Defining digital revenue
in media and entertainment
Establishing industry-wide
consistency and comparability
Media & Entertainment
Global Media & Entertainment Center
Table of contents
The changing landscape ................................................. 3
Advertising .................................................................... 7
Film and television ......................................................... 9
Broadcast and cable networks ...................................... 13
Publishing ................................................................... 14
Music .......................................................................... 15
Accounting and reporting considerations ....................... 17
Looking back to chart a course for the future.................20
Defining digital revenue in media and entertainment
|
1
2
|
Global Media & Entertainment Center
The changing landscape
When the dot-com business model took off in the 1990s,
public and private companies alike reported record-setting
revenues. Products and services were being bundled and
sold like never before.
It only took a short while for
regulators and standard setters to
realize that without some guidance
and consistency, there was little
chance for investors to make
reasonable comparisons between
companies or informed decisions
about the financial performance and
condition of a dot-com. The Financial
Accounting Standards Board (FASB)
and the Securities and Exchange
Commission (SEC) responded by
publishing several new accounting
pronouncements and guidelines.
Digital business models and revenue
streams have evolved significantly.
Although there is little expectation
that regulators will step in to mandate
consistency, analysts, investors and
other industry stakeholders may come
to demand it. The digital evolution
within many media and entertainment
(M&E) companies may create less
comparability and lead to uncertainty
and less predictability of financial
performance and company success.
One approach may be for companies
to bring more transparency into the
individual business models that have
been identified as digital. Without
the ability to make an apples-toapples comparison of future revenue
streams and profitability, analysts
and investors may struggle to
make definitive stock valuations or
intelligent investment decisions.
Until now, digital revenue has been
a relatively small portion of the
total revenue generated by many
M&E companies. As a result, it has
not garnered significant attention.
However, as business models continue
to evolve, consumer demand changes,
new disruptive technologies emerge,
and digital revenues become a more
significant part of the overall business,
M&E companies may want to consider
how they define and report digital
revenue. Now is the time to establish
consistency and comparability.
The media and entertainment
industry needs to come together
to discuss these questions:

What is digital revenue? How do
we distinguish digital revenue
from traditional, non-digital
revenue?

Should we account for digital
revenue in the same way that we
account for traditional revenue?
What special accounting
considerations, if any, should
be given to revenue generated
from digital formats and
distribution platforms?

Should we report digital
revenue separately from
revenue generated by our
traditional businesses?

Should we make our digital
operations a separate operating
segment or include them
as a part of our traditional
businesses?

What disclosures should we
make regarding our accounting
policies for digital operations?

How do our financial statement
disclosures about our digital
operations compare to those of
our peers?

Do our financial statements
adequately reflect the results of
our digital operations?

Do we have the systems
necessary to capture and
distinguish digital and
traditional revenues?
Defining digital revenue in media and entertainment
|
3
The changing landscape
Limiting the infinite definitions of digital revenue
Although a definition of digital revenue does not exist in
US Generally Accepted Accounting Principles (GAAP)
or other international accounting standards (e.g.,
International Financial Reporting Standards (IFRS)), many
M&E companies have begun to discuss the effects of digital
distribution on their business models and revenue streams.
Some companies disclose digital revenue as a completely
separate component. Others include digital revenue in
their existing operating segments.
Although some industry groups have developed a
definition of digital revenue, it remains unclear which
business models should be included. For example, the
American Association of Publishers (AAP) has previously
defined electronic media products as those published
and (or) delivered in any electronic format including:
books and printed materials; subscription and related
revenues; standardized tests; periodicals and magazines
for students and teachers; databases; subscription
reference books (encyclopedias and yearbooks) sold to
consumers, libraries and educational institutions. While
this definition includes certain examples, it does not
include other revenue streams for publishers that may be
considered digital. For example, online advertising sales,
online sales of products and CDs (e.g., digital format
that may contain software) may be considered digital. In
addition, the definition may be not be viewed the same
way by everyone. Some companies may view a book that
is distributed in electronic format but that is printed in a
bookstore through an espresso book machine as nondigital, whereas others may view this as digital revenue.
If we look at Wikipedia as a barometer for the general
public’s view, digital media is defined as “a form of
electronic media where data is stored in digital (as
opposed to analog) form. It can refer to the technical
aspect of storage and transmission (e.g., hard disk
drives or computer networking) of information or to the
‘end product,’ such as digital video, augmented reality
or digital art.”1 Similar to the AAP definition, this may
provide a framework for a company to define digital
revenue, but it remains unclear as to which business
models would be included.
The lack of a standard definition and inconsistent judgment
of what comprises digital revenue may cause differences in
the reporting of digital revenue by M&E companies.
The multiple interchangeable terms used to describe
digital revenue — new media, online, internet, electronic
delivery or interactive — add to the complexity of clearly
defining digital revenue. The interchangeable terms may
lead to a lack of clarity of individual business models and
revenue streams.
1
4
|
“Digital media,” Wikipedia website, en.wikipedia.org/wiki/
Digital_media, accessed 4 October 2011.
Global Media & Entertainment Center
Apples to apples or apples
to oranges?
Recently, some M&E company press releases and
articles have increased their focus on digital revenue
growth and the percentage of the overall business
related to digital revenue. However, other companies
believe that the digital component of their revenue
is an integral part of their overall relationship with
the customer, and therefore do not report digital
revenues separately.
Although today some companies quantify digital
revenue, most combine these business models with
their traditional businesses. The following descriptions,
reported in the publicly filed financial statements of
several M&E companies, illustrate the difficulties of
comparing or benchmarking digital revenue within
the industry.

