1 sony pictures entertainment us gaap, sony cap and spe accounting policies and procedures -...

11

Sony Pictures EntertainmentSony Pictures Entertainment

US GAAP, Sony CAP and US GAAP, Sony CAP and

SPE Accounting Policies and ProceduresSPE Accounting Policies and Procedures - -

Training CourseTraining CourseSeptember 5, 2006 September 5, 2006

International Finance Directors ConferenceInternational Finance Directors ConferenceRome, ItalyRome, Italy

22

AgendaAgenda

Welcome and AgendaWelcome and Agenda US GAAP,US GAAP, Sony Sony CCorporate orporate AAccounting ccounting PPolicies (olicies (CAPCAP) and ) and

SPE accounting policies and proceduresSPE accounting policies and procedures Q&A and ClosingQ&A and Closing

33

Welcome and AgendaWelcome and Agenda

ObjectiveObjective

Re-fresh current US GAAP topics and gain understanding of Re-fresh current US GAAP topics and gain understanding of Sony CAP and SPE accounting policies and proceduresSony CAP and SPE accounting policies and procedures

Introduce SPE Technical Support and Compliance Group Introduce SPE Technical Support and Compliance Group resources and linksresources and links

44

AGENDAAGENDA

Cash and Cash EquivalentsCash and Cash Equivalents Accounts ReceivableAccounts Receivable InventoryInventory Film CostsFilm Costs Broadcast RightsBroadcast Rights Fixed AssetsFixed Assets Software and Website Development CostsSoftware and Website Development Costs InvestmentsInvestments Investments in Unconsolidated SubsidiariesInvestments in Unconsolidated Subsidiaries Goodwill and IntangiblesGoodwill and Intangibles Other AssetsOther Assets

55

AGENDAAGENDA

Accounts Payable Accounts Payable Accrued Expenses and Other LiabilitiesAccrued Expenses and Other Liabilities Contractual ObligationsContractual Obligations Deferred RevenueDeferred Revenue DebtDebt Equity and Retained EarningsEquity and Retained Earnings Revenue RecognitionRevenue Recognition Barter RevenueBarter Revenue ExpensesExpenses Income TaxesIncome Taxes PensionsPensions Consolidation and Financial ReportingConsolidation and Financial Reporting

66

CASH AND CASH AND CASH EQUIVALENTSCASH EQUIVALENTS

77

Cash and cash equivalentsCash and cash equivalents

Topics

Cash and Cash Equivalents

Restricted CashOverdrafts

Minimum Internal Controls

88


Cash equivalents are investments that:Cash equivalents are investments that: have an original maturity date of three months or less from the have an original maturity date of three months or less from the date of purchase date of purchase are readily convertible into a known cash amount and are readily convertible into a known cash amount and are so near maturity that there is very little risk that the cash value will changeare so near maturity that there is very little risk that the cash value will change

If the above criteria is not met, investments should be classified as short-term or long- If the above criteria is not met, investments should be classified as short-term or long- term investments depending on maturityterm investments depending on maturity

QuestionsQuestions::1.1. Does a three-month Treasury Bill purchased three months from maturity date qualify as Does a three-month Treasury Bill purchased three months from maturity date qualify as

cash equivalent?cash equivalent?2.2. Does a three-year Treasury note purchased three months from maturity date qualify as Does a three-year Treasury note purchased three months from maturity date qualify as

cash equivalent?cash equivalent?3.3. Does a three-year Treasury note purchased three years ago qualify as cash equivalent?Does a three-year Treasury note purchased three years ago qualify as cash equivalent?

99


Answers:Answers:

1.1. Yes, because original maturity is three months from the date of Yes, because original maturity is three months from the date of purchasepurchase

2.2. Yes, because original maturity is three months from the date of Yes, because original maturity is three months from the date of purchasepurchase

3.3. No, because original maturity is three years from the date of No, because original maturity is three years from the date of purchasepurchase

1010

Restricted CashRestricted Cash

Compensating balances with legal restriction as to withdrawalCompensating balances with legal restriction as to withdrawal

Current vs. non-current classification of restricted cash:Current vs. non-current classification of restricted cash: Relate to current liabilities – Restricted cash in current assetsRelate to current liabilities – Restricted cash in current assets Relate to non-current liabilities – Restricted cash in non-current assetsRelate to non-current liabilities – Restricted cash in non-current assets

1111

OverdraftsOverdrafts

Bank overdrafts:Bank overdrafts: total of checks honored by the bank without sufficient funds in the account to cover them total of checks honored by the bank without sufficient funds in the account to cover them should be classified as a current liabilityshould be classified as a current liability more common outside of the the United Statesmore common outside of the the United States overdrafts on ZBA accounts are evaluated at the “parent” account level for possible overdrafts on ZBA accounts are evaluated at the “parent” account level for possible

reclassification due to legal right of offsetreclassification due to legal right of offset

Book overdraftsBook overdrafts:: represent outstanding checks in excess of funds on deposit represent outstanding checks in excess of funds on deposit should be classified as a current liability except for ZBA accounts which are evaluated at should be classified as a current liability except for ZBA accounts which are evaluated at

the “parent” account level for possible reclassification due to legal right of offsetthe “parent” account level for possible reclassification due to legal right of offset

Checks written but not Released:Checks written but not Released: Checks drawn but not released (e.g., not mailed) by the end of accounting period should Checks drawn but not released (e.g., not mailed) by the end of accounting period should

not be deducted from the cash balance but should be included with accounts payable or not be deducted from the cash balance but should be included with accounts payable or other appropriate liability accountsother appropriate liability accounts

1212


Questions:Questions:

1.1. Should Cr balance in a/c 100230 Should Cr balance in a/c 100230 be re-classified to current be re-classified to current liability?liability?



1313


Answers:Answers:

No, because this account is ZBA but should be evaluated at the parent No, because this account is ZBA but should be evaluated at the parent account levelaccount level

No, because this account is ZBA but should be evaluated at the parent No, because this account is ZBA but should be evaluated at the parent company account levelcompany account level

Depends. If there are no cash accounts at Wells Fargo which this a/c has Depends. If there are no cash accounts at Wells Fargo which this a/c has legal rights to be offset with, then it should be re-classed to current legal rights to be offset with, then it should be re-classed to current liability. liability.

1414

Minimum Internal ControlsMinimum Internal Controls

Responsibilities for receiving, disbursing and reconciling cash should be segregatedResponsibilities for receiving, disbursing and reconciling cash should be segregated

Bank accounts can only be opened or closed with the approval of the SPE Treasurer Bank accounts can only be opened or closed with the approval of the SPE Treasurer or Assistant Treasureror Assistant Treasurer

Bank and investment statements should be reconciled to the G/L on a timely basis Bank and investment statements should be reconciled to the G/L on a timely basis ((before the end of the next calendar monthbefore the end of the next calendar month) each month for all accounts (except for ) each month for all accounts (except for impressed accounts that should be reconciled on a quarterly basis), and reviewed by impressed accounts that should be reconciled on a quarterly basis), and reviewed by at least a Manager in the Finance Department. Any exceptions to timing of at least a Manager in the Finance Department. Any exceptions to timing of reconciliations should be pre-approved by Treasury and Technical Compliance and reconciliations should be pre-approved by Treasury and Technical Compliance and Support DepartmentSupport Department

All suspense accounts should be analyzed and cleared on a monthly basis and All suspense accounts should be analyzed and cleared on a monthly basis and reviewed by at least a Manager in the Finance Department reviewed by at least a Manager in the Finance Department

Any restrictions on the availability of cash balances should be disclosed to Any restrictions on the availability of cash balances should be disclosed to Corporate ReportingCorporate Reporting

1515

ACCOUNTSACCOUNTSRECEIVABLERECEIVABLE

1616

Accounts ReceivableAccounts Receivable

Topics

Recording andClassification

Doubtful Accounts Sales Discounts andReserves


1717

Recording and ClassificationRecording and Classification

To be recorded when they are both To be recorded when they are both measurable and earnedmeasurable and earned

SOP 00-02 receivables (refer to Revenue section)SOP 00-02 receivables (refer to Revenue section)

Non-SOP 00-02 receivables (refer to Revenue section)Non-SOP 00-02 receivables (refer to Revenue section)

Percentage-of-Completion Receivables should be recorded based on the ratio of Percentage-of-Completion Receivables should be recorded based on the ratio of current direct costs to total estimated direct costscurrent direct costs to total estimated direct costs

Long-Term Receivables – any receivable within a maturity date or expected Long-Term Receivables – any receivable within a maturity date or expected collection date greater than one year. Should be classified as long term and collection date greater than one year. Should be classified as long term and discounteddiscounted

1818

Doubtful AccountsDoubtful Accounts

Specific Reserve:Specific Reserve: Determined based upon a specific account-by-account reviewDetermined based upon a specific account-by-account review Should include both billed and unbilled receivablesShould include both billed and unbilled receivables

General Reserve:General Reserve: Made for the remaining pool of receivables (after deducting receivables covered by Made for the remaining pool of receivables (after deducting receivables covered by

specific allowance)specific allowance) Requires aging of current period customer accounts. Historical data plus current trends Requires aging of current period customer accounts. Historical data plus current trends

can be used for determination of allowance percentage for each of the categories can be used for determination of allowance percentage for each of the categories (i.e. 1-(i.e. 1-30, 31-60, etc.)30, 31-60, etc.)

Approval from CorporateApproval from Corporate

of allowance percentage from of allowance percentage from

Corporate. Corporate. Needs to be revisedNeeds to be revised

every three years or covered as every three years or covered as

part of Balance sheet review processpart of Balance sheet review process Should be documented and retainedShould be documented and retained

Category Days Past Due Percentage of Allowance *

I 1 - 30I I 31-60I I I 61-90IV 91-180V 180+

* Each individual reporting unit needs to determine the percentage of allowance

1919

Sales Discounts and ReservesSales Discounts and Reserves

Questions:Questions:

1.1. How is sales returns allowance calculated and when it should be recorded?How is sales returns allowance calculated and when it should be recorded?

2.2. Should the bad debt expense be recorded in operating expenses or contra-Should the bad debt expense be recorded in operating expenses or contra-revenue?revenue?

3.3. When should sales discounts be recorded? When should an allowance for sales When should sales discounts be recorded? When should an allowance for sales discounts be recorded?discounts be recorded?

4.4. Can one allowance cover both sales returns and doubtful accounts?Can one allowance cover both sales returns and doubtful accounts?

2020

Sales Discounts and ReservesSales Discounts and Reserves

Answers:Answers:1.1. The amount of the allowance should be a percentage of sales based on the The amount of the allowance should be a percentage of sales based on the

division’s past experience and current market conditions. The allowance should division’s past experience and current market conditions. The allowance should be recorded at the time the associated accounts receivable are recordedbe recorded at the time the associated accounts receivable are recorded

2.2. Bad debt expense should be classified as contra-revenue. It should be passed to Bad debt expense should be classified as contra-revenue. It should be passed to the “producing” entity similar to distribution related expenses in order to match the “producing” entity similar to distribution related expenses in order to match revenue and expenses and the producing entity/productrevenue and expenses and the producing entity/product

3.3. Sales discounts offered to customers in exchange for early payment should be Sales discounts offered to customers in exchange for early payment should be recorded at the time the discount is taken. The allowance for sales discounts recorded at the time the discount is taken. The allowance for sales discounts should be established at the time of billing to reflect the amount of potential should be established at the time of billing to reflect the amount of potential discountsdiscounts

4.4. No, two separate allowances should be establishedNo, two separate allowances should be established

2121


Accounts Receivable sub-systems, as applicable, should be reconciled to Accounts Receivable sub-systems, as applicable, should be reconciled to the G/L at least quarterlythe G/L at least quarterly

Aging reports should be updated and reviewed on a monthly basis and any Aging reports should be updated and reviewed on a monthly basis and any significant changes in the aging, past due accounts and credit balances significant changes in the aging, past due accounts and credit balances should be investigatedshould be investigated

The allowance for doubtful accounts, returns and other allowances should The allowance for doubtful accounts, returns and other allowances should be assessed for adequacy at least quarterly and adjustments approved by be assessed for adequacy at least quarterly and adjustments approved by the Controller or higherthe Controller or higher

All receivables should be reviewed on at least quarterly to ensure that they All receivables should be reviewed on at least quarterly to ensure that they have been properly classified between current and noncurrenthave been properly classified between current and noncurrent

Any employee loans are generally prohibited. Exceptions must be Any employee loans are generally prohibited. Exceptions must be approved by SPE General Counselapproved by SPE General Counsel

2222

INVENTORYINVENTORY

2323

InventoryInventory

Topics

DefinitionAcquisition Costs

ValuationMinimum

Internal Controls

2424

Definition and Acquisition CostsDefinition and Acquisition Costs

Purchased or manufactured items for the purpose of resale including but Purchased or manufactured items for the purpose of resale including but not limited to video cassettes, DVD’s, blue-ray disks, packaged not limited to video cassettes, DVD’s, blue-ray disks, packaged software/games, etcsoftware/games, etc

Acquisition costs = invoiced cost + total of all incidental costs (e.g., Acquisition costs = invoiced cost + total of all incidental costs (e.g., freight-in, insurance, duty, etc.) – purchase returns and allowancesfreight-in, insurance, duty, etc.) – purchase returns and allowances

Receiving, inspection, storage, handling and interest costs are Receiving, inspection, storage, handling and interest costs are notnot included included in acquisition costsin acquisition costs

Incidental costs that are less than 3% of total purchased inventory or Incidental costs that are less than 3% of total purchased inventory or manufacturing costs manufacturing costs maymay be excluded from acquisition costs be excluded from acquisition costs

2525

ValuationValuation

Inventory shall be valued at standard full absorption cost (full Inventory shall be valued at standard full absorption cost (full costing). Includes direct materials, direct labor, both variable costing). Includes direct materials, direct labor, both variable and fixed manufacturing overheadsand fixed manufacturing overheads

Cost variances (the differences between standard costs and Cost variances (the differences between standard costs and actual costs, or previous standard costs and current standard actual costs, or previous standard costs and current standard costs) shall be allocated between inventory and costs of sales. costs) shall be allocated between inventory and costs of sales. Total net variances less than 1% of total manufacturing cost or Total net variances less than 1% of total manufacturing cost or total purchasing cost may be charged or credited against cost total purchasing cost may be charged or credited against cost of sales. This is a Sony Corporation policy based on of sales. This is a Sony Corporation policy based on materialitymateriality

2626

ValuationValuation

Inventory shall be valued at the lower of cost or market. Inventory shall be valued at the lower of cost or market. “Market” refers to either net realizable value (NRV) or “Market” refers to either net realizable value (NRV) or repurchasing cost, defined as followsrepurchasing cost, defined as follows::

Net realizable value = (Net selling price) – (Direct sales Net realizable value = (Net selling price) – (Direct sales expenses)expenses)

Repurchasing cost is the “actual purchasing unit price” or Repurchasing cost is the “actual purchasing unit price” or “contract unit price” at the time of valuation“contract unit price” at the time of valuation

The following limits are placed on “market”:The following limits are placed on “market”: Ceiling – selling price minus estimated cost of completion and saleCeiling – selling price minus estimated cost of completion and sale Floor – selling price minus estimated cost of completion and sale, and Floor – selling price minus estimated cost of completion and sale, and

a normal gross profita normal gross profit

2727

ValuationValuation

Example of applying the “ceiling” and “floor” testsExample of applying the “ceiling” and “floor” tests::

2828

ValuationValuation

Establish inventory reserve for slow-moving items:Establish inventory reserve for slow-moving items:

Reserve is established based on past returns experience and current and Reserve is established based on past returns experience and current and expected market conditionsexpected market conditions

Once an inventory item has been written down, this lower value is Once an inventory item has been written down, this lower value is considered cost for future comparisons with “market”considered cost for future comparisons with “market”

Any purchases or sales of inventory from/to SPE entities Any purchases or sales of inventory from/to SPE entities (intercompany) and Sony affiliates should be identified and (intercompany) and Sony affiliates should be identified and reported to the Home Office for elimination reported to the Home Office for elimination

2929


Physical inventories each half-year or cycle counts on a Physical inventories each half-year or cycle counts on a rotational basis should be performed and reconciled to the rotational basis should be performed and reconciled to the inventory system and G/L inventory system and G/L

Inventory held by third parties should be reported or Inventory held by third parties should be reported or confirmed by the third party and reconciled to the inventory confirmed by the third party and reconciled to the inventory system and G/L at least annuallysystem and G/L at least annually

NRV test should be performed at least quarterlyNRV test should be performed at least quarterly

Obsolescence reserves or write-offs should be reviewed and Obsolescence reserves or write-offs should be reviewed and approved by management in accordance with COFAapproved by management in accordance with COFA

3030

FILM COSTSFILM COSTS

3131

Film CostsFilm Costs

Topics

DefinitionsCapitalization of

Film CostsAmortization of

Film CostsUltimate Revenues

Valuation of Film Costs

MinimumControls

3232

DefinitionsDefinitions

Statement of Position 00-2 (SOP Statement of Position 00-2 (SOP 00-2), 00-2), Accounting by Producers Accounting by Producers or Distributors of Filmsor Distributors of Films

Film - feature films, television Film - feature films, television series, television specials, on any series, television specials, on any medium (e.g. film, videotape, medium (e.g. film, videotape, digital)digital)

The costs of producing a film and The costs of producing a film and bringing that film to market bringing that film to market consists of film costs, consists of film costs, participation costs, exploitation participation costs, exploitation costs, and manufacturing costscosts, and manufacturing costs

3333


Film costs – Direct negative costs, Film costs – Direct negative costs, allocated production overhead, and allocated production overhead, and capitalized interest (if applicable) of capitalized interest (if applicable) of physical production of film or television physical production of film or television propertiesproperties

Participation costs – parties involved in the Participation costs – parties involved in the production of a film may be compensated production of a film may be compensated in part by contingent payments based on in part by contingent payments based on the financial results of a film pursuant to the financial results of a film pursuant to contractual formulas (participations) and contractual formulas (participations) and by contingent amounts due under by contingent amounts due under provisions of collective bargaining provisions of collective bargaining agreements (residuals). Such parties are agreements (residuals). Such parties are collectively referred to as participants, and collectively referred to as participants, and such costs are referred to collectively as such costs are referred to collectively as participation costs. Participations may be participation costs. Participations may be given to creative talent, such as actors and given to creative talent, such as actors and writers, or to entities from whom writers, or to entities from whom distribution rights are licenseddistribution rights are licensed

3434


Exploitation costs – all direct costs Exploitation costs – all direct costs (including marketing, advertising, (including marketing, advertising, publicity, promotion, and other publicity, promotion, and other distribution expenses) incurred in distribution expenses) incurred in connection with the distribution of a filmconnection with the distribution of a film

Manufacturing costs - costs of Manufacturing costs - costs of manufacturing or duplicating products, manufacturing or duplicating products, including film prints, videocassettes and including film prints, videocassettes and digital video discs. Not included in film digital video discs. Not included in film costscosts

Film prints – those materials, produced on Film prints – those materials, produced on behalf of a film distributor for delivery to a behalf of a film distributor for delivery to a theatre or other similar venue, that contain theatre or other similar venue, that contain the completed audio and video elements of the completed audio and video elements of a film. Such materials are used by the a film. Such materials are used by the theatre or other similar venue to exhibit the theatre or other similar venue to exhibit the film to its customersfilm to its customers

