The accounting department is the most creative part of Tinseltown.
Much publicized lawsuits leave the observer wondering why apparently successful films never show a positive bottom line. It's because studios use a very sharp pencil when they draw up contracts for sharing the profits. Even GAAP could use some changes.
Although writer Winston Groom received an up-front payment of $350,000 for the movie rights to Forrest Gump, his additional fee of three percent of net profits is yet to be paid. Gump was the fourth highestgrossing film in history with $661 million in box-office receipts, but with Hollywoodstyle accounting it incurred a net loss of $62 million as of December 31, 1994. Gump is the norm rather than the exception. Very few studio films do make a profit. The question in nearly everyone's mind is, "How can successful films that have an obvious high gross profit and cash flow wind up with no net profits?" A further question that comes to an accountant's mind is "Why don't movie studios have to follow GAAP in computing net profits?"
The answer to the first question is that studios use such creative tools as surcharges on advertising, fees treated as expenses, and good, old-fashioned overhead charges to inflate their costs. Meanwhile, they ignore income through devices such as block booking and only recognizing 20% of videocassette revenue.
The answer to the second question is that, although studios have net losses on individual films, they do use GAAP and show a profit overall. The sum of the parts (individual films) does not add up to the whole (total studio income) because there is a difference in net profits for contract purposes and for financial reporting. To use one auditor's phrase, they "don't cook the books, they cook the contracts."
All is not well, however, even with GAAP-computed total profits. Although SFAS No. 53, Financial Reporting by Pro ducers of Motion Picture Films, specifically covers the film industry, the statement leaves unanswered questions concerning the way studios estimate a film's earning potential and the amount included as amortizable cost. Reforms are needed for both contract-computed net profits and GAAP profits.
Hollywood Profits: Dirty Dancing
One notable exception to the general rule that studio pictures do not turn a net profit is the 1987 film Dirty Dancing. The Forrest Gump case, however, is only the latest in a long line of cases in which net profit participants have found they are participating in a net loss on a major Hollywood blockbuster. Winston Groom settled out of court with Paramount, probably influenced by a seven-figure deal for the movie rights to the Gump sequel, Gump Co., including a share of gross points. Other net profit participants, however, have taken their respective studios to court.
Jane Fonda sued Universal for a larger share of profits of On Golden Pond. Writer Art Buchwald sued Paramount for a better accounting for costs in Coming to America. In the television arena James Garner sued Universal when his 37.5% of net profits from The Rockford Files failed to materialize. Sidney Sheldon, Robert Wagner, and Stefanie Powers sued Columbia and Spelling-Goldberg Productions charging them with "systematically rendering false and fraudulent accounting statements," when Hart to Hart reported a net loss of $16 million while being broadcast in 75 countries and grossing $137 million.
Probably the most publicized case concerning movie studio accounting of net profits was Buchwald v. Paramount. Humorist Art Buchwald and his partner Alain Bernheim sued for breach of contract when Paramount optioned a story idea of theirs based on an African prince's visit to America and then dropped the project. A similar story attributed to Eddie Murphy then emerged in Coming to America. Being upheld in their claim of breach of contract eventually proved to be a hollow victory because Buchwald and Bernheim were net profit participants. …