“The digital revenue from our broadcasting
operations are rolled into the broadcasting
segment.”

“Digital revenues are included in our respective
operating segments’ total revenue.”

“Net revenues from our digital segment
accounted for approximately 4.5% of our
consolidated net revenue.”

”Digital revenues are incorporated under the
publishing and other revenue lines.”

“Digital revenues from film, television and publishing
are included in the primary business units.”
The need for a standard definition aside, the
quantification of digital revenues is important for:

Analyst and investor use. In evaluating a
cross-section of M&E companies, analysts and
investors need to be able to compare digital revenues
to assess competitive advantages and growth
potential.

Transaction analysis. Assessing digital revenues may
affect a buyer’s or seller’s view on the transaction
price for a sale that includes a digital component. For
example, businesses that include digital revenues
may demand higher values than those without digital
revenues, as investors are betting to some extent on
the future of digital business models.

Tax purposes. Whether digital revenue results from
the sale of a good or service could have different tax
implications. For example, online advertising may
be viewed as a service, instead of a digital product,
and therefore may not be subject to certain taxes.
In some states, digital revenue for tax purposes may
include sales from music, videos or other electronic
file downloads via the internet. However, this definition
differs from state to state. In addition, this tax
definition may not capture new distribution models or
the sale of bundled products that a company may view
as digital.

Accounting and reporting. Evolving distribution
models, multi-element arrangements, operating
segments and film-forecast models are all areas M&E
companies will need to consider when determining
what constitutes digital revenue. We explore these
areas in more detail on page 16.
Defining digital revenue in media and entertainment
|
5
The changing landscape
Though digital revenue models are driving change
in the M&E industry, not all of the major M&E
companies report digital revenues in the same
way. We looked at the financial disclosures of the
43 M&E companies listed on the Forbes 2000
and found that nearly half don’t discuss digital
revenues at all.
In the pages that follow, we examine in greater detail several
digital revenue complexities by subsector: advertising, film
and television, broadcast and cable networks, publishing, and
music. We also look at a number of cross-sector accounting
and reporting issues M&E companies should consider as digital
revenue continues to grow.
How are companies disclosing
digital revenues?
49%
Percentage
50
44%
40
30
26%
20
7%
10
No
m
of ent
dig ion
Di
ita
git
l
al
re
ve
in nu
ot e i
he s i
r s nc
eg lud
me ed
Pr
nt
ov
s
ide
s
inf qu
dig orm ant
ita at itat
l re ion ive
ve for
nu
e
Di
git
se al
pa re
ra ve
te nu
se e
gm is
en a
t
0
The percentages on the chart total more than 100% because
some companies were classified into more than one category.
Source: Based on Ernst & Young analyses of publicly available
financial reports.
6
|
Global Media & Entertainment Center
Advertising
What are M&E companies saying about advertising revenue?