3535


Ultimates represent the Ultimates represent the estimated lifetime revenues estimated lifetime revenues of the exhibition or sale of a of the exhibition or sale of a film or television product in film or television product in all markets and territories, all markets and territories, including revenues from the including revenues from the sale of title-related productssale of title-related products

Ultimates are used to Ultimates are used to determine the amount by determine the amount by which film costs should be which film costs should be amortized each accounting amortized each accounting periodperiod

3636

Capitalization of Film CostsCapitalization of Film Costs

Should be recorded as a non-current assetShould be recorded as a non-current asset

Film costs consist of 1) the production or “negative” costs of a film or television Film costs consist of 1) the production or “negative” costs of a film or television product, including direct production costs such as ATL and BTL payroll, set product, including direct production costs such as ATL and BTL payroll, set construction, wardrobe, sound, postproduction costs, etc. 2) development costs that construction, wardrobe, sound, postproduction costs, etc. 2) development costs that are directly related to a title, and 3) allocated production overheadare directly related to a title, and 3) allocated production overhead

Production overhead includes allocable costs of individuals or departments with Production overhead includes allocable costs of individuals or departments with exclusive or significant responsibility for production of films. Production overhead exclusive or significant responsibility for production of films. Production overhead should not include G&A costs, the costs of certain overall dealsshould not include G&A costs, the costs of certain overall deals

Overall deals (e.g. the exclusive right to a writer’s creating product) should not be Overall deals (e.g. the exclusive right to a writer’s creating product) should not be included in film costs unless costs can be directly associated with the acquisition, included in film costs unless costs can be directly associated with the acquisition, adaptation or development of specific projectsadaptation or development of specific projects

Interest related to production of a film can be capitalized. SPE’s practice – not to Interest related to production of a film can be capitalized. SPE’s practice – not to capitalize the interestcapitalize the interest

3737


If a project is not expected to be ultimately used in the If a project is not expected to be ultimately used in the production of a film or television property, a loss should be production of a film or television property, a loss should be recorded immediatelyrecorded immediately

Any project that has not been “Any project that has not been “set for production” within three set for production” within three yearsyears from its capitalization should be expensed from its capitalization should be expensed

A property is set for production when (a) management has A property is set for production when (a) management has implicitly or explicitly committed to fund the production, i.e. implicitly or explicitly committed to fund the production, i.e. greenlight (b) the property has entered active pre-production greenlight (b) the property has entered active pre-production and c) principal photography is set to start within six monthsand c) principal photography is set to start within six months

3838


Episodic television series costs can be capitalized only to the extent of Episodic television series costs can be capitalized only to the extent of revenue contracted for the respective episode until its future secondary revenue contracted for the respective episode until its future secondary market revenues can be estimated. An entity should expense as incurred market revenues can be estimated. An entity should expense as incurred film costs in excess of this limitation on an episode-by-episode basis, and film costs in excess of this limitation on an episode-by-episode basis, and an entity should not restore such amounts as film cost assets in subsequent an entity should not restore such amounts as film cost assets in subsequent periods. An entity should expense all capitalized costs (including set costs) periods. An entity should expense all capitalized costs (including set costs) for each episode as it recognizes the related revenue for each episode. for each episode as it recognizes the related revenue for each episode. Once secondary market revenues can be estimated, costs may be Once secondary market revenues can be estimated, costs may be capitalized to the extent supported by the ultimatescapitalized to the extent supported by the ultimates

In cases of an episodic television series over multiple seasons, where In cases of an episodic television series over multiple seasons, where secondary market revenue can be estimated, the series can be counted as a secondary market revenue can be estimated, the series can be counted as a single film in calculating amortizationsingle film in calculating amortization

3939


Example – Accounting for costs of episodic television production prior to the Example – Accounting for costs of episodic television production prior to the establishment of secondary market revenue estimatesestablishment of secondary market revenue estimates

Assumptions:Assumptions: An episodic TV series is in first year of productionAn episodic TV series is in first year of production Secondary market revenue estimate – noneSecondary market revenue estimate – none Cost of production, per episode after the first episode - $500,000 (assume that the most of the Cost of production, per episode after the first episode - $500,000 (assume that the most of the

set costs were accounted for as part of the first episode)set costs were accounted for as part of the first episode) Exploitation costs, per episode - $5,000Exploitation costs, per episode - $5,000 Estimated ultimate revenue per episode: contracted $200,000Estimated ultimate revenue per episode: contracted $200,000

4040

Amortization of Film CostsAmortization of Film Costs

Individual-film-forecast-computation methodIndividual-film-forecast-computation method

Individual-film-forecast-computation method is calculated as:Individual-film-forecast-computation method is calculated as:

Change in amortization due to change in ultimates – charge or credit to income Change in amortization due to change in ultimates – charge or credit to income statementstatement

Actual revenue for current periodx Unamortized film costs

Future ultimate revenue starting fromBeginning of current fiscal year

4141


Example - Illustration of the Individual-Film-Forecast Method of Amortization, for a Example - Illustration of the Individual-Film-Forecast Method of Amortization, for a Film in Its Initial Year of ReleaseFilm in Its Initial Year of Release

Assumptions:Assumptions: Film cost - $50,000Film cost - $50,000 Estimated ultimate revenue - $100,000Estimated ultimate revenue - $100,000 Actual revenue earned in Year 1 - $60,000Actual revenue earned in Year 1 - $60,000 Estimated ultimate participation costs - $10,000Estimated ultimate participation costs - $10,000

Question 1Question 1 – What is film cost amortization in Year 1? – What is film cost amortization in Year 1?

Question 2Question 2 – What amount of participation costs is accrued in Year 1? – What amount of participation costs is accrued in Year 1?

4242


1.1. Film cost amortization in Year 1:Film cost amortization in Year 1:

$60,000 earned revenue$60,000 earned revenue * $50,000 film cost = * $50,000 film cost = $30,000$30,000

$100,000 ultimate revenue$100,000 ultimate revenue

2.2. Participation costs accrued in Year 1:Participation costs accrued in Year 1:

$60,000 earned revenue$60,000 earned revenue * $10,000 ultimate participation costs = * $10,000 ultimate participation costs = $6,000$6,000$100,000 ultimate revenue$100,000 ultimate revenue

4343


Example - Illustration of the Individual-Film-Forecast Method of Amortization, for an Example - Illustration of the Individual-Film-Forecast Method of Amortization, for an Episodic Television Series Episodic Television Series

Question 1 – Question 1 – What is the amount of amortization for season 4 and 5?What is the amount of amortization for season 4 and 5?Question 2 – Question 2 – What is the amount of accrual of participation costs for season 4 and 5?What is the amount of accrual of participation costs for season 4 and 5?

Assumptions:Assumptions:1.1. An entity produces and distributes an episodic television series. Five seasons of the series An entity produces and distributes an episodic television series. Five seasons of the series

are ultimately produced.are ultimately produced.2.2. The entity's fiscal year end corresponds directly with the completion of each production The entity's fiscal year end corresponds directly with the completion of each production

season.season.3.3. The beginning of Season 4 is when secondary market revenue estimates are initially The beginning of Season 4 is when secondary market revenue estimates are initially

established.established.4.4. Costs of production are the following:Costs of production are the following:

Seasons 1 to 3 - $36,000 (fully expensed prior to Season 4) Seasons 1 to 3 - $36,000 (fully expensed prior to Season 4) Season 4 - $16,000Season 4 - $16,000 Season 5 - $18,000 Season 5 - $18,000

4444


Assumptions (cont’d):Assumptions (cont’d):5.5. Earned and remaining ultimate revenues are the following:Earned and remaining ultimate revenues are the following:

As of Season 4 As of Season 4 Earned and reported in Season 4 Earned and reported in Season 4 $ 8,000 $ 8,000 Earned and reported in Season 5Earned and reported in Season 5 N/A N/A Remaining ultimate revenue, Seasons 1 to 4 Remaining ultimate revenue, Seasons 1 to 4 $40,000 $40,000 Remaining ultimate revenue, Season 5 Remaining ultimate revenue, Season 5 N/A N/A

$48,000$48,000

As of Season 5As of Season 5 Earned and reported in Season 4 Earned and reported in Season 4 N/A N/A Earned and reported in Season 5 Earned and reported in Season 5 $11,000 $11,000 Remaining ultimate revenue, Seasons 1 to 4 Remaining ultimate revenue, Seasons 1 to 4 $40,000 $40,000 Remaining ultimate revenue, Season 5 Remaining ultimate revenue, Season 5 $10,000$10,000

$61,000$61,000

6.6. Ultimate participation costs are as follows:Ultimate participation costs are as follows:As of Seasons 1 to 3 As of Seasons 1 to 3 $ 0 $ 0 As of Season 4 As of Season 4 $2,000$2,000 As of Season 5 As of Season 5 $3,000$3,000

4545


1.1. Amortization of series costs:Amortization of series costs:

Season 4 Season 4 $8,000$8,000 //$48,000 x $16,000 = $48,000 x $16,000 = $2,667$2,667

Season 5 Season 5 $11,000 /$61,000 x $31,333 = $11,000 /$61,000 x $31,333 = $5,650$5,650

2.2. Accrual of participation costs:Accrual of participation costs:

Season 4 Season 4 $8,000/$48,000 x $2,000 = $8,000/$48,000 x $2,000 = $333$333

Season 5 Season 5 $11,000/$61,000 x $2,667 = $11,000/$61,000 x $2,667 = $481$481

4646

Ultimate RevenuesUltimate Revenues

Most PropertiesMost Properties

Revenues should be estimated for up to the ten-Revenues should be estimated for up to the ten-year period following the initial release for non-year period following the initial release for non-catalog and non-episodic television series catalog and non-episodic television series propertiesproperties

Episodic Television SeriesEpisodic Television Series

Revenues should include estimates of revenue Revenues should include estimates of revenue over a period not to exceed ten years from the over a period not to exceed ten years from the date of delivery of the first episode or, if still in date of delivery of the first episode or, if still in production, five years from the date of delivery production, five years from the date of delivery of the most recent episode, if later. Revenue of the most recent episode, if later. Revenue estimates for secondary markets should be estimates for secondary markets should be included only if an entity can demonstrate included only if an entity can demonstrate through its experience or industry norms that the through its experience or industry norms that the number of episodes already produced, plus those number of episodes already produced, plus those for which a firm commitment exists and the for which a firm commitment exists and the entity expects to deliver, can be licensed entity expects to deliver, can be licensed successfully in the secondary marketsuccessfully in the secondary market

4747

Ultimate RevenuesUltimate Revenues

Catalog PropertiesCatalog Properties

Revenues for films acquired for the film Revenues for films acquired for the film library should be estimated over a period library should be estimated over a period of up to twenty years from acquisition dateof up to twenty years from acquisition date

Film-Related ProductsFilm-Related Products

Revenues from licensing deals for the Revenues from licensing deals for the marketing of film-related products should marketing of film-related products should be included only if either a) a contract for be included only if either a) a contract for a nonrefundable amount exists or b) there a nonrefundable amount exists or b) there is a history of revenues from similar deals. is a history of revenues from similar deals. In the case of film-related product sales In the case of film-related product sales revenues, revenues should be included revenues, revenues should be included only if there is a history of revenues from only if there is a history of revenues from similar products for similar types of films. similar products for similar types of films.

4848

Valuation of Film CostsValuation of Film Costs

Film costs must be recorded at the lower of cost or net realizable value Film costs must be recorded at the lower of cost or net realizable value (NRV). The fair value of the film should be evaluated using discounted (NRV). The fair value of the film should be evaluated using discounted cash flows. In cases where the fair value of a film is expected to be less cash flows. In cases where the fair value of a film is expected to be less than its unamortized film costs, the film must be written down to fair than its unamortized film costs, the film must be written down to fair value, with the difference recorded as a loss. In no case can a film’s value, with the difference recorded as a loss. In no case can a film’s recorded value be written uprecorded value be written up

Subsequent eventsSubsequent events Need for a write-down occurred after the date of the balance sheet but Need for a write-down occurred after the date of the balance sheet but

before issuance of financial statements – film costs have to be adjusted for before issuance of financial statements – film costs have to be adjusted for the write-downthe write-down

4949


NRV testing should be performed at least quarterly for all significant titlesNRV testing should be performed at least quarterly for all significant titles

Amortization expense should be reconciled from the sub-system/schedule to the Amortization expense should be reconciled from the sub-system/schedule to the G/L quarterlyG/L quarterly

““Catalog” balances should be reviewed at least quarterly to determine all Catalog” balances should be reviewed at least quarterly to determine all exploitation costs have been expensed as incurredexploitation costs have been expensed as incurred

Production overhead costs should be reviewed annually to determine a) that Production overhead costs should be reviewed annually to determine a) that capitalized costs are still appropriate and b) whether any portion of non-capitalized capitalized costs are still appropriate and b) whether any portion of non-capitalized overhead costs should be capitalizedoverhead costs should be capitalized

Capitalizable overhead should be allocated on a by-title basis at least quarterlyCapitalizable overhead should be allocated on a by-title basis at least quarterly

Ultimates should be prepared/updated for all significant titles at least quarterly in Ultimates should be prepared/updated for all significant titles at least quarterly in consultation with operating management consultation with operating management

5050

BROADCASTBROADCASTRIGHTSRIGHTS

5151

Broadcast RightsBroadcast Rights

Topics

DefinitionOf Broadcast

Rights

Capitalization andClassification of Broadcast Right

AmortizationOf Broadcast

Rights Valuation

Illustration of Accounting for

License AgreementsFor Program

Material


5252

Definition of Broadcast RightsDefinition of Broadcast Rights

Statement of Position 00-2 (SOP Statement of Position 00-2 (SOP 00-2), 00-2), Accounting by Producers Accounting by Producers or Distributors of Filmsor Distributors of Films and FAS and FAS 63, 63, Financial Reporting by Financial Reporting by BroadcastersBroadcasters

Broadcast RightsBroadcast Rights consist of consist of 1)1) rights to existing programming rights to existing programming

acquired under a license acquired under a license agreementsagreements

2)2) programming produced internally programming produced internally principally for broadcast by principally for broadcast by owned stations or networks and owned stations or networks and

3)3) rights to live programming rights to live programming acquired under license acquired under license agreements and related agreements and related amortization thereofamortization thereof

5353

Capitalization and Classification of Capitalization and Classification of Broadcast RightsBroadcast Rights Broadcast/Program rights and the related liability should be recorded on Broadcast/Program rights and the related liability should be recorded on

the balance sheet when the balance sheet when allall of the following conditions have been met: of the following conditions have been met: The license period has begunThe license period has begun The cost of each program is known or is reasonably determinableThe cost of each program is known or is reasonably determinable The material is acceptable to SPE in accordance with the license agreementThe material is acceptable to SPE in accordance with the license agreement The program is available for first showing or telecastThe program is available for first showing or telecast

Current and non-current classification:Current and non-current classification: Asset – based upon the estimated accounting period in which the Asset – based upon the estimated accounting period in which the

programming will be airedprogramming will be aired Liability – payment termsLiability – payment terms

Amounts paid to a licensor before the license period begins should be Amounts paid to a licensor before the license period begins should be classified as a prepaid expenseclassified as a prepaid expense

5454

Capitalization and Classification of Capitalization and Classification of Broadcast RightsBroadcast Rights Key issue is the allocation of programming rights to individual programs when Key issue is the allocation of programming rights to individual programs when

they are purchased as part of a package. Costs should be allocated to individual they are purchased as part of a package. Costs should be allocated to individual titles based upon the relative value to the programmer. Generally, the cost of the titles based upon the relative value to the programmer. Generally, the cost of the individual programs is set out in the contract. If not, the programmer must individual programs is set out in the contract. If not, the programmer must employ a systematic and rational allocation of the costs on a by-title basisemploy a systematic and rational allocation of the costs on a by-title basis

US GAAP allows licensed program rights to be recorded either at gross or net US GAAP allows licensed program rights to be recorded either at gross or net (NPV). SPE policy is to record at gross value (NPV). SPE policy is to record at gross value

5555

Amortization of Broadcast RightsAmortization of Broadcast Rights

Purchased rights (package) – allocation to individual programs based on Purchased rights (package) – allocation to individual programs based on the relative values of the films or series, which is commonly stated in the the relative values of the films or series, which is commonly stated in the contract. If the value of the first airing is significantly greater than contract. If the value of the first airing is significantly greater than subsequent airings, an accelerated method of amortization should be used. subsequent airings, an accelerated method of amortization should be used. Exception - cartoons, which allow for unlimited airing over a license Exception - cartoons, which allow for unlimited airing over a license period - amortization over the period of the agreementperiod - amortization over the period of the agreement

Feature product - on a program-by-program basis Feature product - on a program-by-program basis

Program series and other syndicated products - allocation needs only to be Program series and other syndicated products - allocation needs only to be made to the series level and not to the individual episode level. If the value made to the series level and not to the individual episode level. If the value of the first airing is significantly greater than subsequent airings, an of the first airing is significantly greater than subsequent airings, an accelerated method of amortization should be usedaccelerated method of amortization should be used

Internally developed programs - individual film forecast computation Internally developed programs - individual film forecast computation method method

5656

Valuation of Broadcast RightsValuation of Broadcast Rights

Should be reported at the lower of unamortized cost or Should be reported at the lower of unamortized cost or estimated net realizable value on a program-by-program, estimated net realizable value on a program-by-program, series, package, or daypart basis, as appropriate series, package, or daypart basis, as appropriate

Management should compare projected revenues to the Management should compare projected revenues to the carrying value . The projected revenue should take into carrying value . The projected revenue should take into consideration the anticipated airing pattern for the property consideration the anticipated airing pattern for the property and the ad revenue associated with the airing pattern. and the ad revenue associated with the airing pattern. Subscription and affiliate fees need to be evaluated if they can Subscription and affiliate fees need to be evaluated if they can be included in projected revenuebe included in projected revenue

A write-down from unamortized cost to a lower estimated net A write-down from unamortized cost to a lower estimated net realizable value establishes a new cost basisrealizable value establishes a new cost basis

5757

ILLUSTRATION OF ACCOUNTING FOR LICENSE ILLUSTRATION OF ACCOUNTING FOR LICENSE AGREEMENTS FOR PROGRAM MATERIALAGREEMENTS FOR PROGRAM MATERIAL

Assumptions:Assumptions:

a. End of Fiscal Year-December 31a. End of Fiscal Year-December 31

b. Contract Execution Date-July 31, 19X1b. Contract Execution Date-July 31, 19X1

c. Number of Films and Telecasts Permitted-4 films, 2 telecasts each c. Number of Films and Telecasts Permitted-4 films, 2 telecasts each

d. Payment Schedule-$1,000,000 at contract execution date, $6,000,000 on d. Payment Schedule-$1,000,000 at contract execution date, $6,000,000 on January 1, 19X2, 19X3, and 19X4January 1, 19X2, 19X3, and 19X4

e. Appropriate Interest Rate for Imputation of Interest-12 percent per yeare. Appropriate Interest Rate for Imputation of Interest-12 percent per year

5858


f.f. Fees, License Periods, and Film Availability Dates:Fees, License Periods, and Film Availability Dates:

g.g. Telecast Dates and RevenuesTelecast Dates and Revenues

5959


Asset and Liability Recognition (Gross Approach)Asset and Liability Recognition (Gross Approach)

Expense Recognition (Gross Approach)Expense Recognition (Gross Approach)

6060


NRV testing should be performed at least quarterly for all programsNRV testing should be performed at least quarterly for all programs

