Hollywood accounting
Encyclopedia
Hollywood accounting refers to the opaque accounting methods used by the film, video and television industry to budget and record profits for film projects. Expenditures can be inflated to reduce or eliminate the reported profit
of the project thereby reducing the amount which the corporation must pay in royalties
or other profit-sharing agreements, as these are based on the net profit
.
studios of Hollywood
. Those affected can range from the writers to the actors.
John D. MacDonald
's novel Free Fall in Crimson
(1981) references Hollywood accounting in its dialogue:
Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of overhead
:
All of the above means of calculating overhead are highly controversial, even within the accounting profession. Namely, these percentages are assigned without much regard to how, in reality, these estimates relate to actual overhead costs. In short, this method does not, by any rational standard, attempt to adequately trace overhead costs.
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net
profit, and the "losers" include such blockbuster films as Rain Man
, Forrest Gump
, Who Framed Roger Rabbit
, and Batman
, which all took in huge amounts in box office and video sales.
Because of this, net points are sometimes referred to as "monkey points," a term attributed to Eddie Murphy
, who is said to have also stated that only a fool would accept net points in his or her contract.
All of this shows why so many big-name actors insist on "gross points" (a percentage of some definition of gross
revenue) rather than net profit participation. This practice reduces the likelihood of a project showing a profit, as a production company will claim a portion of the reported box-office revenue was diverted directly to gross point participants.
's price for the screenplay rights to his novel Forrest Gump
included a share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received nothing. That being so, he has refused to sell the screenplay rights to the novel's sequel, stating that he "cannot in good conscience allow money to be wasted on a failure".
Stan Lee
filed and won a lawsuit
after the producers of the movie Spider-Man
did not give him a portion of the gross revenue.
The estate of Jim Garrison
sued Warner Bros.
for their share of the profits from the movie JFK
, which was based on Garrison's book On the Trail of the Assassins.
Art Buchwald
received a settlement after his lawsuit Buchwald v. Paramount
over Paramount's use of Hollywood accounting. The court found Paramount's actions "unconscionable", noting that it was impossible to believe that a movie (1988's Eddie Murphy
comedy Coming to America
) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.
The film My Big Fat Greek Wedding
was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of Nia Vardalos
who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued Gold Circle Films
due to Hollywood accounting practices because the studio has claimed the film lost $20 million.
Hollywood accounting is not limited to movies. An example is the Warner Bros. television series Babylon 5
created by J. Michael Straczynski
. Straczynski, who wrote 90% of the episodes in addition to producing
the show, would receive a generous cut of profits if not for Hollywood accounting. The series, which was profitable in each of its five seasons from 1993–1998, has garnered more than US$1 billion for Warner Bros., most recently US$500 million in DVD
sales alone. But in the last profit statement given to Straczynski, Warner Bros. claimed the property was $80 million in debt. "Basically", says Straczynski, "by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5s profits."
Peter Jackson
, director of The Lord of the Rings
, and his studio Wingnut Films, brought a lawsuit against New Line Cinema
after "an audit... on part of the income of The Fellowship of the Ring." Jackson stated this is regarding "certain accounting practices," which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of The Hobbit
were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct The Hobbit, as had been anticipated. Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness. Similarly, the Tolkien estate has sued New Line, claiming that while their contract entitled them to 7.5% of the gross receipts, the film studio has refused to pay them any share of the $6 billion hit.
A WB receipt was leaked online, showing that the hugely successful movie Harry Potter and the Order of the Phoenix
ended up with a $167 million loss on paper.
Michael Moore is suing Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11
.
, referring to the project accounting
of the cost of a film project. As with construction accounting
, salient issues are the accurate allocation of workers' time to specific projects (usually requiring each worker to fill out a weekly timesheet
), and the correct assessment of indirect costs such as employee benefits.
Specialized software to support production accounting has been developed.
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
of the project thereby reducing the amount which the corporation must pay in royalties
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
or other profit-sharing agreements, as these are based on the net profit
Net profit
Net profit or net revenue is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the "net profit" metric very useful...
.
Creative accountants
Hollywood accounting gets its name from its prevalence in the entertainment industry — that is, in the movieFilm
A film, also called a movie or motion picture, is a series of still or moving images. It is produced by recording photographic images with cameras, or by creating images using animation techniques or visual effects...
studios of Hollywood
Cinema of the United States
The cinema of the United States, also known as Hollywood, has had a profound effect on cinema across the world since the early 20th century. Its history is sometimes separated into four main periods: the silent film era, classical Hollywood cinema, New Hollywood, and the contemporary period...
. Those affected can range from the writers to the actors.