“Digital activities include the creation of corporate or commercial websites, advice
about online marketing, search engine optimization, internet advertisements and any
other communications via internet or mobile channels.”

“New media is defined as personal computer driven, mobile, video content and
social networks.”

“Digital media segment revenues consist principally of advertising sales on the
Company’s websites, online merchandise sales, and sales of broadband and
mobile content.”
Online advertising continues to be a growing source
of revenue for many M&E companies. In the past
few years, advertising agencies, broadcasters
and cable networks have turned their attention
to online advertising, partly because it enables
them to better target audiences and partly
because companies believe it is more efficient than
traditional advertising.
As the shift to online advertising continues,
companies remain focused on how the shift to
online advertising impacts their overall business
models. For example, if an M&E company
experiences an overall increase in advertising
revenue, is it the result of better monetization
of online advertising? If so, is the increase offset
by a decrease in advertising revenue from
traditional, 30-second spots as advertisers shift
their advertising dollars to alternative mediums?
Understanding the mix of advertising revenue
between digital and non-digital may be a useful
metric for assessing a company’s future success.
Some companies create new sales teams to
sell advertising for both digital and non-digital
platforms. However, others may have separate
advertising sales teams that sell advertising
revenue separately for each (e.g., network division
versus new media division). Advertisers may
have arrangements that include both television
and online advertising. However, it is unclear
whether each company is separately reporting the
advertising revenues that are generated through
their websites through banner and in-stream
advertising, and whether they consider these
advertising revenues as digital.
For example, a TV network may derive a substantial
amount of its revenue from traditional, 30-second
advertising spots. However, with the shift toward
online consumption, more viewers may elect to
view programming online via the network’s website.
M&E companies should consider a consistent
means of determining whether advertising revenue
is based on the actual medium through which
advertising is displayed.
M&E companies should consider a consistent means
of determining whether advertising revenue is
based on the actual medium through which
advertising is displayed.
Defining digital revenue in media and entertainment
|
7
Advertising
Guaranteed levels of viewing for television advertising
spots, and how to manage a potential shortfall
(e.g., audience deficiency units) is one area of recent
change for broadcasters and cable networks. Today, a
broadcaster may deliver online advertising that it uses
to “make good” on the obligation to satisfy a level of
audience participation. As the contract with the customer
may primarily be for offline television advertising, a
company may want to consider whether the online
advertising is considered digital or non-digital revenue.
Sponsored search advertising
The integration of online content has enabled M&E
companies to earn incremental advertising revenue
through revenue-sharing agreements with online search
companies that deliver sponsored sites as a result of
search queries on the content provider’s website.
Advertising through apps
Distributing content via downloadable applications, which
allow consumers to access news content, magazine
content and games, is another growth area for many M&E
companies.
The applications may include a pay wall or may be free
but supported by advertising. The content may be similar
to the content in a printed publication. However, in some
new distribution models, a printed publication may not
exist. In defining and reporting digital revenue, a company
may want to consider whether the revenue earned from
application downloads and any related advertising is
considered digital.
The M&E company is not responsible for supplying the
advertisement or maintaining the relationship with the
advertiser. In this relationship, there is no digital sale
of advertising by the M&E company, but the revenue is
earned through the online display of advertising.
For example, a consumer may search a newspaper’s
website for a topic related to a news article. A third-party
search engine will supply the search results and the search
engine will earn revenue if the consumer accesses certain
advertisements. An agreement would typically provide the
newspaper with a portion of the revenue earned by the
search engine in the form of a traffic acquisition fee.
In defining and reporting digital revenue, a company
may want to consider whether the revenue from these
arrangements is digital or non-digital, given that the
M&E company is not supplying the advertisement, but
rather earning a fee for access to the search engine’s
advertising network.
8
|
Global Media & Entertainment Center
Film and television
What are film and television companies saying about digital revenue?

”We are actively participating in many digital business models, including sell-through,
rental, subscription and advertising-supported streaming. Revenue derived from the
digital distribution of our exclusive content rights continues to grow as a percentage
of revenue.”

“Our film segment encompasses motion picture production, acquisition and
distribution; television production, acquisition and distribution; home entertainment
acquisition and distribution; worldwide television networks; digital content creation
and distribution; operation of studio facilities; and development of new entertainment
products, services and technologies, including 3D.”