Amortization expense should be reconciled from the sub-system/schedule to the Amortization expense should be reconciled from the sub-system/schedule to the G/L at least quarterlyG/L at least quarterly

Production overhead costs should be reviewed annually to determine a) that Production overhead costs should be reviewed annually to determine a) that capitalized costs are still appropriate and b) whether any portion of non-capitalized capitalized costs are still appropriate and b) whether any portion of non-capitalized overhead costs should be capitalizedoverhead costs should be capitalized

Capitalizable overhead should be allocated on a by-title basis at least quarterlyCapitalizable overhead should be allocated on a by-title basis at least quarterly

If estimates are used for allocations, under/overapplied overhead should be If estimates are used for allocations, under/overapplied overhead should be properly reclassified to Film Costs or as a P/L itemproperly reclassified to Film Costs or as a P/L item

Ultimates should be prepared/updated for all significant titles at least quarterly in Ultimates should be prepared/updated for all significant titles at least quarterly in consultation with operating management consultation with operating management

6161

FIXED ASSETSFIXED ASSETS

6262

Fixed AssetsFixed Assets

Topics

CapitalizationDepreciation

Impairment LeasesMinimum

Internal Controls

6363

CapitalizationCapitalization

SPE policy - fixed assets with useful lives of more than one year and acquisition costs SPE policy - fixed assets with useful lives of more than one year and acquisition costs greater than $5,000 individually or as a group should be capitalizedgreater than $5,000 individually or as a group should be capitalized

The capitalization dollar threshold can be adjusted if local standards would require a lower The capitalization dollar threshold can be adjusted if local standards would require a lower amount but this fact should be brought to the Corporate Finance attentionamount but this fact should be brought to the Corporate Finance attention

Free of charge assets with useful life of greater than one year and >$5,000 should be Free of charge assets with useful life of greater than one year and >$5,000 should be recorded at fair value as fixed assets. Assets received through exchanges or purchased by recorded at fair value as fixed assets. Assets received through exchanges or purchased by insurance, shall be recorded at fair value. The difference between fair value and book value insurance, shall be recorded at fair value. The difference between fair value and book value shall be charged /credited to incomeshall be charged /credited to income

Acquisition cost = asset cost (invoice value) + costs incurred to get the asset ready for use Acquisition cost = asset cost (invoice value) + costs incurred to get the asset ready for use (e.g. installation, freight, etc.). After acquisition, expenditures that increase the value of the (e.g. installation, freight, etc.). After acquisition, expenditures that increase the value of the asset (e.g., adding new functions, improvements, or increasing useful life) should be asset (e.g., adding new functions, improvements, or increasing useful life) should be capitalized. Repair and maintenance costs or transfer costs of an asset shall be expensed as capitalized. Repair and maintenance costs or transfer costs of an asset shall be expensed as incurredincurred

The interest cost on specific borrowing made for long term construction projects maybe The interest cost on specific borrowing made for long term construction projects maybe capitalized and amortized over its useful life if certain conditions are metcapitalized and amortized over its useful life if certain conditions are met

6464

DepreciationDepreciation

Straight-line method to be usedStraight-line method to be used

The following is a guideline for estimated useful lives. However, significant The following is a guideline for estimated useful lives. However, significant variances from these lives should be discussed with Corporate Finance:variances from these lives should be discussed with Corporate Finance:

BuildingsBuildings steel and/or concrete - 30 years, others -10 steel and/or concrete - 30 years, others -10 yearsyears

Building improvementsBuilding improvements 10 years10 years

Leasehold improvementsLeasehold improvements shorter of 10 or term of leaseshorter of 10 or term of lease

MachineryMachinery 5-7 years5-7 years

Tools, equipment, furniture & other Tools, equipment, furniture & other fixturesfixtures

5 years5 years

AutomobilesAutomobiles 3 years3 years

6565

ImpairmentImpairment

There are two steps in determining if There are two steps in determining if a long-lived asset is impaired:a long-lived asset is impaired:

Not recoverable if net book value exceeds Not recoverable if net book value exceeds the sum of the undiscounted cash flows the sum of the undiscounted cash flows expected to result from the use and expected to result from the use and eventual disposition of the asset (asset eventual disposition of the asset (asset group)group)

Fair value is the amount at which that asset Fair value is the amount at which that asset could be bought or sold in a current could be bought or sold in a current transaction between willing parties. Use transaction between willing parties. Use quoted market price. If not available, fair quoted market price. If not available, fair value estimate should be based on prices value estimate should be based on prices for similar assets or, on the discounted for similar assets or, on the discounted estimated future cash flowsestimated future cash flows

The impairment loss is measured as the The impairment loss is measured as the difference between fair value and carrying difference between fair value and carrying amount of a long-lived assetamount of a long-lived asset

Step 1 – determine if carrying amount ofa long-lived asset is not

recoverable. If yes, move to step 2

Step 2- determine if carrying amount ofa long-lived asset exceeds

its fair value. If yes,

Asset is impaired

6666


When to test for recoverabilityWhen to test for recoverabilityWhenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following impairment indicators are examples of such events or changes in circumstances:following impairment indicators are examples of such events or changes in circumstances:

A significant decrease in the market price of a long-lived asset (asset group).A significant decrease in the market price of a long-lived asset (asset group). A significant change in the extent or manner in which a long-lived asset (asset group) is being A significant change in the extent or manner in which a long-lived asset (asset group) is being

used or in its physical conditionused or in its physical condition A significant adverse change in legal factors or in the business climate that could affect the A significant adverse change in legal factors or in the business climate that could affect the

value of a long-lived asset (asset group), including an adverse action or assessment by a value of a long-lived asset (asset group), including an adverse action or assessment by a regulator.regulator.

An accumulation of costs significantly in excess of the amount originally expected for the An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group).acquisition or construction of a long-lived asset (asset group).

A current-period operating or cash flow loss combined with a history of operating or cash A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group).use of a long-lived asset (asset group).

A current expectation that it is more likely than not (greater than 50%) that a long-lived asset A current expectation that it is more likely than not (greater than 50%) that a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.previously estimated useful life.

The existence of other factors which indicates asset impairment.The existence of other factors which indicates asset impairment.

6767

LeasesLeases

LeasesLeases

Lease - an agreement conveying the right to use property, plant, or equipment Lease - an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets) usually for a stated period of time (land and/or depreciable assets) usually for a stated period of time

Two main classes of leases from the standpoint of the lessee:Two main classes of leases from the standpoint of the lessee: Capital leases – leases that meet one of more criteria discussed furtherCapital leases – leases that meet one of more criteria discussed further Operating leases – all other leasesOperating leases – all other leases

SFAS No. 13, SFAS No. 13, Accounting for LeasesAccounting for Leases, establishes requirements for accounting , establishes requirements for accounting for leasesfor leases

Accounting can be complex due to:Accounting can be complex due to: Amortization of leasehold improvements (lease term plus lease renewals)Amortization of leasehold improvements (lease term plus lease renewals) Rent holidaysRent holidays Landlord/tenant improvementsLandlord/tenant improvements

6868

LeasesLeases

Capital lease is recorded as a tangible fixed asset subject to depreciation, with a corresponding Capital lease is recorded as a tangible fixed asset subject to depreciation, with a corresponding amount recorded as obligationamount recorded as obligation

If the lease does not meet any of the criteria, it should be classified as an operating lease, with If the lease does not meet any of the criteria, it should be classified as an operating lease, with lease payments charged to expense (straight-line basis versus cash basis of amortization)lease payments charged to expense (straight-line basis versus cash basis of amortization)

Capital lease – need to meet one of

the criteria

Ownership is transferred

to lessee by the endof the lease term

Lease contains a bargain purchase

option

Lease term is 75% or more of

useful life ofleased property

PV of minimumlease payments is90% or more of

fair value of leasedproperty

6969

LeasesLeases

Amortization of operating leaseAmortization of operating lease

Some operating leases include lease payments that are not of equal amounts, but Some operating leases include lease payments that are not of equal amounts, but escalate during the life of the lease. Straight-line basis should be used for escalate during the life of the lease. Straight-line basis should be used for amortizationamortization

Lease incentives (e.g., up-front cash payment to the lessee, payment of costs for Lease incentives (e.g., up-front cash payment to the lessee, payment of costs for the lessee such as moving expenses, or the assumption by the lessor of the the lessee such as moving expenses, or the assumption by the lessor of the lessee's preexisting lease, etc.) should be amortized over the term of the lease lessee's preexisting lease, etc.) should be amortized over the term of the lease using the straight- line basis using the straight- line basis

Rent holidays should be included in term of the lease when calculating Rent holidays should be included in term of the lease when calculating amortizationamortization

Rent expense should be recognized once the lessee has the legal right to use the Rent expense should be recognized once the lessee has the legal right to use the property irrespective of when rents are due (payable) under the lease agreement property irrespective of when rents are due (payable) under the lease agreement

7070

LeasesLeases

Accounting for capital leaseAccounting for capital lease Interest rate for determining present value Interest rate for determining present value - Ordinarily, the interest rate - Ordinarily, the interest rate

(as applied to borrowings from a bank, etc.) that, at the inception of the (as applied to borrowings from a bank, etc.) that, at the inception of the lease, the lessee would have incurred. If the lessor's rate is specified and lease, the lessee would have incurred. If the lessor's rate is specified and is lower than the lessee's incremental borrowing rate, then the lessor’s is lower than the lessee's incremental borrowing rate, then the lessor’s rate shall be appliedrate shall be applied

The amount of an asset and obligation to be recorded for a leased assetThe amount of an asset and obligation to be recorded for a leased asset - at the inception of the lease, the lessee shall record the lower of the - at the inception of the lease, the lessee shall record the lower of the present value of the total lease payments or the fair value of the leased present value of the total lease payments or the fair value of the leased asset. The lease payments capitalized shall exclude any executory costs asset. The lease payments capitalized shall exclude any executory costs (e.g., insurance, maintenance, and taxes in connection with the leased (e.g., insurance, maintenance, and taxes in connection with the leased property) to be paid by the lessor. An estimate shall be used for the property) to be paid by the lessor. An estimate shall be used for the executory costs if the amounts cannot be determined from the lease executory costs if the amounts cannot be determined from the lease contractcontract

7171

Minimum Internal Controls Minimum Internal Controls

Fixed Assets roll-forward schedule should be prepared and updated on Fixed Assets roll-forward schedule should be prepared and updated on at least a quarterly basisat least a quarterly basis

At a minimum, a physical inventory count shall be made at least once At a minimum, a physical inventory count shall be made at least once within a fiscal year verifying the existence of all fixed assets, excluding within a fiscal year verifying the existence of all fixed assets, excluding assets under constructionassets under construction

Fixed Assets should be reviewed at least annually for any indications of Fixed Assets should be reviewed at least annually for any indications of impairmentimpairment

The use of other than straight-line method of depreciation must be The use of other than straight-line method of depreciation must be approved by SPE Corporateapproved by SPE Corporate

SPE Insurance and Tax Departments should be notified of all significant SPE Insurance and Tax Departments should be notified of all significant acquisitions and disposalsacquisitions and disposals

7272

SOFTWARE AND SOFTWARE AND WEBSITE WEBSITE

DEVELOPMENT DEVELOPMENT COSTSCOSTS

7373

Software and Website Development CostsSoftware and Website Development Costs

Topics

Software Development

Costs

Internal UseSoftware

Software for Sale

WebsiteDevelopment

Costs

MinimumInternal Controls

7474

Software Development CostsSoftware Development Costs

Key distinction is between:Key distinction is between: Internal use software – one acquired, internally developed or Internal use software – one acquired, internally developed or

modified solely to meet SPE’s needs, for which no substantive plan modified solely to meet SPE’s needs, for which no substantive plan exists or is being developed to market the software externally and exists or is being developed to market the software externally and

Software for sale – one developed for external sale, consisting of Software for sale – one developed for external sale, consisting of the creative development of computer programs, processes and the creative development of computer programs, processes and other related materialsother related materials

Only direct costs (such as wages of internal IS staff involved directly in Only direct costs (such as wages of internal IS staff involved directly in developing the software) of development should be capitalized developing the software) of development should be capitalized

Research and development costs should be expensed when incurredResearch and development costs should be expensed when incurred

7575

Internal Use SoftwareInternal Use Software

Decision to capitalize or expense internal-use software development costs depends on Decision to capitalize or expense internal-use software development costs depends on the stage of the development effort. Red – expense, green – capitalize.the stage of the development effort. Red – expense, green – capitalize.

Preliminary project stage (Analysis)

Application Development

Stage

Post Implementation

Stage

Upgrades and

Enhancements

- Needs evaluation- Requirements analysis and documentation- Evaluation of alternatives- Technology gap analysis- Initial charter and ROI formulation- Final selection of alternatives

- Application design- Coding- Installation of hardware- Testing and QA- License fees for purchased software components- Payroll costs for persons working directly on the project

- User training- Application and hardware maintenance

- Upgrades that add new functionality

7676

Software for SaleSoftware for Sale

Technical feasibility has to be established in order to capitalizeTechnical feasibility has to be established in order to capitalize

Capitalization must cease when the product is available for general release to customersCapitalization must cease when the product is available for general release to customers

Capitalization vs. expense is similar to internal-use software costs. Specific requirement Capitalization vs. expense is similar to internal-use software costs. Specific requirement that maintenance and customer support be expensed when related revenue is recognized or that maintenance and customer support be expensed when related revenue is recognized or when those costs are incurred, whichever occurs firstwhen those costs are incurred, whichever occurs first

Amortization on a product-by-product basis, starting at the time the software is released to Amortization on a product-by-product basis, starting at the time the software is released to customerscustomers

Amortization is calculated as the greater of (1) the ratio of the product’s current gross Amortization is calculated as the greater of (1) the ratio of the product’s current gross revenues to the total of current and expected revenues or (2) the straight-line method. The revenues to the total of current and expected revenues or (2) the straight-line method. The estimated useful life for software typically ranges from 3 to 7 yearsestimated useful life for software typically ranges from 3 to 7 years

The unamortized capitalized costs for each product must be compared to the net realizable The unamortized capitalized costs for each product must be compared to the net realizable value annually, with the excess costs written offvalue annually, with the excess costs written off

7777

Website Development CostsWebsite Development Costs

Decision to capitalize or expense internal-use website development costs depends on the Decision to capitalize or expense internal-use website development costs depends on the stage of the development effortstage of the development effort. Red – expense, green - capitalize. Red – expense, green - capitalize

Planning Stage

Web application/Infrastructure

Development Stage

OperationStage

•Develop business/project plan •Determine website functionalities•Determine existence of needed technology•Formulate conceptual graphics and content•Identify and evaluate alternatives•Select alternatives

•Procuring software tools for coding•Coding applications and security features•Installation of website application to hardware•Internet connection /hosting•Creating initial links•Testing•Crating graphics/user interface

•Training•Website launch•User administration•Update graphics and content•Create links•Maintain/upgrade links•Security review/user analysis

7878


Software and Website costs should be reviewed at least annually for any Software and Website costs should be reviewed at least annually for any indications of impairment indications of impairment

Entries for software accounts in the G/L should be reviewed for significant or Entries for software accounts in the G/L should be reviewed for significant or unusual items at least quarterlyunusual items at least quarterly

Significant capital expenditures should be compared to the budget/forecast and Significant capital expenditures should be compared to the budget/forecast and significant variances investigated significant variances investigated

For internally developed software, assess the project stage and nature of For internally developed software, assess the project stage and nature of expenditures to determine that the capitalization or expensing of expenditures is expenditures to determine that the capitalization or expensing of expenditures is appropriate.appropriate.

7979

INVESTMENTSINVESTMENTS

8080

InvestmentsInvestments

Topics

Types of Securities

Classification ofSecurities

Valuation of Securities

Impairment of Securities


8181

Types of SecuritiesTypes of Securities

Debt securitiesDebt securities – securities which carry obligations for the issuer to pay a certain – securities which carry obligations for the issuer to pay a certain sum plus interest at a specified rate (e.g. government bonds, local government sum plus interest at a specified rate (e.g. government bonds, local government bonds, debentures, convertible bonds, commercial paper, etc)bonds, debentures, convertible bonds, commercial paper, etc)

Equity securitiesEquity securities – securities representing ownership rights in the issuer’s – securities representing ownership rights in the issuer’s business (e.g. common stock, preferred stock, warrants, call options, put options, business (e.g. common stock, preferred stock, warrants, call options, put options, etc.). Income may be received on such equities through the payment of etc.). Income may be received on such equities through the payment of dividendsdividends

8282

Classification of SecuritiesClassification of Securities

Held-to-maturityHeld-to-maturity – debt securities with management’s positive intent and ability – debt securities with management’s positive intent and ability to hold to maturityto hold to maturity

Trading Trading – securities (either debt or equity securities with readily determinable – securities (either debt or equity securities with readily determinable fair values) that are bought and held principally for the purpose of selling them fair values) that are bought and held principally for the purpose of selling them in the near term. Trading generally reflects active and frequent buying and in the near term. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating selling, and trading securities are generally used with the objective of generating profits on short-term differences in priceprofits on short-term differences in price

Available-for-saleAvailable-for-sale – investments that are not classified as trading or as held-to- – investments that are not classified as trading or as held-to-maturity securities maturity securities

8383

Valuation of SecuritiesValuation of Securities

Held-to-maturityHeld-to-maturity securities are reported at amortized cost, subject to an impairment test. securities are reported at amortized cost, subject to an impairment test. Realized gains and losses for these securities are reported to earnings. Dividend and Realized gains and losses for these securities are reported to earnings. Dividend and interest income, including amortization of premium and discount, should also be included interest income, including amortization of premium and discount, should also be included in earningsin earnings

TradingTrading securities are reported at fair value with unrealized gains and losses included in securities are reported at fair value with unrealized gains and losses included in earnings. Dividends and interest should also be included in earnings.earnings. Dividends and interest should also be included in earnings.

Available-for-saleAvailable-for-sale securities are reported at fair value, with unrealized gains and losses securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net amount in a separate component of excluded from earnings and reported as a net amount in a separate component of shareholders’ equity. Unrealized gains and losses are reported net of the related tax effect shareholders’ equity. Unrealized gains and losses are reported net of the related tax effect in other comprehensive income (“OCI”). Upon sale, realized gains and losses are reported in other comprehensive income (“OCI”). Upon sale, realized gains and losses are reported in earnings. Dividend and interest income, including amortization of the premium and in earnings. Dividend and interest income, including amortization of the premium and discount arising at acquisition, should also be included in earnings.discount arising at acquisition, should also be included in earnings.

8484

Impairment of SecuritiesImpairment of Securities

For held-to-maturity or available-for-sale securities, a company should determine whether For held-to-maturity or available-for-sale securities, a company should determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline a decline in fair value below the amortized cost basis is other than temporary. If the decline is other than temporary, the cost basis of the individual security should be written down to is other than temporary, the cost basis of the individual security should be written down to fair value as a new cost basis, and the amount of the write-down should be included in fair value as a new cost basis, and the amount of the write-down should be included in earnings as a realized loss. The new cost basis should not be changed for subsequent earnings as a realized loss. The new cost basis should not be changed for subsequent recoveries in fair value. A recovery in fair value should not be recorded in earnings until recoveries in fair value. A recovery in fair value should not be recorded in earnings until the security is soldthe security is sold

Each individual security should be evaluated for impairment, and as such, the practice of Each individual security should be evaluated for impairment, and as such, the practice of providing a general allowance for unidentified impairment in a portfolio is not appropriate.providing a general allowance for unidentified impairment in a portfolio is not appropriate.

