost amortization, floored at amounts currently due. Also remember the excess-liability reversal cascades to unamortized film costs first — income only after film costs are exhausted.
participation costsindividual-film-forecast-computation methodultimate revenueunamortized film costsprobable sacrifice of assetsfilm cost amortizationinsignificant changes to a filmaccrued participation liability
Machine-generated study aid for ASC 405-926. Check the source paragraphs below.
405-926-00Status
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405-926-00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| Revenue | Superseded | Accounting Standards Update No. 2014-09 | 05/28/2014 |
| Significant Changes | Superseded | Accounting Standards Update No. 2019-02 | 03/06/2019 |
| Significant Changes to a Film | Added | Accounting Standards Update No. 2019-02 | 03/06/2019 |
| 926-405-25-1 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
| 926-405-55-2 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
| 926-405-55-3 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
| 926-405-55-5 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
| 926-405-55-6 | Amended | Accounting Standards Update No. 2014-09 | 05/28/2014 |
405-926-05Overview and Background
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405-926-05-1
This Subtopic provides guidance to entities in the film production and distribution industry on the accounting for costs incurred to compensate third parties involved in the production of a film, such as actors or writers. These costs are referred to as participation costs. This Subtopic also addresses the accounting for costs incurred to make insignificant changes to a film after its initial availability to a customer.
405-926-15Scope and Scope Exceptions
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Overall Guidance
405-926-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 926-10-15.
405-926-25Recognition
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Participation Costs
405-926-25-1
An entity shall accrue (expense) participation costs using the individual-film-forecast-computation method, which accrues (expenses) such costs in the same ratio that current period actual revenue (numerator) bears to estimated remaining unrecognized ultimate revenue as of the beginning of the current fiscal year (denominator). That is, unaccrued (not yet expensed) ultimate participation costs at the beginning of the current fiscal year are multiplied by the individual-film-forecast-computation method fraction. In this way, in the absence of changes in estimates, participation costs are accrued (expensed) in a manner that yields a constant rate of profit over the ultimate period, as described in paragraph 926-20-35-5(a), for each film before exploitation costs, manufacturing costs, and other period expenses.
405-926-25-2
An entity shall accrue a liability for participation costs only if it is probable that there will be a sacrifice of assets to settle its obligation under the terms of the participation agreement. At each balance sheet date, accrued participation costs shall not be less than the amounts that an entity is obligated to pay as of that date.
405-926-25-3
An entity shall begin accruing (expensing) participation costs when a film is released and it begins to recognize revenue from that film.
405-926-25-4
Estimates of unaccrued (that is, not yet expensed) ultimate participation costs are used in the individual-film-forecast-computation method to arrive at current period participation cost expense. Such costs shall be determined using assumptions that are consistent with an entity's estimates of film costs, exploitation costs, and ultimate revenue, as limited by paragraphs 926-20-35-5 and 926-20-35-11.
405-926-25-5
A film may continue to generate revenue after its film costs are fully amortized. When revenue is recorded on fully amortized films, an entity shall accrue associated participation costs as that revenue is recognized.
Costs Incurred for Insignificant Changes to a Film
405-926-25-6
A licensing arrangement may require an entity to make changes to a film after its initial availability to a customer. Those changes may be deemed significant or not significant. Any costs expected to be incurred for changes that are not significant shall be accrued and charged to expense if an entity begins to recognize revenue from the arrangement before incurring those costs.
405-926-35Subsequent Measurement
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Ultimate Participation Costs
405-926-35-1
If, at any balance sheet date, the recognized participation costs liability exceeds the estimated unpaid ultimate participation costs for an individual film, the excess liability shall be reduced with an offsetting credit to unamortized film costs. To the extent that an excess liability exceeds unamortized film costs for that film, that excess liability shall be credited to income. For more information, see Example 1 (paragraph 926-405-55-1).
405-926-35-2
For the accounting of revised estimates of participation costs, see paragraph 926-20-35-3.
405-926-50Disclosure
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Accrued Participation Liabilities
405-926-50-1
An entity shall disclose the amount of accrued participation liabilities that it expects to pay during the upcoming operating cycle.
Participation Costs
405-926-50-2
An entity shall disclose its methods of accounting for participation costs.
405-926-55Implementation Guidance and Illustrations
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Illustrations
405-926-55-1
This Example illustrates the adjustment of a participation liability that is in excess of a revised estimate of amounts ultimately payable (in accordance with paragraph 926-405-35-1).
405-926-55-2
In accordance with paragraph 926-405-35-1, a participation liability that exceeds the unpaid amount expected to be ultimately payable shall be offset against the remaining carrying value of the corresponding film. This scenario can result from changes in ultimate revenue and cost estimates that result in reduced expectations of ultimate participation costs.
405-926-55-3
Assume the following:
- a Film cost: $50,000
- b Estimated ultimate revenue:
- 1 Year 1: $100,000
- 2 Year 2: $80,000.
- 1
- c Actual revenue recognized:
- 1 In Year 1: $60,000
- 2 In Year 2: $10,000.
- 1
- d Estimated ultimate participation costs:
- 1 Year 1: $10,000
- 2 Year 2: $0.
- 1
- e For Year 1, film cost amortization was $30,000, and participation costs accrued were $6,000.
405-926-55-4
Adjustments of Participation Liability and Film Costs in Year 2.
-
Unamortized Film Costs Participation Liability Balance at end of Year 1 " $20,000 " " $6,000 " Adjustment to eliminate excess liability " (6,000)" " (6,000)" Adjusted balances " $14,000 " $-
405-926-55-5
Film cost amortization in Year 2:
- $10,000 recognized revenue/$20,000 remaining ultimate revenue x $14,000 unamortized film costs = $7,000
- The $20,000 remaining ultimate revenue is computed as follows: Year 2 revised ultimate revenue of $80,000 minus cumulative prior recognized revenue of $60,000.
- The $14,000 unamortized film costs is computed as follows: Film cost of $50,000 minus cumulative prior amortization of $30,000 and minus the excess participation liability adjustment of $6,000.
405-926-55-6
Participation costs accrued in Year 2:
- $10,000 recognized revenue/$20,000 remaining ultimate revenue x $0 remaining ultimate participation costs = $0
- The $20,000 remaining ultimate revenue is computed as follows: Year 2 revised ultimate revenue of $80,000 minus cumulative prior recognized revenue of $60,000.
- Estimated ultimate participation costs were reduced to $0 in Year 2; accordingly, the excess liability was reversed and no further accruals are required.