“Digital media is distributed through a variety of channels, including the internet,
mobile terminal devices and download platforms.”

“The continued increase in digital delivery of content is also expected to foster longterm growth of the overall home entertainment business.”
Distribution models
New distribution and consumption methods
are changing the revenue sources for film and
television companies as well as impacting the
traditional distribution windows. For example,
consumers can watch programming online through:

Video on demand (VOD)

Subscription video on demand (SVOD)

The content owner’s website
Content historically distributed via DVDs and
television VOD has continued to shift to electronic
sell-through or content rental where consumers
can view the content anytime, anywhere. This
distribution method may be viewed as another
form of the home entertainment strategy or as
a separate component or division of a company.
Regardless of the organizational structure,
companies should consider whether this
distribution is considered digital.
These distribution models differ significantly from
historical distribution channels (e.g., theatrical,
DVD, network). As a result, there may not be a clear
view of whether the revenue is viewed as digital
or non-digital.
Defining digital revenue in media and entertainment
|
9
Film and television
Multiple device licenses
How customers consume content
has also shifted, from solely through
television to other devices such as
computers, smartphones and tablets.
As consumption trends develop,
agreements to license content that
may be viewed on multiple devices
are increasingly popular. For example,
certain cable companies allow
customers to purchase VOD that may
be viewed on any device (e.g., home
television, computer, mobile phone or
a compatible handheld device).
For example, a consumer wanting to
watch a film using VOD has a number
of options for purchasing and viewing
the content, including:

Purchased online and viewed on
a tablet

Purchased through TV but viewed
online through a tablet

Purchased through TV and
viewed on TV
In defining and reporting digital
revenue, a company may want
to consider how the content is
purchased or consumed.
A digital definition based on how the
content is purchased might view only
the first example as digital revenue.
A digital definition based on how
the content is consumed might view
10
Global Media & Entertainment Center
|
both the first and second examples
as digital revenue. The third example
may be viewed as digital if a company
views the distribution as digital based
on the transmission (i.e., digital
versus analog).
Another option may be to classify
all VOD revenue as either digital or
non-digital, regardless of how it is
purchased or consumed. This example
highlights the potential diversity in
practice for companies providing VOD
programming or receiving license fees
for their content.
Distribution licensing agreements
How consumers view content
has also changed the way M&E
companies develop their licensing
agreements. New agreements
that enable the customer to view
unlimited TV episodes or movies
online are becoming more prevalent.
Such license agreements to online
distributors may be similar to
broadcast or network license
agreements in that they may be
exclusive for a certain time period
but may allow for both physical and
online exploitation. The content may
be viewed online but may also be
viewed through DVD home delivery.
As the content is distributed both
through digital and traditional
channels, these arrangements may
present a revenue allocation issue for
digital and non-digital components.
In defining and reporting digital
revenue, a company may want to
consider whether all or only a portion
of the license revenue is considered
digital. If only a portion is considered
digital, a company may also consider
whether the allocation methodology
is consistently applied across its
business units and is consistent with
the separation and measurement
guidance in current US GAAP.
License agreements to distribute
content may limit the exploitation
to a broadcast or cable network
channel. However, newer license
agreements may include the right to
exploit the content on the licensee’s
website. In defining and reporting
digital revenue, M&E companies
should consider whether the license
fees received for the programming
are non-digital or whether a portion
of revenue attributable to the
online consumption is considered
digital and how to allocate revenue
between them.
Defining digital revenue in media and entertainment
|
11
Film and television
Advertising sharing
arrangements
Agreements to provide content
through online distribution may
not be monetized through a
predetermined license fee. Instead,
they may be structured to share in
the demand for content through an
advertising-sharing arrangement,
under which the revenue earned for
the streaming advertising included
in the programming is shared
between the content provider and
the distributor. A company may
view the method of consumption as
the determining factor of whether
revenue is digital or non-digital.
However, this type of arrangement
may be viewed as just another
method for licensing content. As a
result, how the content is consumed
by the customer may not be the
determining factor.
DVDs
In the home entertainment market,
the shift in demand to view content
whenever and wherever has also
led to changes in how companies
package and distribute DVDs.
More companies bundle DVDs
with electronic versions of the film
or television program accessible
through a digital download or cloud
computing. In defining and reporting
digital revenue, a company may
want to consider if the sale of the
DVD is considered non-digital or if a
portion of the revenue attributable
to the electronic or cloud
distribution is considered digital.
12
|
Global Media & Entertainment Center
Broadcast and cable
networks
What are broadcasters and cable networks saying about digital revenue?