For trading securities, unrealized holding losses are included in earnings. It is not For trading securities, unrealized holding losses are included in earnings. It is not necessary to evaluate trading securities for impairment.necessary to evaluate trading securities for impairment.

8585


Entries to the investment accounts in the G/L should be reviewed at least Entries to the investment accounts in the G/L should be reviewed at least quarterly for significant or unusual itemsquarterly for significant or unusual items

Investment schedules or statements of investments held by third parties should Investment schedules or statements of investments held by third parties should be reconciled to the G/L quarterlybe reconciled to the G/L quarterly

All purchases and sales of investments should be reviewed and authorized in All purchases and sales of investments should be reviewed and authorized in accordance with the COFA . Any significant related gains or losses should be accordance with the COFA . Any significant related gains or losses should be calculated and the Tax and SPE Corporate should be notifiedcalculated and the Tax and SPE Corporate should be notified

Significant investments should be reviewed at least annually to determine if Significant investments should be reviewed at least annually to determine if there are any indications of impairmentthere are any indications of impairment

Appropriate consideration should be given to the classification of investments Appropriate consideration should be given to the classification of investments between current and noncurrent, and to the difference between the cost and between current and noncurrent, and to the difference between the cost and market value of investmentsmarket value of investments

8686

INVESTMENTS IN INVESTMENTS IN UNCONSOLIDATED UNCONSOLIDATED

SUBSIDIARIESSUBSIDIARIES

8787

Investments in Unconsolidated SubsidiariesInvestments in Unconsolidated Subsidiaries

Topics

Definitions Equity vsCost Method

Variable InterestEntities (VIE)

ImpairmentMinimum

Internal Controls

8888


The nature of the relationship between SPE and the subsidiary, in terms of influence, The nature of the relationship between SPE and the subsidiary, in terms of influence, ownership percentage and control, determines the appropriate accounting treatment for SPE’s ownership percentage and control, determines the appropriate accounting treatment for SPE’s accounting of its investment in the subsidiaryaccounting of its investment in the subsidiary

The following are general guidelines for the categorizing of investments in subsidiaries:The following are general guidelines for the categorizing of investments in subsidiaries: Less than 20% - Less than 20% - cost method cost method 20% - 50% - 20% - 50% - equity methodequity method More than 50% - More than 50% - consolidationconsolidation

If SPE owns less than 20% but holds significant influence over subsidiary – If SPE owns less than 20% but holds significant influence over subsidiary – equity methodequity method

If SPE is a primary beneficiary (has majority of risks and rewards compared to other If SPE is a primary beneficiary (has majority of risks and rewards compared to other investors) in the subsidiary, irrespective of % of investment – investors) in the subsidiary, irrespective of % of investment – consolidation. consolidation.

8989

Cost versus Equity MethodCost versus Equity Method

Cost MethodCost Method The investment in the subsidiary is recorded at its original acquisition cost, and is not The investment in the subsidiary is recorded at its original acquisition cost, and is not

adjusted. The only investment activity recorded is income from any dividends received adjusted. The only investment activity recorded is income from any dividends received from the subsidiaryfrom the subsidiary

Equity MethodEquity Method Portion of the subsidiary’s income (loss) is recognized as investment income (loss), and Portion of the subsidiary’s income (loss) is recognized as investment income (loss), and

the original investment cost is adjusted for the subsidiary’s periodic income (loss). Any the original investment cost is adjusted for the subsidiary’s periodic income (loss). Any dividends declared by the subsidiary are treated as reductions to the investment balancedividends declared by the subsidiary are treated as reductions to the investment balance

Share of losses in an investee may equal or exceed the carrying amount of the investment Share of losses in an investee may equal or exceed the carrying amount of the investment accounted for the equity method plus advances made. Equity adjustments should be discontinued accounted for the equity method plus advances made. Equity adjustments should be discontinued if the investment balance becomes zero unless the investor has guaranteed obligations of the if the investment balance becomes zero unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support to the investee . If the investee or is otherwise committed to provide further financial support to the investee . If the investee becomes profitable again, income cannot be recorded on the investment until SPE’s share investee becomes profitable again, income cannot be recorded on the investment until SPE’s share of income covers previously unrecorded lossesof income covers previously unrecorded losses

9090

Variable Interest Entities (VIE)Variable Interest Entities (VIE)

In early 2002, the FASB launched a project on the consolidation of special-In early 2002, the FASB launched a project on the consolidation of special-purpose entities (SPEs), after Enron’s collapse exposed a number of purpose entities (SPEs), after Enron’s collapse exposed a number of worrisome accounting issuesworrisome accounting issues

FIN 46 issued in January 2003 and reissued in December 2003 as FIN 46RFIN 46 issued in January 2003 and reissued in December 2003 as FIN 46R

Applying FIN 46 is Applying FIN 46 is COMPLEXCOMPLEX

PwC generally recommends to pre-clear with the SEC the significant PwC generally recommends to pre-clear with the SEC the significant transactions involving FIN 46 issuestransactions involving FIN 46 issues

Highly complicated area and any potential transaction of concern should be Highly complicated area and any potential transaction of concern should be discussed with Technical Support and Compliance Groupdiscussed with Technical Support and Compliance Group

9191


Under GAAP, a company must consolidate any entity in which it has a Under GAAP, a company must consolidate any entity in which it has a “controlling financial interest.” (>50% )“controlling financial interest.” (>50% )

FIN 46 makes two critical changes:FIN 46 makes two critical changes: Defines when a company should base “controlling financial interest” on factors Defines when a company should base “controlling financial interest” on factors

other than voting rights, including even things as distribution feesother than voting rights, including even things as distribution fees Requires that a new “risk and rewards” model be appliedRequires that a new “risk and rewards” model be applied

Consequently, GAAP now prescribes two accounting models for Consequently, GAAP now prescribes two accounting models for consolidation:consolidation:

1.1. The voting interest modelThe voting interest model where the investor owning more than 50 percent of an where the investor owning more than 50 percent of an entity’s voting interests consolidatesentity’s voting interests consolidates

2.2. The risk and rewards modelThe risk and rewards model where the party who participates in the majority of the where the party who participates in the majority of the entity’s economics consolidates. This party could be an equity investor, other capital entity’s economics consolidates. This party could be an equity investor, other capital provider, or a party with contractual arrangementsprovider, or a party with contractual arrangements

9292


Variable Interest Entity (VIE)Variable Interest Entity (VIE) – an entity that possesses one of the following – an entity that possesses one of the following characteristics:characteristics:

The entity is thinly capitalizedThe entity is thinly capitalized Residual equity holders do not control the entityResidual equity holders do not control the entity Equity holders do not participate fully in entity’s residual economicsEquity holders do not participate fully in entity’s residual economics The entity was established with non-substantive voting interestsThe entity was established with non-substantive voting interests

To identify potential VIEs, reporting enterprises must review all To identify potential VIEs, reporting enterprises must review all arrangements with an entity to determine whether they:arrangements with an entity to determine whether they:

Hold economic interests, voting rights or similar rights in the entity, or Hold economic interests, voting rights or similar rights in the entity, or obligations with an entity (e.g., in the form of derivatives)obligations with an entity (e.g., in the form of derivatives)

Issue guarantees with respect to the entity’s assets and/or liabilitiesIssue guarantees with respect to the entity’s assets and/or liabilities Transfer assets to the entityTransfer assets to the entity Manage the assets of the entityManage the assets of the entity Lease assets from an entity or provide it with financingLease assets from an entity or provide it with financing

9393


Step 1: Determine Whether an Investment is Impaired - Step 1: Determine Whether an Investment is Impaired - An investment is An investment is considered impaired if the fair value of the investment is less than its amortized considered impaired if the fair value of the investment is less than its amortized cost basis (the carrying amount)cost basis (the carrying amount)

Step 2: Determine Whether Impairment is Other Than Temporary - Step 2: Determine Whether Impairment is Other Than Temporary - An impairment An impairment shall be deemed other than temporary unless positive evidence indicating that the shall be deemed other than temporary unless positive evidence indicating that the investment's carrying amount is recoverable within a reasonable period of time investment's carrying amount is recoverable within a reasonable period of time outweighs any evidence to contraryoutweighs any evidence to contrary

Step 3: Recognize an Other-Than-Temporary Impairment Loss Equal to the Step 3: Recognize an Other-Than-Temporary Impairment Loss Equal to the Difference between the Investment's Carrying Amount and its Fair Value - Difference between the Investment's Carrying Amount and its Fair Value - An An other-than-temporary impairment loss should be recognized in earnings and the other-than-temporary impairment loss should be recognized in earnings and the fair value of the investment would then become the new cost basis of the investment fair value of the investment would then become the new cost basis of the investment and it should not be adjusted for subsequent recoveries in fair value.and it should not be adjusted for subsequent recoveries in fair value.

9494


Indicators of other-than temporary impairment:Indicators of other-than temporary impairment:

The investee's financial condition and quality of assets are deteriorating, with no immediate The investee's financial condition and quality of assets are deteriorating, with no immediate prospect of recoveryprospect of recovery

The investee has sustained significant losses in the current yearThe investee has sustained significant losses in the current year The regulatory, economic, or technological environment has changed in a way that is expected The regulatory, economic, or technological environment has changed in a way that is expected

to adversely affect the investee's profitabilityto adversely affect the investee's profitability There has been a significant decline in fair value of publicly traded securities of comparable There has been a significant decline in fair value of publicly traded securities of comparable

entitiesentities The investee has announced, or the investor has become aware of, adverse changes or events The investee has announced, or the investor has become aware of, adverse changes or events

such as changes or planned changes in senior management, restructurings, or a sale of assets such as changes or planned changes in senior management, restructurings, or a sale of assets The general market conditions in either the geographic region or the industry in which the The general market conditions in either the geographic region or the industry in which the

investee operates have weakened, with no immediate prospect of recoveryinvestee operates have weakened, with no immediate prospect of recovery Factors that raise significant concerns about the investee's ability to continue as a going Factors that raise significant concerns about the investee's ability to continue as a going

concern, such as negative cash flows from operations, working-capital deficiencies, concern, such as negative cash flows from operations, working-capital deficiencies, investment advisors' recommendations, or non-compliance with statutory capital requirements investment advisors' recommendations, or non-compliance with statutory capital requirements or debt covenantsor debt covenants

9595


A permanent closing binder should be maintained for the acquisition and disposition of all investments in a A permanent closing binder should be maintained for the acquisition and disposition of all investments in a subsidiary subsidiary

Entries to the investment accounts in the G/L should be reviewed at least quarterly for significant or Entries to the investment accounts in the G/L should be reviewed at least quarterly for significant or unusual itemsunusual items

Schedules supporting SPE’s share of investee financial statements should be reconciled to the G/LSchedules supporting SPE’s share of investee financial statements should be reconciled to the G/L

All acquisitions or dispositions of any investment in a subsidiary should be reviewed and authorized in All acquisitions or dispositions of any investment in a subsidiary should be reviewed and authorized in accordance with the COFA. The Tax and SPE Corporate Departments should be notified for all accordance with the COFA. The Tax and SPE Corporate Departments should be notified for all transactions greater than $5 milliontransactions greater than $5 million

Significant investments should be reviewed at least annually to determine if there are any indications of Significant investments should be reviewed at least annually to determine if there are any indications of impairmentimpairment

SPE and subsidiary financial information should be reviewed for items that should be eliminated such as SPE and subsidiary financial information should be reviewed for items that should be eliminated such as inter-company payables/receivables, loans, minority interest, etc inter-company payables/receivables, loans, minority interest, etc

Internal controls of the investee company must be reviewed annually to determine the viability and Internal controls of the investee company must be reviewed annually to determine the viability and accuracy of the subsidiary’s financial information accuracy of the subsidiary’s financial information

9696

GOODWILL AND GOODWILL AND INTANGIBLESINTANGIBLES

9797

Goodwill and IntangiblesGoodwill and Intangibles

Topics

Business CombinationsAnd Goodwill

Intangible Assets Other Than Goodwill


9898

Business Combinations and GoodwillBusiness Combinations and Goodwill

Goodwill - excess of price paid for a business over fair value of its Goodwill - excess of price paid for a business over fair value of its assetsassets

Goodwill is not amortizedGoodwill is not amortized

Goodwill should be tested for impairment on an annual basis, and Goodwill should be tested for impairment on an annual basis, and between annual tests if an event occurs or circumstances change that between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its would more likely than not reduce the fair value of goodwill below its carrying amount. Examples of reasons to test for impairment include carrying amount. Examples of reasons to test for impairment include the following:the following:

A significant adverse change in the legal or business climateA significant adverse change in the legal or business climate An adverse action or assessment by a regulatorAn adverse action or assessment by a regulator Unanticipated competitionUnanticipated competition Loss of key personnelLoss of key personnel

9999

Intangible Assets Other Than GoodwillIntangible Assets Other Than Goodwill

Intangible assets other than goodwill may include:Intangible assets other than goodwill may include:

Some intangible assets carry with them discrete useful lives. For example, a patent legally expires 17 years from issuance. Some intangible assets carry with them discrete useful lives. For example, a patent legally expires 17 years from issuance. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized

Intangible assets shall be tested for impairment on an annual basis, Intangible assets shall be tested for impairment on an annual basis, and between annual tests if an event occurs or and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of intangibles below its circumstances change that would more likely than not reduce the fair value of intangibles below its carrying amountcarrying amount

The area of purchase price allocation is a complicated area and should be discussed with Home office and SPE Technical The area of purchase price allocation is a complicated area and should be discussed with Home office and SPE Technical Support and Compliance groupSupport and Compliance group

Marketing relatedAssets:

Customer relatedAssets:

Artistic relatedAssets:

Contract basedassets

Technology-basedassets

Trade marksTrade namesNon-competeagreements

Customer listsNon-contractual

customer relationships

Motion picsTV programsMusic videos

Licensing and royaltyagreementsBroadcast

RightsNon Compete

agreements

Computersoftware

Databases

100100


The basis for and method of determining the purchase price of an acquired entity The basis for and method of determining the purchase price of an acquired entity and decision factors for the acquisition should be documented at the time of and decision factors for the acquisition should be documented at the time of purchasepurchase

Transactions involving goodwill and other intangible assets should be approved Transactions involving goodwill and other intangible assets should be approved in accordance with COFA. in accordance with COFA.

Goodwill should be reviewed for any indications of impairment, and the Goodwill should be reviewed for any indications of impairment, and the estimated useful lives of intangible assets should be reviewed for changes, at estimated useful lives of intangible assets should be reviewed for changes, at least annually. If there are indications of impairment or changes in useful lives, a least annually. If there are indications of impairment or changes in useful lives, a further analysis should be performed in coordination with the SPE Corporatefurther analysis should be performed in coordination with the SPE Corporate

Entries for goodwill and other intangible asset accounts should be reviewed at Entries for goodwill and other intangible asset accounts should be reviewed at least quarterly in the G/L for significant or unusual itemsleast quarterly in the G/L for significant or unusual items

Significant acquisitions should be reviewed for accuracy and the Tax and SPE Significant acquisitions should be reviewed for accuracy and the Tax and SPE Corporate Departments should be notifiedCorporate Departments should be notified

101101

OTHER ASSETSOTHER ASSETS

102102

Other AssetsOther Assets

Topics

DefinitionsMinimum

Internal Controls

103103


Other assetsOther assets represent assets not classified elsewhere, can include prepaid expenses, represent assets not classified elsewhere, can include prepaid expenses, rent or other deposits, trust funds, insurance claims, debt issuance costs, etc., both rent or other deposits, trust funds, insurance claims, debt issuance costs, etc., both short- and long-term short- and long-term

Prepaid expense – payment (s) made for expenses not yet incurredPrepaid expense – payment (s) made for expenses not yet incurred

Expenses should be recognized as incurred (accrual basis versus cash basis), e.g. Expenses should be recognized as incurred (accrual basis versus cash basis), e.g. audit fees, professional services, etc.audit fees, professional services, etc.

Other assets should be recorded at cost. The assets should be reviewed on a quarterly Other assets should be recorded at cost. The assets should be reviewed on a quarterly basis to determine if changes need to be made to the carrying values as a result of the basis to determine if changes need to be made to the carrying values as a result of the following:following:

The asset should be amortized or charged to expense based on the nature of the asset and the activities The asset should be amortized or charged to expense based on the nature of the asset and the activities associated with the assetassociated with the asset

The asset should be reclassified between long-term and short-termThe asset should be reclassified between long-term and short-term The asset should be reviewed for any indication of impairmentThe asset should be reviewed for any indication of impairment

104104


Deposits should be monitored to ensure they are returned timely to SPE Deposits should be monitored to ensure they are returned timely to SPE when the related deposit activity is concludedwhen the related deposit activity is concluded

Significant movements should be identified, and any unexpected or unusual Significant movements should be identified, and any unexpected or unusual relationships between current month and prior month should be investigatedrelationships between current month and prior month should be investigated

Significant additions or deletions to other assets should be properly classified Significant additions or deletions to other assets should be properly classified between current and non-current and also reviewed against underlying between current and non-current and also reviewed against underlying documents supporting the amounts and nature of the transactions documents supporting the amounts and nature of the transactions

Other assets should be reviewed at least annually for any indications of Other assets should be reviewed at least annually for any indications of impairment impairment

105105

ACCOUNTS ACCOUNTS PAYABLEPAYABLE

106106

Accounts PayableAccounts Payable

Topics

DefinitionsMinimum

Internal Controls

107107


All purchases should be initiated with a properly approved, complete purchase All purchases should be initiated with a properly approved, complete purchase order, or contractorder, or contract

Payment should not be made without evidence of receipt of goods or services, and Payment should not be made without evidence of receipt of goods or services, and a written invoice or contacta written invoice or contact

Payment timing should be managed to allow for payment within stated terms but Payment timing should be managed to allow for payment within stated terms but not significantly before thennot significantly before then

Accrued liabilities not generally invoiced should be classified as accrued expensesAccrued liabilities not generally invoiced should be classified as accrued expenses

A significant debit balance in accounts payable should not be offset against other A significant debit balance in accounts payable should not be offset against other accounts payable, but instead treated accounts payable, but instead treated as a receivable.as a receivable.

108108


All purchase commitments and payment requests must be approved in accordance with the COFAAll purchase commitments and payment requests must be approved in accordance with the COFA

Checks should be mailed directly to vendors, if applicableChecks should be mailed directly to vendors, if applicable

Vendors granting early payment discounts should be identified and such discounts utilizedVendors granting early payment discounts should be identified and such discounts utilized

New vendors must be approved by at least the Director or Manager of the Accounts Payable DepartmentNew vendors must be approved by at least the Director or Manager of the Accounts Payable Department

All data relating to a new vendor must be entered into the accounts payable system before issuing payment All data relating to a new vendor must be entered into the accounts payable system before issuing payment (i.e. name, address, phone number, contact, Tax Payer ID number, etc)(i.e. name, address, phone number, contact, Tax Payer ID number, etc)

Invoices must be properly authorized and matched to a purchase order and receiving report, if applicable, Invoices must be properly authorized and matched to a purchase order and receiving report, if applicable, before paymentbefore payment

Proper system controls should be in place to ensure there are no duplicate payments of invoicesProper system controls should be in place to ensure there are no duplicate payments of invoices

Individuals in the Accounts Payable Dept should not be allowed to authorize invoices for payment, sign Individuals in the Accounts Payable Dept should not be allowed to authorize invoices for payment, sign checks or reconcile bank accounts.checks or reconcile bank accounts.