John D. MacDonald
John D. MacDonald
John Dann MacDonald was an American crime and suspense novelist and short story writer.MacDonald was a prolific author of crime and suspense novels, many of them set in his adopted home of Florida...
's novel Free Fall in Crimson
Free Fall in Crimson
Free Fall in Crimson is the nineteenth novel in the Travis McGee series by John D. MacDonald. In the plot McGee sets out to investigate the death of an ailing millionaire, and encounters a motorcycle gang, pornographic movie-makers, and balloonists. The book also revives the character of Lysa Dean...
(1981) references Hollywood accounting in its dialogue:
"Darling! This is the Industry! The really creative people are the accountants. A big studio got over half the profit, after setting breakeven at about three times the cost, taking twenty-five percent of income as an overhead charge, and taking thirty percent of income as a distribution charge, plus rental fees, and prime interest on what they advanced."
How it works
Hollywood accounting can take several forms. In one form, a subsidiary is formed to perform a given activity and the parent entity will extract money out of the subsidiary not in terms of profits but in the form of charges for certain "services". The specific schemes can range from the simple and obvious to the extremely complex.Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of overhead
Overhead (business)
In business, overhead or overhead expense refers to an ongoing expense of operating a business...
:
- Production overhead – Studios, on average, calculate production overhead by using a figure around 15% of total production costs.
- Distribution overhead – Film distributorFilm distributorA film distributor is a company or individual responsible for releasing films to the public either theatrically or for home viewing...
s typically keep 30% of what they receive from movie theaters ("gross rentals"). - Marketing overhead – To determine this number, studios usually choose about 10% of all advertising costs.
All of the above means of calculating overhead are highly controversial, even within the accounting profession. Namely, these percentages are assigned without much regard to how, in reality, these estimates relate to actual overhead costs. In short, this method does not, by any rational standard, attempt to adequately trace overhead costs.
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net
Net (economics)
In economics, net means after deductions. A related concept is gross, meaning before deductions.Nett is an alternative spelling used in British English.-Usage:...
profit, and the "losers" include such blockbuster films as Rain Man
Rain Man
Rain Man is a 1988 drama film written by Barry Morrow and Ronald Bass and directed by Barry Levinson. It tells the story of an abrasive and selfish yuppie, Charlie Babbitt, who discovers that his estranged father has died and bequeathed all of his multimillion-dollar estate to his other son,...
, Forrest Gump
Forrest Gump
Forrest Gump is a 1994 American epic comedy-drama romance film based on the 1986 novel of the same name by Winston Groom. The film was directed by Robert Zemeckis, starring Tom Hanks, Robin Wright and Gary Sinise...
, Who Framed Roger Rabbit
Who Framed Roger Rabbit
Who Framed Roger Rabbit is a 1988 American fantasy-comedy-noir film directed by Robert Zemeckis and released by Touchstone Pictures. The film combines live action and animation, and is based on Gary K. Wolf's novel Who Censored Roger Rabbit?, which depicts a world in which cartoon characters...
, and Batman
Batman (1989 film)
Batman is a 1989 superhero film based on the DC Comics character of the same name, directed by Tim Burton. The film stars Michael Keaton in the title role, as well as Jack Nicholson, Kim Basinger, Robert Wuhl and Jack Palance...
, which all took in huge amounts in box office and video sales.
Because of this, net points are sometimes referred to as "monkey points," a term attributed to Eddie Murphy
Eddie Murphy
Edward Regan "Eddie" Murphy is an American stand-up comedian, actor, writer, singer, director, and musician....
, who is said to have also stated that only a fool would accept net points in his or her contract.
All of this shows why so many big-name actors insist on "gross points" (a percentage of some definition of gross
Gross (economics)
In economics, gross means before deductions. The antonym is net, meaning after deductions.-Usage:In this sense, it may appear an adjective, following the noun it modifies, e.g., "earned two million dollars, gross"...
revenue) rather than net profit participation. This practice reduces the likelihood of a project showing a profit, as a production company will claim a portion of the reported box-office revenue was diverted directly to gross point participants.
Examples
Winston GroomWinston Groom
Winston F. Groom, Jr. is an American novelist and non-fiction writer, best known for his book Forrest Gump, which was adapted into a film in 1994.- Life :...
's price for the screenplay rights to his novel Forrest Gump
Forrest Gump (novel)
Forrest Gump is a 1986 novel by Winston Groom. The title character experiences adventures ranging from shrimp boating and ping pong championships to thinking about his childhood love. The Vietnam War and college football are all part of the story. Throughout his life, Gump views the world simply...
included a share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received nothing. That being so, he has refused to sell the screenplay rights to the novel's sequel, stating that he "cannot in good conscience allow money to be wasted on a failure".