”Revenues from digital businesses are derived primarily from the sale
of display, banner, rich media and video advertising sponsorships and
subscriber fees to access the company’s content.”

“We continue to believe that mobile digital broadcast television represents
a tremendous and efficient use of our digital spectrum and could provide a
significant revenue stream to the television broadcasting industry.”

“The Communications Act and the FCC required television stations to
transition from analog television service to digital television service.”
Broadcaster and cable networks revenue primarily include advertising and re-transmission
fees. The advertising models were discussed earlier. With the shift to digital, some cable and
satellite companies are now offering consumers the ability to watch certain cable channels
online. Others are offering customers the ability to watch all programming on smartphones,
tablets or computers. When assessing the definition of digital revenue, broadcast and cable
companies should consider whether the shift to online content distribution represents a
change in the traditional view of the cable affiliate or retransmission fees earned by the
broadcasters or cable networks and whether the fees are considered digital.
Defining digital revenue in media and entertainment
|
13
Publishing
What are publishers saying about digital revenue?

“Online book revenue grew 25%. Online advertising revenue grew 30%. Digital only
revenue grew 40% (digital-only is defined as stand-alone transactions, not packaged
with a print text book).”

“Digital revenue from our website (e.g., advertising, subscriptions and classified
revenue) is included in our media group division along with application and
e-book subscriptions.”

“Most of our revenue is digital as it is delivered in an electronic format.”

“The increasing popularity of digital media and the shift in consumer habits and
advertising expenditures from traditional to digital media has adversely affected
and may continue to adversely affect our revenues.”

“Digital relates to all material delivered electronically over the internet or to
hand held devices.”
To accommodate the digital
evolution, publishers are adapting
their customer offerings to enable
consumers to obtain content both
offline and online. Online content
has changed the method in which
we read books, magazines and
newspapers. Consumers can read
magazines via a physical paper copy
or online. With the recent boom in
e-readers, publishers continue to
see a dramatic shift in the demand
for content available through
electronic distribution, as well as
other distribution models such as
video interactive publications. The
content may be offered only offline,
only online, or the products may be
bundled together.
For example, a newspaper
subscription may be $3 per week for
online access or an application, $5
per week for home delivery, and $6
per week for both digital and home
delivery. This trend to online content
has also affected education publishers
that offer both offline (e.g., textbooks)
and online content or services
(e.g., tests, tutorials and additional
content) as one bundled product.
14
Global Media & Entertainment Center
|
In defining and reporting digital
revenue, publishing companies
should consider whether a portion
of the revenue from bundled digital
and non-digital products or services
is considered digital revenue.
Publishing companies should also
consider whether printed content
ordered online, or content delivered
electronically but ultimately printed
by a customer, is considered digital.
CDs
In the publishing sector, content and
information delivered via CD have
historically been considered digital
as they are delivered in an electronic
format. Conversely, the music and
film industries have considered sales
of CDs and DVDs to be non-digital
physical sales. M&E companies
should consider whether there
is a consistent application of the
definition of digital revenue across
industries (e.g., music and film) and
across their own business units.
Music
What are music companies saying about digital revenue?

”Digital revenues relate to online or mobile downloads, mobile ringtones
or ring-back tones and online and mobile streams.”