109109


If there are any significant accounts being disputed with vendors, the proper If there are any significant accounts being disputed with vendors, the proper adjustments/accruals should be madeadjustments/accruals should be made

Significant movements should be identified, and any unexpected or unusual relationships Significant movements should be identified, and any unexpected or unusual relationships between current month and prior month should be investigated. If the entity is part of the SPE between current month and prior month should be investigated. If the entity is part of the SPE Corporate Services Accounts Payable Group, this analysis will be done Corporate Services Accounts Payable Group, this analysis will be done onlyonly on a consolidated on a consolidated basisbasis

The accounts payable sub-system, as applicable, should be reconciled to the G/L at least The accounts payable sub-system, as applicable, should be reconciled to the G/L at least quarterly. If the entity is part of the SPE Corporate Services Accounts Payable Group, this quarterly. If the entity is part of the SPE Corporate Services Accounts Payable Group, this analysis will be done analysis will be done onlyonly on a consolidated basis on a consolidated basis

The accounts payable G/L accounts should be reviewed for significant or unusual postingsThe accounts payable G/L accounts should be reviewed for significant or unusual postings

The nature and significance of accounts payable cut-off accruals should be reviewed at least The nature and significance of accounts payable cut-off accruals should be reviewed at least quarterly and the proper reversing entry should be subsequently bookedquarterly and the proper reversing entry should be subsequently booked

Significant purchase commitments should be reviewed on at least a quarterly basis to Significant purchase commitments should be reviewed on at least a quarterly basis to determine if any such commitments have become adversedetermine if any such commitments have become adverse

110110


Aging reports should be reviewed on a monthly basis and any significant changes in past due Aging reports should be reviewed on a monthly basis and any significant changes in past due accounts, debit balances, individually significant payables, unmatched receiving reports and accounts, debit balances, individually significant payables, unmatched receiving reports and vendor invoices, items returned for which a credit has not been received, and differences vendor invoices, items returned for which a credit has not been received, and differences reported by vendors should be investigated. If the entity is part of the SPE Corporate Services reported by vendors should be investigated. If the entity is part of the SPE Corporate Services Accounts Payable Group, this analysis will be done Accounts Payable Group, this analysis will be done onlyonly on a consolidated basis on a consolidated basis

The Goods Receipt/Invoice Receipt account should be reconciled for any unmatched receiving The Goods Receipt/Invoice Receipt account should be reconciled for any unmatched receiving reports and/or vendor invoices and adjustments should be recorded as appropriatereports and/or vendor invoices and adjustments should be recorded as appropriate

Any intercompany transactions should be reported to Corporate Reporting to determine the Any intercompany transactions should be reported to Corporate Reporting to determine the need for any elimination of intercompany profit or loss, sales, and balances including other need for any elimination of intercompany profit or loss, sales, and balances including other SPE and other Sony related entitiesSPE and other Sony related entities

All suspense accounts should be analyzed and cleared on a monthly basis and reviewed by at All suspense accounts should be analyzed and cleared on a monthly basis and reviewed by at

least a Manager in the Finance Departmentleast a Manager in the Finance Department

Any collateralized liabilities should be disclosed to Corporate ReportingAny collateralized liabilities should be disclosed to Corporate Reporting

Any payables to employees or related parties should be disclosed to Corporate ReportingAny payables to employees or related parties should be disclosed to Corporate Reporting

111111

ACCRUED EXPENSES ACCRUED EXPENSES AND OTHER AND OTHER LIABILITIESLIABILITIES

112112

Accrued Expenses and Other LiabilitiesAccrued Expenses and Other Liabilities

Discussion Topics

Definitions ExploitationAccruals

Employee-RelatedLiabilities Loss Contingencies


113113


Accrued expenses and other liabilities Accrued expenses and other liabilities represent expenses incurred but not yet paid. represent expenses incurred but not yet paid. They include goods or services that have been received but not invoiced, interest, They include goods or services that have been received but not invoiced, interest, payroll taxes, rent, deferred compensation, pension liabilities, deferred taxes, etc., payroll taxes, rent, deferred compensation, pension liabilities, deferred taxes, etc., both short- and long-termboth short- and long-term

Exploitation accrualsExploitation accruals include accruals for marketing, advertising, publicity, include accruals for marketing, advertising, publicity, promotion, and other distribution expenses incurred in connection with the promotion, and other distribution expenses incurred in connection with the distribution of a film. Exploitation costs should be accrued when incurred but not distribution of a film. Exploitation costs should be accrued when incurred but not when committedwhen committed

114114

Employee-Related LiabilitiesEmployee-Related Liabilities

Most employees are entitled to vacation, holiday an sick pay Most employees are entitled to vacation, holiday an sick pay (“compensated absences”)(“compensated absences”)

If all of the following conditions are met, a liability for employees’ If all of the following conditions are met, a liability for employees’ compensation for future absences must be accrued:compensation for future absences must be accrued:

1.1. SPE’s obligation relating to employees’ rights to receive compensation for SPE’s obligation relating to employees’ rights to receive compensation for future absences is attributable to employees’ services already rendered.future absences is attributable to employees’ services already rendered.

2.2. The obligation relates to employees’ rights that vest or accumulate.The obligation relates to employees’ rights that vest or accumulate.3.3. Payment of the compensation is probable.Payment of the compensation is probable.4.4. The amount can be reasonably estimatedThe amount can be reasonably estimated

If conditions 1-3 are met, but the amount cannot be estimated, disclosure If conditions 1-3 are met, but the amount cannot be estimated, disclosure is requiredis required

115115

Loss ContingenciesLoss Contingencies

FAS No. 5 Accounting for ContingenciesFAS No. 5 Accounting for Contingencies establishes the guidelines for recording a loss establishes the guidelines for recording a loss contingency. Some examples of loss contingencies include:contingency. Some examples of loss contingencies include:

Obligations related to product warrantiesObligations related to product warranties Risk of loss of or damage to property by fire, explosion, or other hazardsRisk of loss of or damage to property by fire, explosion, or other hazards Threat of expropriation of assetsThreat of expropriation of assets Pending or threatened litigationPending or threatened litigation Actual or possible claims and assessmentsActual or possible claims and assessments Guarantees of indebtedness of othersGuarantees of indebtedness of others

The loss contingency should be accrued as a charge to earnings and reserve in the current The loss contingency should be accrued as a charge to earnings and reserve in the current period if: (1) If it is period if: (1) If it is probableprobable that a loss or liability is incurred at balance sheet date (at the that a loss or liability is incurred at balance sheet date (at the end of each quarter) end of each quarter) andand (2) the (2) the amount can be reasonably estimatedamount can be reasonably estimated

Accrual of minimum amount in the range when no single amount within the range is a Accrual of minimum amount in the range when no single amount within the range is a better estimate than anotherbetter estimate than another

116116


Estimates used in the booking of significant accruals should be approved by a Estimates used in the booking of significant accruals should be approved by a Director or higherDirector or higher

Accrued liability amounts must be supported, with invoices, contracts, Accrued liability amounts must be supported, with invoices, contracts, computations, etccomputations, etc

Prior period accruals should be reviewed to determine if adjustments/reversals Prior period accruals should be reviewed to determine if adjustments/reversals are neededare needed

Significant accrued liabilities must be examined and approved by the Significant accrued liabilities must be examined and approved by the Accounting ManagerAccounting Manager

Costs such as legal, accounting and consulting fees, should be reviewed for the Costs such as legal, accounting and consulting fees, should be reviewed for the existence of additional accrualsexistence of additional accruals

Cash disbursements subsequent to “Cost Cutoff” should be reviewed for Cash disbursements subsequent to “Cost Cutoff” should be reviewed for potential accrual adjustmentspotential accrual adjustments

All accrued liabilities should be examined to determine the term (long vs. short) All accrued liabilities should be examined to determine the term (long vs. short) by which it should be classifiedby which it should be classified

117117

CONTRACTUAL CONTRACTUAL OBLIGATIONSOBLIGATIONS

118118

Contractual ObligationsContractual Obligations

Topics

Definitions andClassification

Participation and Residual Accruals


119119

Definitions and ClassificationDefinitions and Classification

Contractual obligations Contractual obligations represent amounts due to individuals or entities for the performance represent amounts due to individuals or entities for the performance of services or provision of goods that are enforceable under legal documentsof services or provision of goods that are enforceable under legal documents .. Contractual Contractual obligations include long-term debt and leases, purchase obligations, pension and employee obligations include long-term debt and leases, purchase obligations, pension and employee related payments, legal settlements, royalty contracts, participations and residuals, etc.related payments, legal settlements, royalty contracts, participations and residuals, etc.

Sony Corporation (Tokyo) requirement for semi-annual and annual footnotes submission. Sony Corporation (Tokyo) requirement for semi-annual and annual footnotes submission. Contractual obligations must be disclosed in a table that presents the amounts of payments due Contractual obligations must be disclosed in a table that presents the amounts of payments due in the current year, 1-3 years, 3-5 years, and more than 5 years. Obligations must be presented in the current year, 1-3 years, 3-5 years, and more than 5 years. Obligations must be presented in the following categories, although additional detail may be presented:in the following categories, although additional detail may be presented:

Long-term debt obligationsLong-term debt obligations Capital lease obligationsCapital lease obligations Operating lease obligationsOperating lease obligations Purchase obligationsPurchase obligations Other long-term liabilities reflected on the balance sheetOther long-term liabilities reflected on the balance sheet

Material contract provisions, including termination or renewal provisions, must also be Material contract provisions, including termination or renewal provisions, must also be discloseddisclosed

Current (due within one year) versus non current (due within more than one year) Current (due within one year) versus non current (due within more than one year) classificationclassification

120120

Participation and Residual AccrualsParticipation and Residual Accruals

Participation accruals relate to costs associated with payments to talent Participation accruals relate to costs associated with payments to talent for their contractual or union-required share of film revenuesfor their contractual or union-required share of film revenues

Participation costs shouldParticipation costs should be accrued (expensed) using the individual-film- be accrued (expensed) using the individual-film-forecast-computation method:forecast-computation method:

Unaccrued (that is, not yet expensed) Unaccrued (that is, not yet expensed) Current period actual revenueCurrent period actual revenueultimate participation costs ultimate participation costs xxat the beginning of the current yearat the beginning of the current year Estimated remaining Estimated remaining

unrecognized unrecognized ultimate revenueultimate revenue as of the beginning as of the beginning of the of the

current fiscal yearcurrent fiscal year

In the absence of changes in estimates, participation costs are accrued in a In the absence of changes in estimates, participation costs are accrued in a manner that yields a constant rate of profit over the ultimate period for each film manner that yields a constant rate of profit over the ultimate period for each film before exploitation costs, manufacturing costs, and other period expensesbefore exploitation costs, manufacturing costs, and other period expenses

121121

Participation and Residual AccrualsParticipation and Residual Accruals

At each balance sheet date, accrued participation costs should not be less than the amounts At each balance sheet date, accrued participation costs should not be less than the amounts that an entity is obliged to pay as of that datethat an entity is obliged to pay as of that date

Begin to accrue participation costs when a film is released and it begins to recognize revenue Begin to accrue participation costs when a film is released and it begins to recognize revenue from that filmfrom that film

Review and revise estimates of ultimate revenue and participation costs as of each reporting Review and revise estimates of ultimate revenue and participation costs as of each reporting date date

If estimates are revised, new denominator should be calculated that includes only the ultimate If estimates are revised, new denominator should be calculated that includes only the ultimate revenue from the beginning for the fiscal year of change. The numerator is unaffected by the revenue from the beginning for the fiscal year of change. The numerator is unaffected by the change. Revised fraction should be applied to the film’s unaccrued ultimate participation costs change. Revised fraction should be applied to the film’s unaccrued ultimate participation costs as of the beginning of the fiscal year. Difference between expenses determined using the new as of the beginning of the fiscal year. Difference between expenses determined using the new estimates and any amounts previously expensed during that fiscal year should be charged or estimates and any amounts previously expensed during that fiscal year should be charged or credited to the income statement in the period (for example, the quarter) during which the credited to the income statement in the period (for example, the quarter) during which the estimates are revisedestimates are revised

122122


Any significant, unexpected, or unusual relationships between current month, prior Any significant, unexpected, or unusual relationships between current month, prior month, and budgeted amounts should be investigated and explainedmonth, and budgeted amounts should be investigated and explained

Contractual Obligation statements should be reconciled to the actual paymentsContractual Obligation statements should be reconciled to the actual payments

Supporting statements/calculations should be prepared and reviewed by at least an Supporting statements/calculations should be prepared and reviewed by at least an Accounting ManagerAccounting Manager

Contractual obligation advances must be approved in accordance with the COFA Contractual obligation advances must be approved in accordance with the COFA and properly reflected as a prepaid asset if significantand properly reflected as a prepaid asset if significant

123123

DEFERRED DEFERRED REVENUEREVENUE

124124

Deferred RevenueDeferred Revenue

Topics

DefinitionsMinimum

Internal Controls

125125


Deferred revenueDeferred revenue represents the receipt of cash or other assets in advance of the sale of goods, represents the receipt of cash or other assets in advance of the sale of goods, “availability” of products, or performance of services. Sometimes called unearned revenue“availability” of products, or performance of services. Sometimes called unearned revenue

Payment is made to secure future performance (e.g. the future rent of a facility) and is legally Payment is made to secure future performance (e.g. the future rent of a facility) and is legally refundable – classify as a deposit, no revenue is recognizedrefundable – classify as a deposit, no revenue is recognized

Payment is made with the intent of applying it against future amounts due – classify as Payment is made with the intent of applying it against future amounts due – classify as deferred revenue, income recognized as it is earneddeferred revenue, income recognized as it is earned

Deferred revenues should be properly classified between long-term and short-termDeferred revenues should be properly classified between long-term and short-term

126126


Significant movements and any unexpected or unusual relationships between Significant movements and any unexpected or unusual relationships between current month and prior month should be identified and investigated for deferred current month and prior month should be identified and investigated for deferred revenue and the recognition of deferred revenue in incomerevenue and the recognition of deferred revenue in income

Entries in the deferred revenue accounts in the G/L should be reviewed for Entries in the deferred revenue accounts in the G/L should be reviewed for significant or unusual itemssignificant or unusual items

When applicable, deferred revenue should be supported with invoices, contracts, When applicable, deferred revenue should be supported with invoices, contracts, computations/system reports and other supporting documentationcomputations/system reports and other supporting documentation

The Deferred Revenue sub system, if applicable, should be reconciled to the G/L The Deferred Revenue sub system, if applicable, should be reconciled to the G/L by contract or customer and reviewed for unusual items at least quarterlyby contract or customer and reviewed for unusual items at least quarterly

127127

DEBTDEBT

128128

DebtDebt

Topics

DefinitionsMinimum

Internal Controls

129129


Debt Debt represents an obligation owed to another entity that is required to be paid by a represents an obligation owed to another entity that is required to be paid by a specified date or on demand, and is generally collateralized or guaranteed by assets specified date or on demand, and is generally collateralized or guaranteed by assets of the company. Examples of debt include bonds, mortgages and notesof the company. Examples of debt include bonds, mortgages and notes

Key concerns include the proper calculation of carrying amount and amortization, Key concerns include the proper calculation of carrying amount and amortization, compliance with legal agreement terms, and complete disclosure compliance with legal agreement terms, and complete disclosure

Before recording the obligation or retirement of any debt and debt related costs, Before recording the obligation or retirement of any debt and debt related costs, there should be a consultation with the Treasury Department, Legal Department there should be a consultation with the Treasury Department, Legal Department and Corporate Finance Departmentand Corporate Finance Department

Debt discounts or premiums:Debt discounts or premiums: Direct reduction or addition to the face amount of the debtDirect reduction or addition to the face amount of the debt Should not be reported as deferred charges or deferred creditsShould not be reported as deferred charges or deferred credits Use effective interest method, or straight-line method if not materially different, to Use effective interest method, or straight-line method if not materially different, to

amortizeamortize

130130


All debt payments should be properly approved in accordance with the COFAAll debt payments should be properly approved in accordance with the COFA

SPE Corporate should be consulted on any new issuance or extinguishment of debt SPE Corporate should be consulted on any new issuance or extinguishment of debt in excess of $5 millionin excess of $5 million

Reconciliations of statements from lending institutions and other partners to the Reconciliations of statements from lending institutions and other partners to the G/L should be completed at least quarterlyG/L should be completed at least quarterly

Corporate Reporting should be informed of any new debt for possible disclosureCorporate Reporting should be informed of any new debt for possible disclosure

Any violations of restrictive loan covenants that have been waived by lenders Any violations of restrictive loan covenants that have been waived by lenders should be documentedshould be documented

A list including all short-term notes payable, their due dates, and interest accrued A list including all short-term notes payable, their due dates, and interest accrued and paid during the period should be maintained and paid during the period should be maintained

131131

EQUITY AND EQUITY AND RETAINED EARNINGSRETAINED EARNINGS

132132

Equity and Retained EarningsEquity and Retained Earnings

Topics

DefinitionsMinimum

Internal Controls

133133


Common stock, additional paid-in capital (APIC), preferred and treasury stock, Common stock, additional paid-in capital (APIC), preferred and treasury stock, unrealized gains and losses on marketable securities, cumulative translation unrealized gains and losses on marketable securities, cumulative translation adjustments (CTA)adjustments (CTA)

EquityEquity reflects the ownership interest of a company. reflects the ownership interest of a company. Retained earningsRetained earnings is a is a component of component of equityequity, and refers to accumulated net income or loss; each period’s , and refers to accumulated net income or loss; each period’s income or loss is transferred to retained earningsincome or loss is transferred to retained earnings

There is no ‘appropriation of profits’ concept in the US GAAPThere is no ‘appropriation of profits’ concept in the US GAAP

134134


Additional paid-in capital – Paid-in capital in excess of par or stated value of Additional paid-in capital – Paid-in capital in excess of par or stated value of common stockcommon stock

Common stock - A unit of ownership in a company, typically allowing voting Common stock - A unit of ownership in a company, typically allowing voting rights and the right to receive dividends when declaredrights and the right to receive dividends when declared

Cumulative translation adjustment – An equity account that captures the changes Cumulative translation adjustment – An equity account that captures the changes resulting from foreign currency fluctuationsresulting from foreign currency fluctuations

Preferred stock - Stock that does not carry ownership rights but carries a Preferred stock - Stock that does not carry ownership rights but carries a specified dividendspecified dividend

Treasury stock - Stock reacquired by the issuing company; carries no ownership Treasury stock - Stock reacquired by the issuing company; carries no ownership or dividend rights. or dividend rights.