Stan Lee
Stan Lee
Stan Lee is an American comic book writer, editor, actor, producer, publisher, television personality, and the former president and chairman of Marvel Comics....
filed and won a lawsuit
Lawsuit
A lawsuit or "suit in law" is a civil action brought in a court of law in which a plaintiff, a party who claims to have incurred loss as a result of a defendant's actions, demands a legal or equitable remedy. The defendant is required to respond to the plaintiff's complaint...
after the producers of the movie Spider-Man
Spider-Man (film)
Spider-Man is a 2002 American superhero film, the first in the Spider-Man film series based on the fictional Marvel Comics character Spider-Man. It was directed by Sam Raimi and written by David Koepp...
did not give him a portion of the gross revenue.
The estate of Jim Garrison
Jim Garrison
Earling Carothers "Jim" Garrison — who changed his first name to Jim in the early 1960s — was the District Attorney of Orleans Parish, Louisiana from 1962 to 1973. A member of the Democratic Party, he is best known for his investigations into the assassination of President John F. Kennedy...
sued Warner Bros.
Warner Bros.
Warner Bros. Entertainment, Inc., also known as Warner Bros. Pictures or simply Warner Bros. , is an American producer of film and television entertainment.One of the major film studios, it is a subsidiary of Time Warner, with its headquarters in Burbank,...
for their share of the profits from the movie JFK
JFK (film)
JFK is a 1991 American film directed by Oliver Stone. It examines the events leading to the assassination of President John F. Kennedy and alleged subsequent cover-up, through the eyes of former New Orleans district attorney Jim Garrison .Garrison filed charges against New Orleans businessman Clay...
, which was based on Garrison's book On the Trail of the Assassins.
Art Buchwald
Art Buchwald
Arthur Buchwald was an American humorist best known for his long-running column in The Washington Post, which in turn was carried as a syndicated column in many other newspapers. His column focused on political satire and commentary...
received a settlement after his lawsuit Buchwald v. Paramount
Buchwald v. Paramount
Buchwald v. Paramount was a breach of contract lawsuit filed and decided in California in which humorist and writer Art Buchwald alleged that Paramount Pictures stole his script idea and turned it into the 1988 movie Coming to America...
over Paramount's use of Hollywood accounting. The court found Paramount's actions "unconscionable", noting that it was impossible to believe that a movie (1988's Eddie Murphy
Eddie Murphy
Edward Regan "Eddie" Murphy is an American stand-up comedian, actor, writer, singer, director, and musician....
comedy Coming to America
Coming to America
Coming to America is a 1988 comedy film directed by John Landis. The screenplay was written by David Sheffield and Barry W. Blaustein, from a story by Eddie Murphy, who also stars in the film. Murphy plays an African prince, who heads to the United States in hopes of finding a woman he can marry...
) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.
The film My Big Fat Greek Wedding
My Big Fat Greek Wedding
My Big Fat Greek Wedding is a 2002 Canadian and American romantic comedy film written by and starring Nia Vardalos and directed by Joel Zwick. The film is centered on Fotoula "Toula" Portokalos , a middle class Greek American woman who falls in love with a non-Greek upper middle class "White...
was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of Nia Vardalos
Nia Vardalos
Antonia Eugenia "Nia" Vardalos is a Canadian-American actress, screenwriter, director, singer and producer. Her most notable work is the 2002 Academy Award–nominated film My Big Fat Greek Wedding.-Personal life:...
who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued Gold Circle Films
Gold Circle Films
Gold Circle Films is an American independent film production company, mainly focusing on horror and romance films, founded in 2000. Titles released by Gold Circle include White Noise, My Big Fat Greek Wedding, The Wedding Date, and The Man From Elysian Fields.-Films:*Double Whammy *The Man From...
due to Hollywood accounting practices because the studio has claimed the film lost $20 million.
Hollywood accounting is not limited to movies. An example is the Warner Bros. television series Babylon 5
Babylon 5
Babylon 5 is an American science fiction television series created, produced and largely written by J. Michael Straczynski. The show centers on a space station named Babylon 5: a focal point for politics, diplomacy, and conflict during the years 2257–2262...
created by J. Michael Straczynski
J. Michael Straczynski
Joseph Michael Straczynski , known professionally as J. Michael Straczynski and informally as Joe Straczynski or JMS, is an American writer and television producer. He works in films, television series, novels, short stories, comic books, and radio dramas. He is a playwright, a former journalist,...