”Growth in digital sales and merchandising more than offset declining
physical product sales and slightly lower music publishing activity.
Digital sales increased 13.8% year-on-year.”
Music is typically purchased either as a physical CD or downloaded. The digital aspect of these
transactions with customers may be clear. However, other transactions within the music
industry could be more ambiguous. For example, a music company that sells advertising on its
website should consider whether the advertising revenue is considered digital.
Similar to film and television companies, license agreements for music libraries are more
prevalent due to online distribution under which consumers may pay a subscription fee for
unlimited access to music. A company should consider whether these sales are similar to sales
of individual songs that are downloaded and therefore would be considered digital.
Defining digital revenue in media and entertainment
|
15
16
|
Global Media & Entertainment Center
Accounting and reporting
considerations
The accounting and reporting issues we describe in this section apply across all subsectors
within M&E.
Gross versus net revenue presentation for distribution models
The influx of online distributors that now offer films,
television shows, music and books — for sale or rent
digitally — has changed business models and cash flows for
many M&E companies. One of the accounting and financial
reporting considerations for these new distribution models
is the determination of the presentation of revenue as
gross or net in the income statement.
The presentation of “gross revenue” would result
in the content provider (e.g., studio) recording
revenue for 100% of the sales price collected by the
online distributor from the customer (e.g., $9.99),
with the portion of the sales remitted to the online
distributor recorded as cost of goods sold (e.g., $5.00).
Alternatively, the presentation of “net revenue” would
result in the net amount remitted to the content
provider (e.g., $4.99 paid to the studio) recorded as
revenue with $0 recorded as cost of goods sold.
Companies should make the determination of gross or
net revenue presentation based on the factors described
in Accounting Standards Codification (ASC) 605-45,
Revenue Recognition, Principal Agent Considerations.
Whether a company should recognize revenue as gross
or net is a matter of judgment that depends on the
relevant facts and circumstances. ASC 605-45 provides
a number of indicators that companies should consider
in the evaluation, some of which are stronger indicators
than others.
Defining digital revenue in media and entertainment
This guidance was written prior to the existence of many
digital products and doesn’t work well for these types
of transactions. For example, one of the typical factors
used to assess gross versus net revenue presentation is
general inventory risk. This factor comes into play in the
physical market for the sale of CDs, DVDs or magazines.
However, in the digital distribution model, the assessment
of inventory risk is typically not a factor at all, as physical
inventory generally does not exist.
The primary obligor is typically the party who has
ultimate responsibility for fulfillment (delivery). This may
be the same party to whom the customer looks for the
provision of the product or for remedy if the customer is
dissatisfied. Once again, in the digital distribution model,
this will require judgment.
Which party bears credit risk is another indicator that
should be considered. Generally, bearing credit risk is an
indicator of being the primary obligor. However, in the
digital distribution model most transactions are prepaid
using credit cards, so there is little credit risk. As a result,
this is typically not a strong indicator either way for these
types of transactions.
M&E companies should also consider the terms of the
distribution agreement to assess which party has latitude
in establishing the price.
As this is one of the few remaining indicators, more
weight is typically placed on who determines the pricing.
For example, does the book publisher set the price for all
digital sales or does the online distributor have latitude to
establish the price for certain publications?
|
17
Accounting and reporting considerations
Multi-element arrangements
As demand for flexible delivery media continues to
grow, M&E companies are developing offerings that give
consumers more access options. Frequently, offerings
include bundled products such as access to online content
with the physical delivery of the content for a single price.
Examples of these arrangements may include:
This assessment will require significant judgment as there
may not be an established market for the products or
services. Additionally, the company may never sell some or
all of the deliverables on a standalone basis. Nonetheless,
US GAAP requires the company to separate and allocate
the arrangement consideration to separate deliverables.

Home delivery of a newspaper or magazine and online
access through an app
For products or services that are delivered at the same
time, an allocation of revenue is not required. However, if
a company chooses to disclose the value of each item in
the arrangement, this allocation should be made based
on the relative selling price of each item.

Sale of a DVD that includes a digital download or access
to digital version through cloud computing

Sale of educational publications that includes test
services for a six-month period

Sale of a physical publication with a coupon to
purchase the online version at a discount in the future