135135


An equity roll forward schedule, including a reconciliation of shares authorized, An equity roll forward schedule, including a reconciliation of shares authorized, issued and outstanding, should be prepared and reconciled to the G/L on at least issued and outstanding, should be prepared and reconciled to the G/L on at least a quarterly basisa quarterly basis

All transactions affecting equity should be approved in accordance with the All transactions affecting equity should be approved in accordance with the COFA, should be in writing and should be in compliance with SPE’s by-laws, COFA, should be in writing and should be in compliance with SPE’s by-laws, corporate charter and requirements of regulatory agenciescorporate charter and requirements of regulatory agencies

Any significant, unexpected, or unusual relationships between current period, Any significant, unexpected, or unusual relationships between current period, prior period, and budgeted amounts should be investigatedprior period, and budgeted amounts should be investigated

136136

REVENUE REVENUE RECOGNITIONRECOGNITION

137137

Revenue RecognitionRevenue Recognition

Topics

DefinitionsRevenue Recognition Under Motion Picture

Accounting

Revenue Recognition Of Broadcast

RightsRevenue Recognition

Examples

Consideration PaidTo Customers andSales Incentives

Gross VsNet Presentation


138138


Sale of goods and the performance of services such as licensing of film and other Sale of goods and the performance of services such as licensing of film and other intellectual properties, sale of products, rental of equipment and facilities, intellectual properties, sale of products, rental of equipment and facilities, subscriptions, distribution services, production services and advertising revenuessubscriptions, distribution services, production services and advertising revenues

The major source of SPE revenue is the production and sale, licensing or exhibition The major source of SPE revenue is the production and sale, licensing or exhibition of its film, television and home entertainment productsof its film, television and home entertainment products

Revenue offsets, such as sales discounts, returns and allowances, should be Revenue offsets, such as sales discounts, returns and allowances, should be distinguished from expenses and, in general, be deducted from gross revenue, as distinguished from expenses and, in general, be deducted from gross revenue, as they truly represent revenue that is never realizedthey truly represent revenue that is never realized

Revenue should be realized and earned. The following four criteria should be met:Revenue should be realized and earned. The following four criteria should be met: Persuasive evidence of an arrangement existsPersuasive evidence of an arrangement exists Delivery has occurred or services have been renderedDelivery has occurred or services have been rendered The seller’s price to the buyer is fixed or determinable, andThe seller’s price to the buyer is fixed or determinable, and Collectibility is reasonably assuredCollectibility is reasonably assured

139139

Revenue Recognition Under Motion Picture Revenue Recognition Under Motion Picture AccountingAccounting

Revenue from a sale or licensing arrangement of a film or television product is Revenue from a sale or licensing arrangement of a film or television product is to be recognized when the following conditions are met:to be recognized when the following conditions are met:

1.1. Persuasive evidence of a sale or licensing arrangement with a customer Persuasive evidence of a sale or licensing arrangement with a customer exists;exists;

2.2. The film is complete and, in accordance with the terms of the arrangement, The film is complete and, in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery;has been delivered or is available for immediate and unconditional delivery;

3.3. The license period of the arrangement has begun and the customer can begin The license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale;its exploitation, exhibition or sale;

4.4. The arrangement fee is fixed or determinable; and The arrangement fee is fixed or determinable; and

5.5. Collection of the arrangement fee is reasonably assured.Collection of the arrangement fee is reasonably assured.

140140

Revenue Recognition Under Motion Picture Revenue Recognition Under Motion Picture AccountingAccounting

Revenue from the theatrical exhibition of motion pictures is recognized Revenue from the theatrical exhibition of motion pictures is recognized as the customer exhibits or exploits the film. as the customer exhibits or exploits the film.

Revenue from television licensing arrangements for film and television Revenue from television licensing arrangements for film and television product is recognized when the product is available and any restrictions product is recognized when the product is available and any restrictions regarding the exhibition or exploitation of the product lapse. regarding the exhibition or exploitation of the product lapse.

Revenue from home video/DVD sales is recognized upon the street date, Revenue from home video/DVD sales is recognized upon the street date, that is, the date when home video products may be sold or displayed for that is, the date when home video products may be sold or displayed for rental. rental.

141141

Revenue Recognition of Broadcast RightsRevenue Recognition of Broadcast Rights

Ad RevenuesAd Revenues – as a general rule, should be recognized when the ads are aired or delivery – as a general rule, should be recognized when the ads are aired or delivery has occurred. If advertising is sold in multiple-spot packages that may span multiple has occurred. If advertising is sold in multiple-spot packages that may span multiple periods, the total license fee should be allocated to the individual spots using a rational, periods, the total license fee should be allocated to the individual spots using a rational, systematic and consistent process; ad revenues should ultimately be recorded at fair market systematic and consistent process; ad revenues should ultimately be recorded at fair market value, rather than the billing valuevalue, rather than the billing value

Subscriber RevenuesSubscriber Revenues –should be recognized as services are provided and accrued at month –should be recognized as services are provided and accrued at month end if not yet billed and the other general requirements of SAB 104 have been metend if not yet billed and the other general requirements of SAB 104 have been met

Affiliate RevenuesAffiliate Revenues – should be recognized on subscriber fees each month when the service – should be recognized on subscriber fees each month when the service is provided and collectibility is reasonably assured. Since revenues are often based on the is provided and collectibility is reasonably assured. Since revenues are often based on the number of subscribers and the actual number of subscribers may not be known for one to number of subscribers and the actual number of subscribers may not be known for one to three months, an estimate should be made at least quarterly and trued up when actual three months, an estimate should be made at least quarterly and trued up when actual payments are received. The estimate should generally be based on the most recent payment payments are received. The estimate should generally be based on the most recent payment actually received unless better information is available.actually received unless better information is available.

142142

Revenue Recognition ExamplesRevenue Recognition Examples

Example 1 - Allocation of Revenue for a Fixed Fee, Multiple Film ArrangementExample 1 - Allocation of Revenue for a Fixed Fee, Multiple Film Arrangement

Assumptions:Assumptions:a.a. An entity grants to a customer the cable television broadcast rights to three films under a single An entity grants to a customer the cable television broadcast rights to three films under a single

licensing arrangement in a particular market and territory. The arrangement calls for a fixed licensing arrangement in a particular market and territory. The arrangement calls for a fixed license fee of $30,000. The arrangement provides for a pro-rata reduction in the license fee if Film license fee of $30,000. The arrangement provides for a pro-rata reduction in the license fee if Film 3 is not completed and made available for delivery3 is not completed and made available for delivery

b.b. At the date of the arrangement, Films 1 and 2 are complete; Film 3 is yet to be produced. An At the date of the arrangement, Films 1 and 2 are complete; Film 3 is yet to be produced. An evaluation of the relative fair values of the licensed rights to Films 1 and 2 indicate that Film 1 evaluation of the relative fair values of the licensed rights to Films 1 and 2 indicate that Film 1 should be assigned 55 percent of the fixed license fee and Film 2 should be assigned 45 percent of should be assigned 55 percent of the fixed license fee and Film 2 should be assigned 45 percent of the fee. The amount potentially refundable if Film 3 is not completed and delivered is $10,000the fee. The amount potentially refundable if Film 3 is not completed and delivered is $10,000

The entity should allocate the license fee as follows:The entity should allocate the license fee as follows:

Film 1 = $11,000 ($30,000 license fee, less $10,000 potentially refundable for one incomplete Film 1 = $11,000 ($30,000 license fee, less $10,000 potentially refundable for one incomplete film, multiplied by 55 percent)film, multiplied by 55 percent)

Film 2 = $9,000 ($30,000 license fee, less $10,000 potentially refundable for one incomplete Film 2 = $9,000 ($30,000 license fee, less $10,000 potentially refundable for one incomplete film, multiplied by 45 percent)film, multiplied by 45 percent)

Film 3 = $10,000 (the refundable amount due if the film is not completed and made available Film 3 = $10,000 (the refundable amount due if the film is not completed and made available for delivery)for delivery)

143143


Example 2 - Revenue Recognition for a Variable Fee, Single Film Example 2 - Revenue Recognition for a Variable Fee, Single Film

Arrangement With a Nonrefundable Minimum GuaranteeArrangement With a Nonrefundable Minimum Guarantee Assumptions:Assumptions:a)a) An entity licenses to a customer the home video rights to one film for a An entity licenses to a customer the home video rights to one film for a

period of two years. The licensing arrangement provides for a variable period of two years. The licensing arrangement provides for a variable fee to the entity equal to 30 percent of the customer's gross receipts from fee to the entity equal to 30 percent of the customer's gross receipts from the exploitation of this film during the license period. The licensing the exploitation of this film during the license period. The licensing arrangement also requires the customer to pay the entity a $50,000 arrangement also requires the customer to pay the entity a $50,000 nonrefundable minimum guarantee against the variable feenonrefundable minimum guarantee against the variable fee

b)b) For purposes of this example, assume that the customer generates gross For purposes of this example, assume that the customer generates gross receipts from the exploitation of the film equal to $100,000 in Year 1 receipts from the exploitation of the film equal to $100,000 in Year 1 and $80,000 in Year 2. Also, assume that the entity has met all other and $80,000 in Year 2. Also, assume that the entity has met all other revenue recognition conditions of this SOPrevenue recognition conditions of this SOP

The entity should recognize revenue as follows:The entity should recognize revenue as follows:

144144


Revenue should be recognized as follows:Revenue should be recognized as follows:

145145


Example 3 - Example 3 - Revenue Recognition for a Variable Fee, Multiple Film Arrangement Revenue Recognition for a Variable Fee, Multiple Film Arrangement With a Nonrefundable Minimum GuaranteeWith a Nonrefundable Minimum Guarantee

Assumptions:Assumptions:

a)a) An entity licenses to a customer the home video rights to five films for a period An entity licenses to a customer the home video rights to five films for a period of three years. The licensing arrangement provides for a variable fee to the entity of three years. The licensing arrangement provides for a variable fee to the entity equal to 30 percent of the customer's gross receipts from the exploitation of the equal to 30 percent of the customer's gross receipts from the exploitation of the films during the license period. The licensing arrangement also requires the films during the license period. The licensing arrangement also requires the customer to pay the entity a $50,000 nonrefundable minimum guarantee against customer to pay the entity a $50,000 nonrefundable minimum guarantee against the variable fees for the five films. The variable fees are cross-collateralized for the variable fees for the five films. The variable fees are cross-collateralized for purposes of determining any amounts due in excess of the $50,000 purposes of determining any amounts due in excess of the $50,000 nonrefundable minimum guarantee.nonrefundable minimum guarantee.

b)b) For purposes of this example, assume the customer generates revenue as For purposes of this example, assume the customer generates revenue as followsfollows::

146146


Revenue should be recognized as follows:Revenue should be recognized as follows:

147147

Consideration Paid to Customers and Sales Consideration Paid to Customers and Sales IncentivesIncentives

Consideration (including sales incentives, free products, slotting fees, cooperative Consideration (including sales incentives, free products, slotting fees, cooperative advertising, and buydowns) paid should be recorded as a reduction of revenue advertising, and buydowns) paid should be recorded as a reduction of revenue unless both of the following conditions are met:unless both of the following conditions are met:

SPE has received, or will receive, a benefit in exchange for the consideration that is SPE has received, or will receive, a benefit in exchange for the consideration that is sufficiently separable from the customer’s purchase of products and services (sufficient sufficiently separable from the customer’s purchase of products and services (sufficient documentation must be provided by the purchaser to support the benefit received by documentation must be provided by the purchaser to support the benefit received by SPE)SPE)

A reasonable estimate of the fair value of this benefit is availableA reasonable estimate of the fair value of this benefit is available

If the amount of consideration exceeds the estimated fair value of the If the amount of consideration exceeds the estimated fair value of the benefit received, that excess amount should be characterized as a benefit received, that excess amount should be characterized as a reduction of revenue. If the consideration recorded as a reduction of reduction of revenue. If the consideration recorded as a reduction of revenue results in negative revenue for a specific customer on a revenue results in negative revenue for a specific customer on a cumulative basis, the amount of the cumulative shortfall may be cumulative basis, the amount of the cumulative shortfall may be recharacterized as an expense.recharacterized as an expense.

148148

Consideration Paid to Customers and Sales Consideration Paid to Customers and Sales IncentivesIncentives

A sales incentive offered to customers voluntarily and without charge that is A sales incentive offered to customers voluntarily and without charge that is exercisable by a customer as a result of a single exchange transaction should be exercisable by a customer as a result of a single exchange transaction should be recognized at the later of the following:recognized at the later of the following:

The date at which the related revenue is recordedThe date at which the related revenue is recorded The date at which the sales incentive is offeredThe date at which the sales incentive is offered

If the amount of future rebates or refunds cannot be reasonably estimated, a If the amount of future rebates or refunds cannot be reasonably estimated, a liability should be recognized for the liability should be recognized for the maximum maximum potential amount of the refund or potential amount of the refund or rebaterebate

149149

Gross versus Net PresentationGross versus Net Presentation

Gross - the amount billed to a customer because it has earned revenue Gross - the amount billed to a customer because it has earned revenue from the sale of the goods or services from the sale of the goods or services

Net - the net amount retained (that is, the amount billed to the customer Net - the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or less the amount paid to a supplier) because it has earned a commission or feefee

Gross versus Net revenue recognition is a matter of judgment that Gross versus Net revenue recognition is a matter of judgment that depends on the relevant facts and circumstancesdepends on the relevant facts and circumstances

150150

Gross versus Net PresentationGross versus Net Presentation

Indicators of Gross Revenue Recognition:Indicators of Gross Revenue Recognition: The company is the primary obligor in the arrangementThe company is the primary obligor in the arrangement The company has general inventory risk (before customer order is place or upon The company has general inventory risk (before customer order is place or upon

customer return)customer return) The company has latitude in establishing priceThe company has latitude in establishing price The company changes the product or performs part of the serviceThe company changes the product or performs part of the service The company has discretion in supplier selection The company has discretion in supplier selection The company is involved in the determination of product or service specificationsThe company is involved in the determination of product or service specifications The company has physical loss inventory risk (after customer order or during The company has physical loss inventory risk (after customer order or during

shipping)shipping) The company has credit riskThe company has credit risk

Indicators of Net Revenue Recognition:Indicators of Net Revenue Recognition: The supplier (not the company) is the primary obligor in the arrangement The supplier (not the company) is the primary obligor in the arrangement The amount the company earns is fixedThe amount the company earns is fixed The supplier (and not the company) has credit riskThe supplier (and not the company) has credit risk

151151


Any significant, unexpected, or unusual relationships between current month, Any significant, unexpected, or unusual relationships between current month, prior month and the budget/forecast should be investigated from a P&L prior month and the budget/forecast should be investigated from a P&L perspective perspective

Revenues from sales of products and services should be recognized in the Revenues from sales of products and services should be recognized in the appropriate period, and accruals should be made for “lag” and system cut-off appropriate period, and accruals should be made for “lag” and system cut-off issuesissues

Entries in the revenue G/L accounts should be reviewed for significant or Entries in the revenue G/L accounts should be reviewed for significant or unusual itemsunusual items

All suspense accounts should be analyzed and cleared on a monthly basis and All suspense accounts should be analyzed and cleared on a monthly basis and reviewed by at least a Manager in the Finance Departmentreviewed by at least a Manager in the Finance Department

152152

BARTER BARTER REVENUEREVENUE

153153

Barter RevenueBarter Revenue

Topics

DefinitionsGeneral BarterTransactions

Advertising BarterTransactions


154154


Barter transactions Barter transactions are those transactions where goods or services are exchanged are those transactions where goods or services are exchanged for other goods or services, or for credit; little to no cash is involved in such for other goods or services, or for credit; little to no cash is involved in such transactionstransactions

Important considerations when accounting for barter activity include:Important considerations when accounting for barter activity include: 1) identifying that a transaction represents a barter activity 1) identifying that a transaction represents a barter activity

2) properly accounting for the value of barter transactions2) properly accounting for the value of barter transactions

155155

General Barter TransactionsGeneral Barter Transactions

Exchange should be based on fair value of assets (services)Exchange should be based on fair value of assets (services)

The cost of a nonmonetary asset acquired in exchange for another nonmonetary The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchangebe recognized on the exchange

The fair value of the asset received should be used to measure the cost if it is more The fair value of the asset received should be used to measure the cost if it is more clearly evident than the fair value of the asset surrenderedclearly evident than the fair value of the asset surrendered

156156


A nonmonetary exchange shall be measured at cost, and not on the fair value of the A nonmonetary exchange shall be measured at cost, and not on the fair value of the exchanged assets, if any of the following conditions apply:exchanged assets, if any of the following conditions apply:

Fair value is not determinable: neither the fair value of the asset(s) received nor the Fair value is not determinable: neither the fair value of the asset(s) received nor the asset(s) relinquished is determinable within reasonable limitsasset(s) relinquished is determinable within reasonable limits

Exchange transaction to facilitate sales to customers: the transaction is an exchange of a Exchange transaction to facilitate sales to customers: the transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of the business to facilitate sales to customers other property to be sold in the same line of the business to facilitate sales to customers other than the parties to the exchangethan the parties to the exchange

Exchange transaction that lacks commercial substanceExchange transaction that lacks commercial substance

157157


A transaction should be considered monetary (i.e. not a barter transaction) if the A transaction should be considered monetary (i.e. not a barter transaction) if the boot received is "significant." "Significant" is defined as at least 25 percent of the boot received is "significant." "Significant" is defined as at least 25 percent of the fair value of the exchange fair value of the exchange

If the consideration consists of barter or non-monetary exchange such as a “free” If the consideration consists of barter or non-monetary exchange such as a “free” product or service, the cost of the consideration should be characterized as a cost of product or service, the cost of the consideration should be characterized as a cost of sales when recognized in the income statement sales when recognized in the income statement

The The key conceptkey concept in bartered or non-monetary transactions is that sufficient in bartered or non-monetary transactions is that sufficient evidence of the evidence of the fair valuefair value of the items being exchanged must exist of the items being exchanged must exist

158158

Advertising Barter TransactionsAdvertising Barter Transactions

Barter of unsold advertising time for products or servicesBarter of unsold advertising time for products or services

Record barter at estimated fair value of the product or serviceRecord barter at estimated fair value of the product or service

Barter revenue should be reported when:Barter revenue should be reported when: Commercials are broadcastCommercials are broadcast Merchandise or services received or usedMerchandise or services received or used If merchandise or services are received prior to the broadcast of the commercial – report liabilityIf merchandise or services are received prior to the broadcast of the commercial – report liability If the commercial is broadcast first – report receivableIf the commercial is broadcast first – report receivable

Exchange of advertising for advertising:Exchange of advertising for advertising: record at the carrying value of the advertising surrendered, which is generally zerorecord at the carrying value of the advertising surrendered, which is generally zero record at fair market value – if it can be demonstrated that the time exchanged has a determinable record at fair market value – if it can be demonstrated that the time exchanged has a determinable

market value through the historical practice of receiving cash, marketable securities or other market value through the historical practice of receiving cash, marketable securities or other consideration that is readily convertible to a known amount of cashconsideration that is readily convertible to a known amount of cash

159159


All recorded barter revenue must be supported by adequate All recorded barter revenue must be supported by adequate documentation of the fair value basis for recordingdocumentation of the fair value basis for recording

Assets related to barter transactions should be reviewed for impairment Assets related to barter transactions should be reviewed for impairment at least quarterly and adjusted if necessary.at least quarterly and adjusted if necessary.

160160

EXPENSESEXPENSES

161161

ExpensesExpenses

TopicsTopics::

Cost of Goods Sold Cost of Goods Sold Selling ExpensesSelling Expenses Advertising ExpensesAdvertising Expenses Research & Development ExpensesResearch & Development Expenses Overhead, General and Administrative expensesOverhead, General and Administrative expenses Restructuring chargesRestructuring charges Employee CostsEmployee Costs Minimum Internal ControlsMinimum Internal Controls

162162

Cost of Goods Sold and Selling ExpensesCost of Goods Sold and Selling Expenses

Cost of Goods SoldCost of Goods Sold

Repair and maintenance, utilities, rent, labor, materials, supplies, rights to Repair and maintenance, utilities, rent, labor, materials, supplies, rights to book/stage plays/original screenplays, insurance, taxes, and pension contributions, book/stage plays/original screenplays, insurance, taxes, and pension contributions, film prints, videocassettes and digital video discs, etc.film prints, videocassettes and digital video discs, etc.