. Straczynski, who wrote 90% of the episodes in addition to producing
Executive producer
An executive producer is a producer who is not involved in any technical aspects of the film making or music process, but who is still responsible for the overall production...
the show, would receive a generous cut of profits if not for Hollywood accounting. The series, which was profitable in each of its five seasons from 1993–1998, has garnered more than US$1 billion for Warner Bros., most recently US$500 million in DVD
DVD
A DVD is an optical disc storage media format, invented and developed by Philips, Sony, Toshiba, and Panasonic in 1995. DVDs offer higher storage capacity than Compact Discs while having the same dimensions....
sales alone. But in the last profit statement given to Straczynski, Warner Bros. claimed the property was $80 million in debt. "Basically", says Straczynski, "by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5s profits."
Peter Jackson
Peter Jackson
Sir Peter Robert Jackson, KNZM is a New Zealand film director, producer, actor, and screenwriter, known for his The Lord of the Rings film trilogy , adapted from the novel by J. R. R...
, director of The Lord of the Rings
The Lord of the Rings film trilogy
The Lord of the Rings is an epic film trilogy consisting of three fantasy adventure films based on the three-volume book of the same name by English author J. R. R. Tolkien. The films are The Fellowship of the Ring , The Two Towers and The Return of the King .The films were directed by Peter...
, and his studio Wingnut Films, brought a lawsuit against New Line Cinema
New Line Cinema
New Line Cinema, often simply referred to as New Line, is an American film studio. It was founded in 1967 by Robert Shaye and Michael Lynne as a film distributor, later becoming an independent film studio. It became a subsidiary of Time Warner in 1996 and was merged with larger sister studio Warner...
after "an audit... on part of the income of The Fellowship of the Ring." Jackson stated this is regarding "certain accounting practices," which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of The Hobbit
The Hobbit
The Hobbit, or There and Back Again, better known by its abbreviated title The Hobbit, is a fantasy novel and children's book by J. R. R. Tolkien. It was published on 21 September 1937 to wide critical acclaim, being nominated for the Carnegie Medal and awarded a prize from the New York Herald...
were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct The Hobbit, as had been anticipated. Fifteen actors are suing New Line Cinema, claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness. Similarly, the Tolkien estate has sued New Line, claiming that while their contract entitled them to 7.5% of the gross receipts, the film studio has refused to pay them any share of the $6 billion hit.
A WB receipt was leaked online, showing that the hugely successful movie Harry Potter and the Order of the Phoenix
Harry Potter and the Order of the Phoenix (film)
Harry Potter and the Order of the Phoenix is a 2007 fantasy film directed by David Yates and based on the novel of the same name by J. K. Rowling. It is the fifth instalment in the Harry Potter film series, written by Michael Goldenberg and produced by David Heyman and David Barron...
ended up with a $167 million loss on paper.
Michael Moore is suing Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11
Fahrenheit 9/11
Fahrenheit 9/11 is a 2004 documentary film by American filmmaker and political commentator Michael Moore. The film takes a critical look at the presidency of George W. Bush, the War on Terror, and its coverage in the news media...
.
Production accounting
Production accounting is a filmmaking term, used especially in HollywoodCinema of the United States
The cinema of the United States, also known as Hollywood, has had a profound effect on cinema across the world since the early 20th century. Its history is sometimes separated into four main periods: the silent film era, classical Hollywood cinema, New Hollywood, and the contemporary period...
, referring to the project accounting
Project accounting
Project accounting is the practice of creating financial reports specifically designed to track the financial progress of projects, which can then be used by managers to aid project management....
of the cost of a film project. As with construction accounting
Construction accounting
Construction accounting is a form of project accounting applied to construction projects. See also production accounting. Construction accounting is a vitally necessary form of accounting, especially when multiple contracts come into play. The construction field uses many terms not used in other...
, salient issues are the accurate allocation of workers' time to specific projects (usually requiring each worker to fill out a weekly timesheet
Timesheet
A timesheet is a method for recording the amount of a worker's time spent on each job.-Use:Originally developed for an employer to determine payroll, timesheets are not just for payroll any more. Timesheets may record the start and end time of tasks, or just the duration. It may contain a...
), and the correct assessment of indirect costs such as employee benefits.
Specialized software to support production accounting has been developed.
External links
- Josh Getlin. "Eaten alive in the studio jungle". Los Angeles TimesLos Angeles TimesThe Los Angeles Times is a daily newspaper published in Los Angeles, California, since 1881. It was the second-largest metropolitan newspaper in circulation in the United States in 2008 and the fourth most widely distributed newspaper in the country....
, 13 February 2008. - Warner Music's Royalty Statements: Works Of Fiction
- STUDIO SHAME! Harry Potter Pic Loses Money Because Of Warner Bros' Net Profit Accounting