Sale of a physical book with the ability to download an
electronic version

Sale of advertising campaign that includes many
medias including print and online (banners,
impressions)
When products are bundled (i.e., a multi-element
arrangement), M&E companies should consider the
accounting guidance in ASC 605-25, Revenue Recognition,
Multiple-Element Arrangements to assess the deliverables
in the arrangement. A critical step in applying this
guidance is determining exactly what deliverables are in
the arrangement. For example, for an arrangement that
includes access to digital content, is the deliverable the
content itself or is it the service of keeping (i.e., storing)
that content until the customer wants it?
When certain criteria are met, ASC 605-25 requires the
consideration to be allocated to all deliverables on the
basis of their relative selling price (i.e., the price at which a
company would sell the deliverable for separately) at the
inception of the arrangement. This may require a company
to make an assessment of the existence of vendor-specific
objective evidence (VSOE) if available; otherwise, thirdparty evidence (TPE) must be used. If neither one of those
is available, a company should use its best estimate of the
selling price of the separate deliverables.
18
|
For products or services that are not delivered at the
same time, an allocation of revenue may be necessary.
For example, the right to a discount on a future purchase
(i.e., a coupon for a 50% discount on the online version)
that is issued with the sale of a physical book publication
may be considered an element of an arrangement (i.e., if
the discount is considered significant and incremental).
In essence, the customer is receiving an in-the-money
option to purchase an item in the future at a specified
price or discount.
When the entity determines that the option is a separate
deliverable, a portion of the sales price for the physical
publication should be allocated to the discount using
the relative-selling price method, which incorporates
management’s best estimate of the selling price for the
discount. In certain situations, determining the best
estimate of selling price may be relatively straightforward
(e.g., if the maximum amount of discount provided is
known or the discount can be applied to only specified
products, all of which have a known selling price). In other
situations, however, determining this estimate may require
more judgment, such as in situations in which the total
amount of the discount available is not quantifiable.
Any amount allocated to the discount should be deferred
and recognized as revenue as the online book version is
delivered to the customer (assuming that all other revenue
recognition criteria are met). The allocation of the revenue
will result in a portion of the sale to be associated with the
discount and therefore may be viewed as digital.
Global Media & Entertainment Center
Operating segments
Digital revenue could have an effect
on a company’s determination of
operating segments and reportable
segments in accordance with ASC
280, Reportable Segments. An
operating segment is identified based
on the financial information that is
regularly reviewed by a company’s
Chief Operating Decision Maker
(CODM) to assess the performance
of the individual components and
make decisions about resources to be
allocated to each component.
The objective of requiring
disclosures about segments is
to provide information about
the different types of business
activities in which a company
engages and the different economic
environments in which it operates.
This helps financial statement users
better understand the company’s
performance, better assess the
prospects for future net cash flows
and make more informed judgments
about the company as a whole.
In situations where the CODM
regularly receives information that
presents discrete operating results
for components of the company,
there may be a presumption that the
CODM uses these reports to assess
performance and allocate resources
for that segment.
This financial information also must
be sufficiently detailed to allow
the CODM to make decisions. A
measure of profit or loss by product
or business is typically needed to
assess performance and allocate
resources. Therefore, although an
M&E company may monitor digital
revenue separately for its businesses,
it may not have separate operating
Film-forecast model
metrics (e.g., operating income, gross
margin) that allow the CODM to assess
performance of the digital operations.
If a measure of profitability is provided
to the CODM for a company’s digital
businesses, this may represent a
separate operating segment.
A change in the determination of
operating segments may also change
the determination of reporting units
and therefore have an effect on the
testing for goodwill impairment. For
example, if in the previous year an
M&E company had two operating
segments (e.g., film and cable), it
may have determined that there
were only two reporting units.
However, the CODM now receives
separate information about its
digital businesses. The new digital
component may be a separate
operating segment and therefore
may be its own reporting unit. If it is
