Friday, November 17, 2023
Renewed scrutiny targets Hollywood's bizarre accounting tactics.

Renewed scrutiny targets Hollywood’s bizarre accounting tactics.

Editor’s Note: This article was originally published in CNN Business’ Nightcap newsletter. If you want to receive this content directly in your inbox, sign up for free here.

Hollywood is known for its mesmerizing films that captivate audiences worldwide. Movies like “Forrest Gump,” “Return of the Jedi,” and even some Harry Potter films have sold millions of tickets and generated hundreds of millions of dollars in revenue. However, what many people don’t know is that these blockbuster hits have failed to make a single penny for the studios that produced them. Welcome to the world of “Hollywood accounting.”

Hollywood accounting is a unique financial practice specific to the entertainment industry. It deviates from the generally accepted accounting principles (GAAP) that most US companies follow. While these techniques are legal, they involve creative strategies that can seem quite fantastical.

The basic premise of Hollywood accounting revolves around setting up subsidiaries for each movie the studio wants to produce. The studio agrees to pay actors and other creatives based on the profits of these subsidiaries. However, when the subsidiary incurs necessary expenses to make the movie, such as crew wages, set design, and props, the costs add up.

Once the movie hits theaters and starts generating revenue from ticket sales, the subsidiary receives this income. As any business would, the studio then deducts the expenses from the revenue to calculate the profit or loss. Here’s where it gets interesting.

If the movie-making subsidiary turns a profit, the studio charges it fees for distribution, advertising, and other costs. Essentially, the studio charges its own subsidiary for services rendered, ensuring that the subsidiary never makes any profit on paper. This technique allows the studios to avoid paying actors and creators who have profit-sharing agreements in their contracts.

To ensure a fair deal for themselves, actors and writers are advised to negotiate profit-sharing agreements tied to revenue or ticket sales rather than net profit. Net profit, by design, may never exist due to these accounting tactics.

But what about the studios? Why would they not be interested in making a profit? Well, the studios have various expenses beyond just making the film. Costs associated with distributing the film to theaters, paid TV channels, streaming services, and airlines, as well as significant marketing expenses and interest payments on debt, quickly consume the revenues generated by the film. These expenses often result in zero profits or losses.

Critics argue that studios artificially inflate their overhead costs to reduce profits as much as possible. This practice allows them to avoid making substantial payouts to actors and writers who are entitled to a share of the profits. One notable example is the hit film “Men In Black,” which grossed nearly $600 million but, according to studio accounting, has never broken even.

Screenwriter Ed Solomon has publicly spoken out about the accounting tricks used by studios. He revealed that despite the film’s massive success, Sony Pictures, the studio behind “Men In Black,” claims that the film incurred a loss. Solomon humorously emphasized the absurdity of the situation, highlighting the discrepancy between the film’s enormous revenue and the studio’s reported losses.

While Hollywood accounting may be legal, its ethics are questionable. Some experts argue that studios using these tactics are acting unethically and potentially harming one of their most valuable assets—their talent. The practice of inflating overhead costs to keep movies unprofitable seems to have no purpose other than avoiding substantial payouts to actors and writers.

The motivations behind studios keeping their overhead costs inflated remain unclear, as any tax savings are generally eliminated through consolidation of earnings. However, it is evident that these creative expense allocations should not affect the net profits that the studio’s shareholders ultimately see.

Overall, Hollywood accounting brings a unique and controversial aspect to the film industry. As audiences continue to enjoy blockbuster hits, it’s important to understand the complex financial practices that shape the industry’s monetary success, or lack thereof.


About Eamon Connor

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