Selling ExpensesSelling Expenses

Exploitation costs, including marketing, advertising, publicity, promotion and other Exploitation costs, including marketing, advertising, publicity, promotion and other distribution expenses in connection with the distribution of a film-related product distribution expenses in connection with the distribution of a film-related product should be expensed as incurred should be expensed as incurred

163163

Advertising ExpensesAdvertising Expenses

Advertising activities have two primary components:Advertising activities have two primary components: Producing advertisementsProducing advertisements, such as the costs of idea development, writing , such as the costs of idea development, writing

advertising copy, artwork, printing, audio and video crews, actors and other advertising copy, artwork, printing, audio and video crews, actors and other costscosts

Communicating advertisements that have been producedCommunicating advertisements that have been produced, such as the costs , such as the costs of magazine space, television airtime and distributionof magazine space, television airtime and distribution

Advertising expenses shall be expensed either a) as incurred or b) Advertising expenses shall be expensed either a) as incurred or b) deferred and expensed the first time the advertising takes placed. In the deferred and expensed the first time the advertising takes placed. In the case of direct-response advertising, costs are capitalized and amortized case of direct-response advertising, costs are capitalized and amortized over the expected period of future benefitsover the expected period of future benefits

164164


The costs of producing advertising shall be expensed the first time the The costs of producing advertising shall be expensed the first time the advertising takes place. Costs of communicating advertising are not advertising takes place. Costs of communicating advertising are not incurred until the item or service has been received and should not be incurred until the item or service has been received and should not be reported as expenses before the item or service has been received. For reported as expenses before the item or service has been received. For instance, the costs of television airtime and magazine advertising space instance, the costs of television airtime and magazine advertising space should not be reported as advertising expenses before the airtime is used should not be reported as advertising expenses before the airtime is used or the space is usedor the space is used

Some activities, such as product endorsements and sponsorships of Some activities, such as product endorsements and sponsorships of events, may be performed pursuant to executory contracts. Costs events, may be performed pursuant to executory contracts. Costs incurred under executory contracts generally are recognized as incurred under executory contracts generally are recognized as

performance under the contract is receivedperformance under the contract is received

165165


Promotion materials, such as brochures and catalogues should be Promotion materials, such as brochures and catalogues should be accounted for as prepaid supplies, until they no longer are owned or accounted for as prepaid supplies, until they no longer are owned or expected to be used, in which case their cost would be a cost of expected to be used, in which case their cost would be a cost of advertising. In case of such promotion materials are expensed when advertising. In case of such promotion materials are expensed when purchased, unused materials should be picked up and accounted for as purchased, unused materials should be picked up and accounted for as prepaid supplies at least each quarter-end prepaid supplies at least each quarter-end

In cases where SPE shares in the cost of a retailer’s advertising, costs In cases where SPE shares in the cost of a retailer’s advertising, costs should be expensed if SPE could obtain the advertising provided by the should be expensed if SPE could obtain the advertising provided by the retailer from another source and the value of the benefit can be retailer from another source and the value of the benefit can be estimated. Otherwise, the costs should be recorded as a reduction to estimated. Otherwise, the costs should be recorded as a reduction to sales revenue sales revenue

166166

Research and Development ExpensesResearch and Development Expenses

All costs must be expensed when incurred All costs must be expensed when incurred

Examples of research or development activities:Examples of research or development activities: Laboratory research for discovery of new knowledgeLaboratory research for discovery of new knowledge Searching for applications of new research findings or other new knowledgeSearching for applications of new research findings or other new knowledge Conceptual formulation and design, investigation, testing or evaluation, or Conceptual formulation and design, investigation, testing or evaluation, or

modification or improvement of product or process (including modification or improvement of product or process (including manufacturing equipment) alternativesmanufacturing equipment) alternatives

Design, construction and testing of preproduction prototypes and modelsDesign, construction and testing of preproduction prototypes and models Engineering activity to advance a new product or process to a point where it Engineering activity to advance a new product or process to a point where it

meets specific functional and economic requirementsmeets specific functional and economic requirements

167167

Overhead, General and Administrative Overhead, General and Administrative (G&A) Expenses(G&A) Expenses

Overhead, G&A and Other Expenses Overhead, G&A and Other Expenses represent non-capitalized costs incurred for represent non-capitalized costs incurred for operating activities including but not limited to salaries, bonuses, utilities, repair operating activities including but not limited to salaries, bonuses, utilities, repair & maintenance, general insurance, postage, travel and entertainment and rent & maintenance, general insurance, postage, travel and entertainment and rent

All expenses shall be recorded when incurred. Under no circumstances shall the All expenses shall be recorded when incurred. Under no circumstances shall the following ever be deferred: following ever be deferred:

Organization costs, pre-opening expenditures, plant opening expensesOrganization costs, pre-opening expenditures, plant opening expenses Research and development costsResearch and development costs Market development costsMarket development costs

Cash DiscountsCash Discounts. . If a cash discount is calculated based on a normal interest rate If a cash discount is calculated based on a normal interest rate and days of early payment of accounts receivable, then it shall be recorded as a and days of early payment of accounts receivable, then it shall be recorded as a non-operating expense. If a cash discount is not calculated based on the reasons non-operating expense. If a cash discount is not calculated based on the reasons above, and can be characterized as a sales allowance, then it shall be treated as a above, and can be characterized as a sales allowance, then it shall be treated as a deduction from the sales amountdeduction from the sales amount

168168

Restructuring ChargesRestructuring Charges

Costs associated with an exit or disposal activity (hereinafter referred to as Costs associated with an exit or disposal activity (hereinafter referred to as “restructuring charges”) shall be recognized in the period in which the related “restructuring charges”) shall be recognized in the period in which the related liability is incurred liability is incurred

Restructuring charges shall be recorded as an operating expense (Cost of Sales, Restructuring charges shall be recorded as an operating expense (Cost of Sales, Selling, General & Administrative Expenses or other General Expense) in the Selling, General & Administrative Expenses or other General Expense) in the income statementincome statement

A liability for restructuring charges should be recognized and measured initially A liability for restructuring charges should be recognized and measured initially at fair value in the period the liability is incurred. Fair value should be measured at fair value in the period the liability is incurred. Fair value should be measured by discounting future expected payments using the credit-adjusted risk free rate by discounting future expected payments using the credit-adjusted risk free rate in accordance in accordance

169169

Restructuring ChargesRestructuring Charges

Restructuring charges include, but are not limited to, the following:Restructuring charges include, but are not limited to, the following:

Termination benefits provided to current employees that are involuntarily terminated Termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract (referred to as one-time arrangement or an individual deferred compensation contract (referred to as one-time termination benefits)termination benefits)

Loss on disposal, sale or impairment of long-lived assetsLoss on disposal, sale or impairment of long-lived assets

Inventory disposal or write-downInventory disposal or write-down

Costs to terminate a contract that is not a capital leaseCosts to terminate a contract that is not a capital lease

Other associated costs including costs to consolidate facilities or relocate employees.Other associated costs including costs to consolidate facilities or relocate employees.

170170

Employee CostsEmployee Costs

Employee costs Employee costs represent expenses for payments and future benefits to represent expenses for payments and future benefits to employees for services rendered including but not limited to wages, pensions, employees for services rendered including but not limited to wages, pensions, medical benefits, compensated absences, payroll processing fees, and medical benefits, compensated absences, payroll processing fees, and employers’ portion of payroll taxesemployers’ portion of payroll taxes

A key consideration of employee-related costs is accurate calculation and A key consideration of employee-related costs is accurate calculation and account coding. Inaccuracies not only impact the efficiency of payroll and account coding. Inaccuracies not only impact the efficiency of payroll and benefit processing, but can subject SPE to penalties imposed by the unions and benefit processing, but can subject SPE to penalties imposed by the unions and guilds representing certain employee groupsguilds representing certain employee groups

171171


All expenditures should be approved in accordance with the COFAAll expenditures should be approved in accordance with the COFA All period-end accruals should be properly calculated and approved by a All period-end accruals should be properly calculated and approved by a

Manager or above on at least a quarterly basisManager or above on at least a quarterly basis Purchases and expenses should be recognized in the appropriate period and Purchases and expenses should be recognized in the appropriate period and

properly classified, and adjustments should be made for “lag” and system cut-off properly classified, and adjustments should be made for “lag” and system cut-off issuesissues

Plans to enter into restructuring activity must be authorized in accordance with Plans to enter into restructuring activity must be authorized in accordance with the COFA and communicated to Legal and Corporate Financethe COFA and communicated to Legal and Corporate Finance

All overhead accruals should be properly calculated and reconciled on a monthly All overhead accruals should be properly calculated and reconciled on a monthly basis basis

Reconciliations of the payroll register or similar report to the g/l and cash Reconciliations of the payroll register or similar report to the g/l and cash disbursement records should be reviewed for gross and net pay on a monthly disbursement records should be reviewed for gross and net pay on a monthly basis. If the entity is part of the SPE Corporate Services Payroll Group, this basis. If the entity is part of the SPE Corporate Services Payroll Group, this analysis should be done analysis should be done onlyonly on a consolidated basis on a consolidated basis

172172

INCOME TAXESINCOME TAXES

173173

Income TaxesIncome Taxes

Topics

Definitions AccountingMinimum

Internal Controls

174174


Income taxes – national, local and foreign (including franchise taxes) Income taxes – national, local and foreign (including franchise taxes) based on income. Total tax expense or benefit is the sum of a company’s based on income. Total tax expense or benefit is the sum of a company’s current income tax expense or benefit and the company’s deferred income current income tax expense or benefit and the company’s deferred income tax expense or benefittax expense or benefit

Current tax expense (or benefit) – the amount of income taxes paid or Current tax expense (or benefit) – the amount of income taxes paid or payable (or refundable) for a year as determined by applying the provision payable (or refundable) for a year as determined by applying the provision of the enacted tax law to the taxable income of the enacted tax law to the taxable income

Current tax payable – the accumulated balance sheet amount of income Current tax payable – the accumulated balance sheet amount of income taxes currently payable as of specified datetaxes currently payable as of specified date

Deferred tax expense (or benefit) – the change during the year in a Deferred tax expense (or benefit) – the change during the year in a company’s deferred tax assets and liabilitiescompany’s deferred tax assets and liabilities

175175


Deferred taxes – tax effects that are postponed for allocation (either as Deferred taxes – tax effects that are postponed for allocation (either as increases or decreases) to income taxes expense in future accounting increases or decreases) to income taxes expense in future accounting periodsperiods

Deferred tax asset – the deferred tax consequences attributable to Deferred tax asset – the deferred tax consequences attributable to deductible temporary differences and carryforwards. A deferred tax asset is deductible temporary differences and carryforwards. A deferred tax asset is measured using the applicable enacted tax rate and provisions of the measured using the applicable enacted tax rate and provisions of the enacted tax lawenacted tax law

Deferred tax liability – the deferred tax consequences attributable to Deferred tax liability – the deferred tax consequences attributable to taxable temporary differences. A deferred tax liability is measured using taxable temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the enacted tax lawthe applicable enacted tax rate and provisions of the enacted tax law

176176


Permanent differences – the differences between pre-tax accounting Permanent differences – the differences between pre-tax accounting income and taxable income arising from transactions which, under income and taxable income arising from transactions which, under applicable tax laws and regulations, will not be offset by corresponding applicable tax laws and regulations, will not be offset by corresponding differences or reversals in the future periodsdifferences or reversals in the future periods

Temporary differences – the differences between the tax basis of assets or Temporary differences – the differences between the tax basis of assets or liabilities and their reported amounts in financial statements that will result liabilities and their reported amounts in financial statements that will result in taxable income or deductions upon its reversal at some future datein taxable income or deductions upon its reversal at some future date

Taxable temporary differences – temporary differences that result in Taxable temporary differences – temporary differences that result in taxable amounts in future years when the related asset or liability is taxable amounts in future years when the related asset or liability is recovered or settled, respectivelyrecovered or settled, respectively

Valuation allowance – the portion of a deferred tax asset for which it is Valuation allowance – the portion of a deferred tax asset for which it is more likely than not that a tax benefit will be realized more likely than not that a tax benefit will be realized

177177

AccountingAccounting

FAS 109, Accounting for Income TaxesFAS 109, Accounting for Income Taxes

Accounting for Accounting for income taxesincome taxes requires the recognition of current income requires the recognition of current income taxes due or refundable, as well astaxes due or refundable, as well as deferred income taxes, in the financial deferred income taxes, in the financial statementsstatements

FAS 109 mandates an asset and liability method for computing deferred FAS 109 mandates an asset and liability method for computing deferred income taxes. The deferred income tax amount is a calculable liability or income taxes. The deferred income tax amount is a calculable liability or asset, and future tax effects, rather than past or current tax effects, are the asset, and future tax effects, rather than past or current tax effects, are the basis of the deferred tax computationbasis of the deferred tax computation

178178


Steps to calculate deferred taxes:Steps to calculate deferred taxes:

1.1. Identify the types and amounts of existing temporary differences and Identify the types and amounts of existing temporary differences and the nature and amount of each type of tax loss carry-forward or tax the nature and amount of each type of tax loss carry-forward or tax credit carry-forwardcredit carry-forward

2.2. Calculate the total deferred tax liabilities for taxable temporary Calculate the total deferred tax liabilities for taxable temporary differences using the applicable tax ratedifferences using the applicable tax rate

3.3. Calculate the total deferred tax assets for deductible temporary Calculate the total deferred tax assets for deductible temporary differences and tax loss carry-forwards using the applicable tax ratedifferences and tax loss carry-forwards using the applicable tax rate

4.4. Calculate the deferred tax assets for each type of tax credit carry-Calculate the deferred tax assets for each type of tax credit carry-forwardforward

5.5. Reduce deferred tax assets by a valuation allowanceReduce deferred tax assets by a valuation allowance

179179


Example – Year 1 - Company A has $500,000 in taxable temporary differences, Example – Year 1 - Company A has $500,000 in taxable temporary differences, $200,000 in deductible differences, and no loss or credit carryforwards. $200,000 in deductible differences, and no loss or credit carryforwards. Applicable federal tax rate is 35%. No valuation allowance is neededApplicable federal tax rate is 35%. No valuation allowance is neededYear 2 – same as Year 1, except that taxable temporary differences are $300,000 Year 2 – same as Year 1, except that taxable temporary differences are $300,000

Year 1:Year 1:Deferred tax liability - $500,000 x 35%Deferred tax liability - $500,000 x 35% $175,000$175,000Deferred tax asset - $200,000 x 35%Deferred tax asset - $200,000 x 35% (70,000)(70,000)Valuation allowance Valuation allowance 00

$105,000$105,000Year 2:Year 2:Deferred tax liability - $300,000 x 35%Deferred tax liability - $300,000 x 35% $105,000$105,000Deferred tax asset - $200,000 x 35%Deferred tax asset - $200,000 x 35% (70,000)(70,000)Valuation allowance Valuation allowance 00

$35,000$35,000Question – What is the amount of deferred tax expense or benefit in Year 2?Question – What is the amount of deferred tax expense or benefit in Year 2?

180180


Answer Answer - Deferred tax benefit is $70,000 ($105,000 - $35,000)- Deferred tax benefit is $70,000 ($105,000 - $35,000)

181181


Examples of common temporary differences:Examples of common temporary differences:

Revenues or gains that are taxable Revenues or gains that are taxable afterafter they are recognized in the US GAAP they are recognized in the US GAAP financial statements (FS) – e.g., receivable from installment salesfinancial statements (FS) – e.g., receivable from installment sales

Expenses or losses that are tax-deductible Expenses or losses that are tax-deductible after after they are recognized in FS – e.g., they are recognized in FS – e.g., a product warranty liabilitya product warranty liability

Revenues or gains that are taxable Revenues or gains that are taxable beforebefore they are recognized in FS – e.g., they are recognized in FS – e.g., subscriptions received in advancesubscriptions received in advance

Expenses and losses that are deductible Expenses and losses that are deductible beforebefore they are recognized in FS – e.g., they are recognized in FS – e.g., depreciable propertydepreciable property

A reduction in the tax basis of depreciable assets because of tax credits – e.g., A reduction in the tax basis of depreciable assets because of tax credits – e.g., amounts received upon future recovery of the amount of the asset for financial amounts received upon future recovery of the amount of the asset for financial reporting will exceed the remaining tax basis of the asset, and the excess will be reporting will exceed the remaining tax basis of the asset, and the excess will be taxable when the asset is recoveredtaxable when the asset is recovered

Business combinations Business combinations

182182


Examples of common permanent differences:Examples of common permanent differences:

Financial expenses that are not deductible for tax purposes – e.g., premiums paid Financial expenses that are not deductible for tax purposes – e.g., premiums paid on life insurance policies for which the company is the beneficiary, certain on life insurance policies for which the company is the beneficiary, certain penaltiespenalties

Financial income that is not taxable or tax-free income – e.g., interest received Financial income that is not taxable or tax-free income – e.g., interest received on state or municipal bonds, life insurance proceeds received by the company on on state or municipal bonds, life insurance proceeds received by the company on death of its officersdeath of its officers

183183


If a deferred tax asset is not expected to be realized, a valuation allowance If a deferred tax asset is not expected to be realized, a valuation allowance shall be recorded for the relevant amount. A tax planning strategy is shall be recorded for the relevant amount. A tax planning strategy is essential to reduce the amount of the aforementioned valuation allowancesessential to reduce the amount of the aforementioned valuation allowances

Deferred tax liabilities/assets and related valuations shall be classified as Deferred tax liabilities/assets and related valuations shall be classified as either current or non-current, based on when the reversal of temporary either current or non-current, based on when the reversal of temporary differences will occur. Within the current or non-current classification, tax differences will occur. Within the current or non-current classification, tax liabilities/assets owed to the same tax authority may be offset and liabilities/assets owed to the same tax authority may be offset and presented net. Deferred liabilities/assets owed to different tax authorities presented net. Deferred liabilities/assets owed to different tax authorities may not be offsetmay not be offset

Accounting for income taxes may be complex and consultations with SPE Accounting for income taxes may be complex and consultations with SPE tax department are requiredtax department are required

184184


An income tax roll-forward schedule to properly adjust the deferred tax An income tax roll-forward schedule to properly adjust the deferred tax asset/liability based on current P&L activity should be prepared at least asset/liability based on current P&L activity should be prepared at least quarterlyquarterly

Tax account balances should be reconciled to supporting detail (tax Tax account balances should be reconciled to supporting detail (tax returns, schedules of differences between taxable income and accounting returns, schedules of differences between taxable income and accounting income) at least quarterlyincome) at least quarterly

Tax filing and payment due dates, claims for refunds are monitored on a Tax filing and payment due dates, claims for refunds are monitored on a regular basisregular basis

Any quarterly or year end accruals and top side adjustments should have Any quarterly or year end accruals and top side adjustments should have applicable tax related entries. Any such significant tax entries should be applicable tax related entries. Any such significant tax entries should be provided to SPE tax department for their review and approval by both provided to SPE tax department for their review and approval by both domestic and, especially international territories domestic and, especially international territories

185185

PensionsPensions

186186

PensionsPensions

Topics

Definitions Accounting Disclosure

187187


FAS 87, FAS 87, Employers’ Accounting for PensionsEmployers’ Accounting for Pensions, and FAS 88, , and FAS 88, Employers’ Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefitsand for Termination Benefits

