Over the last decade or so, the process for making a film has changed dramatically and so has the set of accounting practices that go with it. It used to be that there was a narrow "typical movie" archetype that described how most projects moved from initial conception into distribution channels like theaters and home video, but now there are many more possibilities. A movie, TV show or video short might be designed exclusively for distribution on Netflix or Hulu Plus, it might be part of a free Web series or it could even be optimized for a mobile platform like Snapchat.
This new normal in the entertainment industry has complicated cloud financial project accounting:
- Multiple business structures and taxable entities may be created during separate phases of the project. Likewise, different stakeholders may handle the respective creation, selling and distribution of a story, which creates more complexity.
- Accountants in entertainment also have to properly deal with special industry-specific tax incentives and manage new financing sources now, such as crowdfunding sites (e.g., Kickstarter, on which the creators of "Veronica Mars" once raised $5.7 million).
- The media and entertainment sector used to follow its own guidance for revenue recognition, but a major overhaul is underway. The Financial Accounting Standards Board and International Accounting Standards Board introduced big changes to revenue recognition in 2014.
On top of these big changes in how entertainment is financed, produced and regulated, many firms are saddled with outdated tools as well as unscalable manual processes. Transitioning to more modern accounting practices that can respond to the pressures listed above – and also scale to multiple business units – is both hard to initiate and sustain when relying so heavily on QuickBooks, Excel sheets and siloed information sources.
Making a movie has changed a lot in recent years.
We're still rolling: Old tools plus new standards trap entertainment firms in the past
Their industry may be rapidly changing, but entertainment companies have not always kept pace. An October 2015 survey from PricewaterhouseCoopers and the Financial Executives Research Foundation (with 29 percent of respondents in entertainment, tech or communications) found that 75 percent of companies had not completed an initial impact assessment. Nearly 80 percent had not attempted to quantify the impact of the fresh standards on their financial statements. It's like they're in the movie "Groundhog Day," where the same problematic situation keeps happening day after day.
Why is there seemingly so much difficulty in catching up to the new regulatory and business environment? The PwC/FERF study provided some clues. The top three challenges cited by survey takers were:
- Accounting for licenses (39 percent of respondents): Licenses of intellectual property are common in entertainment, as they enable everything from the streaming of a label's music library to the rebroadcasting of a movie. They can also present accounting challenges, such as whether they are distinct and allow revenue recognition at a point in time or over time.
- Financial system (35 percent): Legacy applications like QuickBooks are not ideal for managing multiple entities, which, as we noted earlier, have only become more common in entertainment in recent years. Plus, input errors and delays are bound to happen when reconciling double entries and developing manual reports.
- Accounting for variable consideration percentage: Determining a transaction price can take a lot of work if the promised amount of consideration in a contract is a variable. Accountants may use a probability-weight amount for the expected value or decide on a most likely amount.
What is the solution to these problems? A good place to start is for entertainment companies to update their accounting systems from a patchwork of QuickBooks and spreadsheets to something more modern such as Intacct. Twenty-eight percent of PwC/FERF respondents weren't sure what system they were accounting with, while 14 percent said they still relied on Excel, showing the huge headroom for opportunity.
What cloud financial software can do for today's entertainment companies
Organizations such as Regent Entertainment, as well as Marvista Entertainment and Legendary Entertainment, have graduated from legacy accounting solutions to Intacct, and as a result, they have been able to sustain their growth and adapt to the current landscape. Cloud software brings many advantages to the table, especially when implemented with the help of an experienced partner like Arxis, who helped both Marvista Entertainment and Legendary Entertainment get the most value out of Intacct.
"Accountants can get a unified, real-time view of all of their entities."
For starters, accountants get a unified, real-time view of all of their organization's entities. They can use an intuitive Web-based interface to see data for anything from production sites to theater operations. Sharing information between departments is also easier than ever thanks to tight synchronization across platforms.
Just look at what Legendary Entertainment was able to achieve with RKL's guidance:
- It realized $80,000 in savings in expense processing.
- It was able to reduce its bank reconciliations by 70 percent.
- It made four acquisitions without having to do additional accounts payable hiring.
Cloud-based financial software is also easy to integrate with other applications such as Salesforce.com for custom relationship management and FilmTrack for handling intellectual property. This compatibility enables powerful workflows such as being able to drill down to the season and episode levels of a TV show and then quickly run reports by title.
The entertainment industry continues to change. Companies need an accounting platform and a partner they can depend on, and managed cloud-based solutions provide both in spades.
