Pending Accounting Changes Could Cost Studios Millions

Article excerpt

The nation's accounting rule makers have tentatively approved new financial reporting standards for the film industry that could cost some Hollywood studios hundreds of millions of dollars.

For more than a decade, movie studios have been able to use the current accounting rules to create their own special effects. Almost like magic, the rules have allowed some studios to show profits even when films flop. Often, they do this by postponing the recognition of advertising or film production costs far into the future.

The new rules -- still subject to final approval from the Financial Accounting Standards Board and from the American Institute of Certified Public Accountants -- would have the biggest impact on studios that have been most aggressive in their interpretations of the accounting rules. Those studios include Columbia Pictures, which is owned by Sony; Paramount Pictures, owned by Viacom; 20th Century Fox, owned by News Corp., and Metro-Goldwyn-Mayer, owned by the billionaire Kirk Kerkorian.

The rules would also apply to the producers of television shows, but not to cable companies or broadcasters, which follow other rules.

Most companies would not have to adopt the new rules until 2000. But David Londoner, an entertainment industry analyst at Schroder Inc. and a member of the group that wrote the new rules, said he expected many studios to begin following them next year.

The rules "will essentially place all film companies on an equal footing," said Londoner, who has been pushing for the changes for a decade. The present rules have frustrated analysts because one movie studio cannot easily be compared with another and because the studios have been able to use the accounting to accelerate revenues and delay expenses -- practices not allowed in other industries.

"The suspicions about film accounting will finally be eliminated," Londoner said.

Most studio executives said they could not yet comment in detail about the proposed rules, which the Financial Accounting Standards Board gave preliminary approval to on Friday. But some executives disputed Londoner's estimates that the movie industry as a whole would be forced to write off $2 billion and each major studio would write off $150 million to $450 million when the new rules are in place.

"Any estimates of the impact are inaccurate, premature and very speculative," a spokesman for Paramount Pictures said.

Now, movie studios, unlike almost all other businesses, can spend millions of dollars on advertising and spread those costs over a number of years, avoiding an immediate dent in their bottom lines. The studios have been often able to argue that the films have useful lives of many years, even if the movies bomb at box offices in the United States. After all, they argue, foreign audiences are bound to love the film and there is always money to be made selling home videos or the syndication rights to television. …