Two common types of plans:Two common types of plans: Defined benefit plan – one that defines an amount of pension benefit to be provided, Defined benefit plan – one that defines an amount of pension benefit to be provided,

usually as a function of one or more factors such as age, years of service, or usually as a function of one or more factors such as age, years of service, or compensation. For example, upon retirement participants may receive monthly compensation. For example, upon retirement participants may receive monthly benefits of $10 for each year of service or annual benefit payments of one percent of benefits of $10 for each year of service or annual benefit payments of one percent of the final year’s pay for each year of servicethe final year’s pay for each year of service

Defined contribution plan – provides an individual account for each participant, and Defined contribution plan – provides an individual account for each participant, and specifies how contributions to the individual’s account are to be determined instead of specifies how contributions to the individual’s account are to be determined instead of specifying the amount of benefits the individual is to receive. For an example, each specifying the amount of benefits the individual is to receive. For an example, each year the employer may contribute three percent of pre-tax income to the plan. A year the employer may contribute three percent of pre-tax income to the plan. A 401(k) plan is an example of a defined contribution plan401(k) plan is an example of a defined contribution plan

188188


Accumulated benefit obligation - The actuarial present value of benefits Accumulated benefit obligation - The actuarial present value of benefits (whether vested or nonvested) attributed by the pension benefit formula to (whether vested or nonvested) attributed by the pension benefit formula to employee service rendered before a specified date and based on employee employee service rendered before a specified date and based on employee service and compensation (if applicable) prior to that date. The accumulated service and compensation (if applicable) prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. For plans with flat-benefit or no assumption about future compensation levels. For plans with flat-benefit or non-pay-related pension benefit formulas, the accumulated benefit obligation non-pay-related pension benefit formulas, the accumulated benefit obligation and the projected benefit obligation are the same and the projected benefit obligation are the same

Projected benefit obligation - The actuarial present value as of a date of all Projected benefit obligation - The actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered benefits attributed by the pension benefit formula to employee service rendered prior to that date. The projected benefit obligation is measured using prior to that date. The projected benefit obligation is measured using assumptions as to future compensation levels if the pension benefit formula is assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, final-average-based on those future compensation levels (pay-related, final-pay, final-average-pay, or career-average-pay plans)pay, or career-average-pay plans)

189189


Net periodic pension cost comprises of:Net periodic pension cost comprises of: Service costService cost Interest costInterest cost Expected return on plan assetsExpected return on plan assets Amortization of unrecognized prior service costAmortization of unrecognized prior service cost Amortization of deferred gains and lossesAmortization of deferred gains and losses Amortization of transition amountAmortization of transition amount

Service cost - The actuarial present value of benefits attributed by the pension Service cost - The actuarial present value of benefits attributed by the pension benefit formula to services rendered by employees during that period. The benefit formula to services rendered by employees during that period. The service cost component is a portion of the projected benefit obligation and is service cost component is a portion of the projected benefit obligation and is unaffected by the funded status of the plan unaffected by the funded status of the plan

Interest cost - The increase in the projected benefit obligation due to passage of Interest cost - The increase in the projected benefit obligation due to passage of time time

190190


Expected return on plan assets - An amount calculated as a basis for determining Expected return on plan assets - An amount calculated as a basis for determining the extent of delayed recognition of the effects of changes in the fair value of the extent of delayed recognition of the effects of changes in the fair value of assets. The expected return on plan assets is determined based on the expected assets. The expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan long-term rate of return on plan assets and the market-related value of plan assetsassets

Prior service cost - the cost of retroactive benefits granted in a plan amendment Prior service cost - the cost of retroactive benefits granted in a plan amendment

Gain or loss - a change in the value of either the projected benefit obligation or Gain or loss - a change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or from a the plan assets resulting from experience different from that assumed or from a change in an actuarial assumption change in an actuarial assumption

191191

Accounting Accounting

Immediate recognition of a liability (the minimum liability) when the Immediate recognition of a liability (the minimum liability) when the accumulated benefit obligation exceeds the fair value of plan assets. A liability accumulated benefit obligation exceeds the fair value of plan assets. A liability (unfunded accrued pension cost) is recognized if net periodic pension cost (unfunded accrued pension cost) is recognized if net periodic pension cost exceeds amounts the employer has contributed to the plan. An asset ( prepaid exceeds amounts the employer has contributed to the plan. An asset ( prepaid pension cost) is recognized if net periodic pension cost is less than amounts the pension cost) is recognized if net periodic pension cost is less than amounts the employer has contributed to the planemployer has contributed to the plan

If the accumulated benefit obligation exceeds the fair value of plan assets, the If the accumulated benefit obligation exceeds the fair value of plan assets, the employer shall recognize a liability (including unfunded accrued pension cost) employer shall recognize a liability (including unfunded accrued pension cost) that is at least equal to the unfunded accumulated benefit obligation. that is at least equal to the unfunded accumulated benefit obligation. Recognition of an additional minimum liability is required if an unfunded Recognition of an additional minimum liability is required if an unfunded accumulated benefit obligation exists and (a) an asset has been recognized as accumulated benefit obligation exists and (a) an asset has been recognized as prepaid pension cost, (b) the liability already recognized as unfunded accrued prepaid pension cost, (b) the liability already recognized as unfunded accrued pension cost is less than the unfunded accumulated benefit obligation, or (c) no pension cost is less than the unfunded accumulated benefit obligation, or (c) no accrued or prepaid pension cost has been recognizedaccrued or prepaid pension cost has been recognized

Need to recognize a minimum liability is based on estimated obligations and Need to recognize a minimum liability is based on estimated obligations and assets as of their measurement date. Obligations are estimated as of that date assets as of their measurement date. Obligations are estimated as of that date based on a roll-forward of the beginning-of-the-year actuarial valuationbased on a roll-forward of the beginning-of-the-year actuarial valuation

192192


Company A has a prepaid cost of $100 at year-end prior to calculation of the Company A has a prepaid cost of $100 at year-end prior to calculation of the additional liability. The accumulated benefit obligation (ABO) is $1,000 additional liability. The accumulated benefit obligation (ABO) is $1,000 and the fair value of the assets is $900and the fair value of the assets is $900

Question – What is the amount of additional liability, if any, to be recorded Question – What is the amount of additional liability, if any, to be recorded the required minimum liability?the required minimum liability?

193193


Answer Answer – the additional liability is $200.– the additional liability is $200.

A minimum liability of $100 = $1,000 (ABO) - $900 (fair value of the assets) A minimum liability of $100 = $1,000 (ABO) - $900 (fair value of the assets) plusplus

$100 (prepaid asset)$100 (prepaid asset)

In this case, the company should present in its financial statements an accrued In this case, the company should present in its financial statements an accrued pension liability of $100 ($100 prepaid asset minus $200 additional pension liability of $100 ($100 prepaid asset minus $200 additional liability)liability)

194194

Disclosure Disclosure

FAS 132(R), FAS 132(R), Employers’ Disclosure about Pensions and Other Employers’ Disclosure about Pensions and Other Postretirement BenefitsPostretirement Benefits, issued in December 2003, issued in December 2003

Requires new disclosure (very robust) about the assets, obligations, cash Requires new disclosure (very robust) about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefits plans. other postretirement benefits plans.

Accounting and disclosure of pensions is very complex and require Accounting and disclosure of pensions is very complex and require consultation with SPE Technical Support and Compliance groupconsultation with SPE Technical Support and Compliance group

Any pension plans should be communicated to SPE Corporate Finance Any pension plans should be communicated to SPE Corporate Finance and Technical Support and Compliance groupand Technical Support and Compliance group

195195

CONSOLIDATION AND CONSOLIDATION AND FINANCIAL FINANCIAL REPORTINGREPORTING

196196

Consolidation and Financial ReportingConsolidation and Financial Reporting

Topics

ConsolidationForeign Currency

TranslationIntercompanyTransactions

Material EventDisclosure


197197

ConsolidationConsolidation

Consolidation Consolidation is the process of combining the assets, liabilities and operations of is the process of combining the assets, liabilities and operations of companies under common control, and presenting the result as if it was one companies under common control, and presenting the result as if it was one companycompany

SPE consolidation is performed at the Home Office levelSPE consolidation is performed at the Home Office level

Hyperion is currently used as consolidation tool. Moving towards new Hyperion is currently used as consolidation tool. Moving towards new consolidation tool – BCS (Business Consolidation System)consolidation tool – BCS (Business Consolidation System)

198198

Foreign Currency TranslationForeign Currency Translation

The initial step in foreign currency translation is to determine each entity’s The initial step in foreign currency translation is to determine each entity’s functional currency.functional currency.

There are two main steps in the foreign currency translation:There are two main steps in the foreign currency translation: Step 1 – Revaluation of transactions in other than local currency to local (functional) Step 1 – Revaluation of transactions in other than local currency to local (functional)

currency financial statementscurrency financial statements Step 2 – Translation of financial statements in local (functional) currency to reporting Step 2 – Translation of financial statements in local (functional) currency to reporting

(group) currency.(group) currency.

199199


Step 1 - Revaluation of Foreign Currency TransactionsStep 1 - Revaluation of Foreign Currency Transactions

For other than forward exchange contracts, the following shall apply to all For other than forward exchange contracts, the following shall apply to all foreign currency transactions:foreign currency transactions:

At the date the transaction is recognized, each asset, liability, revenue, expense, At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from transaction shall be measured and recorded in the gain, or loss arising from transaction shall be measured and recorded in the functional currency of the entity by using the exchange rate in effect at that functional currency of the entity by using the exchange rate in effect at that datedate

At each balance sheet date, recorded balances that are denominated in a At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency shall be adjusted to reflect the currency other than the functional currency shall be adjusted to reflect the current exchange ratecurrent exchange rate

The exchange gains and losses should be included in net income (loss) for The exchange gains and losses should be included in net income (loss) for the period. The exceptions are hedging instruments and intercompany the period. The exceptions are hedging instruments and intercompany transactions of a long-term investment nature which gains and losses are transactions of a long-term investment nature which gains and losses are included in cumulative translation adjustment (CTA) account, a component included in cumulative translation adjustment (CTA) account, a component of equityof equity

200200


Step 2 - Translation of Foreign Currency StatementsStep 2 - Translation of Foreign Currency Statements

The functional (local) currency financial statements should be translated into the The functional (local) currency financial statements should be translated into the reporting (group) currency utilizing period-end (for assets and liabilities), daily or reporting (group) currency utilizing period-end (for assets and liabilities), daily or period average (for income statement accounts), and historical (for equity period average (for income statement accounts), and historical (for equity accounts) exchange rates. As a result of these translation procedures, a Cumulative accounts) exchange rates. As a result of these translation procedures, a Cumulative Translation Adjustment (CTA) account will be created Translation Adjustment (CTA) account will be created

The rate in the SAP system as of A/R and A/P cut off date should be used to The rate in the SAP system as of A/R and A/P cut off date should be used to revalue and translate the assets and liabilitiesrevalue and translate the assets and liabilities

201201

Intercompany TransactionsIntercompany Transactions

Transactions between SPE consolidated entities and are required when transaction Transactions between SPE consolidated entities and are required when transaction impacts more than one company code (legal entity) belonging to SPEimpacts more than one company code (legal entity) belonging to SPE

One step intercompany (I/C) transactions - primarily executed between domestic One step intercompany (I/C) transactions - primarily executed between domestic consolidated companies. The company originating the entry has the ability to consolidated companies. The company originating the entry has the ability to directly record the offset entry in the trading partner’s general ledger directly record the offset entry in the trading partner’s general ledger

Two step I/C transactions - generally occur between Home Office and international Two step I/C transactions - generally occur between Home Office and international territories and between territory and territory:territories and between territory and territory:

Is used in order for both parties to approve intercompany transactionIs used in order for both parties to approve intercompany transaction Automated two-step (“park and post’) – SPE preferred methodAutomated two-step (“park and post’) – SPE preferred method Manual two-step – should be used in very limited situations (clearing conversion and Manual two-step – should be used in very limited situations (clearing conversion and

creating transactions with non-SAP entity)creating transactions with non-SAP entity) Five business days for receiving entity to approve or dispute the transactionFive business days for receiving entity to approve or dispute the transaction

202202


SettlementSettlement – remittance of cash and, in rare cases, non-monetary offset. In – remittance of cash and, in rare cases, non-monetary offset. In SAP system, settlement occurs on the account/trading partner level. SAP system, settlement occurs on the account/trading partner level. However, it is not offset on the transactional level and therefore, even if However, it is not offset on the transactional level and therefore, even if settled SAP will continue to treat the transaction as ‘open’. All ‘open’ settled SAP will continue to treat the transaction as ‘open’. All ‘open’ transactions are revalued by the system.transactions are revalued by the system.

Clearing Clearing – process of matching settled transactions on the transactional – process of matching settled transactions on the transactional level. The clearing process will ‘close’ items on the transactional level. In level. The clearing process will ‘close’ items on the transactional level. In this case the transaction is not considered ‘open’ by the system and will this case the transaction is not considered ‘open’ by the system and will not be revalued. not be revalued. Note:Note: the SAP ‘clearing’ functionality is not yet fully in the SAP ‘clearing’ functionality is not yet fully in place.place.

203203


Major push to be in-balance on a line item basis by September 2006 closeMajor push to be in-balance on a line item basis by September 2006 close

Must use the SAP automated “two-step process”Must use the SAP automated “two-step process” to ensure all new activity is in-balance as to ensure all new activity is in-balance as posted by both parties in the same accounting periodposted by both parties in the same accounting period

Must have direct-relationship on all transactionsMust have direct-relationship on all transactions with correct Company Code and Profit Center with correct Company Code and Profit Center

Must record all inter-company activity in “Transaction Currency”Must record all inter-company activity in “Transaction Currency” and let SAP make conversion and let SAP make conversion to the “local currency”to the “local currency”

Must confirm all inter-company balances monthly in “transaction currency”Must confirm all inter-company balances monthly in “transaction currency” with the SAP Report with the SAP Report “SP70A” and remain in-balance at every period-end“SP70A” and remain in-balance at every period-end

Must revalue inter-company balances denominated in foreign currencies at month-endMust revalue inter-company balances denominated in foreign currencies at month-end (system (system A/R – A/P cutoff rates) on your books with offset entries to unrealized gain / loss on foreign A/R – A/P cutoff rates) on your books with offset entries to unrealized gain / loss on foreign exchange account (P&L)exchange account (P&L)

Must use SAP’s A/R – A/P clearing functionMust use SAP’s A/R – A/P clearing function to maintain month-end balance of “open-items” to maintain month-end balance of “open-items” only to allow SAP’s “revaluation program” to work properly only to allow SAP’s “revaluation program” to work properly

204204

Material Event DisclosureMaterial Event Disclosure

Complete and timely disclosure of material events – within 24 hours to SPE Complete and timely disclosure of material events – within 24 hours to SPE CorporateCorporate

Materiality level is updated by Sony Corporation (Tokyo) on a periodic basis. SPE Materiality level is updated by Sony Corporation (Tokyo) on a periodic basis. SPE events are considered material if they exceed $10 millionevents are considered material if they exceed $10 million

Examples of material events:Examples of material events: Any mergers and acquisitions (M&A), joint venture or other strategic alliance transaction Any mergers and acquisitions (M&A), joint venture or other strategic alliance transaction Any acquisition or sale of any property, plant or equipmentAny acquisition or sale of any property, plant or equipment Any impairment or write-off of assets or restructuring chargesAny impairment or write-off of assets or restructuring charges Any event triggering direct or contingent financial obligationsAny event triggering direct or contingent financial obligations Any lawsuit or potential lawsuit with possible monetary damageAny lawsuit or potential lawsuit with possible monetary damage Execution or termination of any material contact outside the ordinary course (including non-binding Execution or termination of any material contact outside the ordinary course (including non-binding

letters or intent), which includes the following:letters or intent), which includes the following: Any contract for the sale of products or servicesAny contract for the sale of products or services Any licensing agreement (except for cross-license) regarding particular intellectual property Any licensing agreement (except for cross-license) regarding particular intellectual property

rights indispensable to the business of a particular product or servicerights indispensable to the business of a particular product or service

205205


Significant changes in internal accounting controls or accounting systems should Significant changes in internal accounting controls or accounting systems should be discussed with the SPE Corporate prior to implementation be discussed with the SPE Corporate prior to implementation

A checklist of standard company forms submitted by each group company (or A checklist of standard company forms submitted by each group company (or other method) should be used to determine all required disclosures have been other method) should be used to determine all required disclosures have been summarized, and should be maintained and reviewed by Corporate Reportingsummarized, and should be maintained and reviewed by Corporate Reporting

If foreign subsidiaries are recorded on a lag basis, a determination of the If foreign subsidiaries are recorded on a lag basis, a determination of the potential impact on the financial statements should be performed quarterly and potential impact on the financial statements should be performed quarterly and accruals made if differences are materialaccruals made if differences are material

206206

SPE Technical Support and Compliance SPE Technical Support and Compliance Resources and LinksResources and Links David Mastalski, Vice David Mastalski, Vice

President, Technical President, Technical Support and Compliance, Support and Compliance, SPE Corporate FinanceSPE Corporate FinanceE-mail: E-mail: [email protected][email protected]

Phone: 1-310-244-8538Phone: 1-310-244-8538

Svetlana Tyuleneva, Svetlana Tyuleneva, Director, Technical Support Director, Technical Support and Compliance, SPE and Compliance, SPE Corporate FinanceCorporate Finance

E-mail: sE-mail: [email protected][email protected]

Phone: 1-310-244-6509Phone: 1-310-244-6509

207207

SPE Technical Support and Compliance SPE Technical Support and Compliance Resources and LinksResources and Links

SPE Accounting Policies and Procedures will be posted to: SPE Accounting Policies and Procedures will be posted to: MySPE/Departments/Corporate/Finance/Compliance/Compliance MySPE/Departments/Corporate/Finance/Compliance/Compliance

Resources/SPE Accounting Policies and ProceduresResources/SPE Accounting Policies and Procedures

Significant Accounting Pronouncements from January 2003 to Significant Accounting Pronouncements from January 2003 to September 2006 will be posted to:September 2006 will be posted to:MySPE/Departments/Corporate/Finance/Compliance/Compliance MySPE/Departments/Corporate/Finance/Compliance/Compliance

Resources/Significant Accounting PronouncementsResources/Significant Accounting Pronouncements

Q&A and ClosingQ&A and Closing

208208

SPE Technical Support and Compliance SPE Technical Support and Compliance Resources and LinksResources and Links

SPE Accounting Policies and Procedures are/will be posted to: SPE Accounting Policies and Procedures are/will be posted to: MySPE/Departments/Corporate/Finance/Compliance/Compliance MySPE/Departments/Corporate/Finance/Compliance/Compliance

Resources/SPE Accounting Policies and ProceduresResources/SPE Accounting Policies and Procedures

Significant Accounting Pronouncements from January 2003 to Significant Accounting Pronouncements from January 2003 to September 2006 are/ will be posted to:September 2006 are/ will be posted to:MySPE/Departments/Corporate/Finance/Compliance/Compliance MySPE/Departments/Corporate/Finance/Compliance/Compliance

Resources/Significant Accounting PronouncementsResources/Significant Accounting Pronouncements

Q&A and ClosingQ&A and Closing

1 sony pictures entertainment us gaap, sony cap and spe accounting policies and procedures -...

Documents

cash balance

cash equivalentsanswers

cash value

known cash

original maturity date

current assetsrelate

spe accounting policies

near maturity