determined to be a separate reporting
unit, a goodwill impairment test would
have to be performed for the digital
business as a standalone reporting
unit, as compared to the testing
being performed for the film and
cable reporting units in the previous
year. In addition, a company may be
required to disclose certain metrics
for digital products and services such
as revenue and a measure of profit.
As the shift to digital revenue
continues, M&E companies should
reassess the information that is
provided to the CODM to assess
performance. Companies should
consider the financial information
given to the Board of Directors,
comments made on earnings calls,
Management’s Discussion and
Analysis disclosures and information
included on the company’s website.
Defining digital revenue in media and entertainment
M&E companies amortize film costs
using the individual film-forecast
method that considers the film’s
actual current-period revenue
and estimated remaining ultimate
revenue. The estimate of ultimate
revenue requires judgment and is
based on the performance of similar
films and the guidance from ASC
926-20, Entertainment – Films, Other
Assets – Film Costs. ASC 926-20
includes guidance that ultimate
revenue should not include estimates
of revenue from unproven or
undeveloped technologies.
The guidance for film costs was
published prior to the advent of
the digital distribution models.
Historically, the film windows
included theatrical, home video and
television distribution revenues.
Today, the markets have expanded
to include electronic sell-through,
rental and license for content that
will be distributed digitally. Also,
digital distribution facilitating a
wide release reduces the theatrical
window for exploitation. Companies
may also need to revise historical
estimates of home video to
accommodate the shift to digital
distribution. Companies should use
judgment to assess when a new
digital distribution model becomes a
proven or developed technology, and
if so, the quantum of revenue digital
distribution can contribute.
|
19
Looking back to chart
a course for the future
Today, definitions of digital revenues
may not only be inconsistent
between companies but may also be
inconsistent between business units
within a company.
Reporting practices are similarly
diverse. Some companies are
reporting digital activities within their
traditional businesses. Others are
reporting digital activities as a new,
distinct business unit.
20
|
As digital revenues garner
increasing attention from the
financial community, as an industry
we want to ensure we are ready
for what promises to be significant
growth from digital revenue
streams. When digital revenues
become a significant part of our
industry’s overall revenues, we want
to ensure we are prepared from an
accounting, disclosure and reporting
perspective.
Global Media & Entertainment Center
Global Media & Entertainment Center
Key contacts
Telephone
Email
John Nendick, Global Sector Leader and Americas Sector Leader
(Los Angeles, US)
+ 1 213 977 3188
[email protected]
Farokh Balsara, EMEIA Sector Leader (Mumbai, India)
+ 91 22 4035 6550
[email protected]
David McGregor, Asia-Pacific Sector Leader, (Melbourne, Australia)
+ 61 3 9288 8491
[email protected]
Yuichiro Munakata, Japan Sector Leader (Tokyo, Japan)
+ 81 3 3503 1100
[email protected]
Global Area Leaders
Global Media & Entertainment Service Line Leaders and Advisory Panel Members
Mark Besca, Global M&E Assurance and NESA M&E Leader (New York, US)
+ 1 212 773 3423
[email protected]
Mark J. Borao, Global M&E Advisory Services Leader (Los Angeles, US)
+ 1 213 977 3633
[email protected]
Thomas J. Connolly, Global M&E Transaction Advisory Services Leader
(New York, US)
+ 1 212 773 7146
[email protected]
Alan Luchs, Global M&E Tax Leader (New York, US)
+ 1 212 773 4380
alan.luchs @ey.com
Global Service Line Leaders and Advisory Panel Members
Howard Bass (New York, US)
+ 1 212 773 4841
[email protected]
Glenn Burr (Los Angeles, US)
+ 1 213 977 3378
[email protected]
Ian Eddleston, Americas M&E Assurance and West Sub-Area M&E Leader
(Los Angeles, US)
+ 1 213 977 3304
[email protected]
Peter YF Chan (Hong Kong, China)
+ 852 2846 9936
[email protected]
Neal Clarance (Vancouver, Canada)
+ 1 604 648 3601
[email protected]
Jonathan Dharmapalan, Global Telecommunications Leader
(San Francisco, US)
+ 1 415 894 8787
[email protected]
Pat Hyek, Global Technology Leader (San Jose, US)
+ 1 408 947 5608
[email protected]
Gerhard Mueller (Munich, Germany)
+ 49 891 4331 13108
[email protected]
Bruno Perrin, EMEIA M&E Assurance Leader (Paris, France)
+ 33 1 46 93 6543
[email protected]
Chris Pimlott, Americas M&E Tax Leader (Los Angeles, US)
+ 1 213 977 7721
[email protected]
Michael Rudberg (London, England)
+ 44 207 951 2370
[email protected]
Ken Walker (Los Angeles, US)
+ 1 805 778 7018
[email protected]
Sylvia Ahi Vosloo, Marketing Lead (Los Angeles, US)
+ 1 213 977 4371
[email protected]
Karen Angel, Global Implementation Director (Los Angeles, US)
+ 1 213 977 5809
[email protected]
Matt Askins, National Accounting M&E Resident (New York, US)
+ 1 212 773 0681
[email protected]
Raghav Mani, Knowledge Lead, (Los Angeles, US)
+ 1 213 977 5855
[email protected]
Jennifer Weiker, M&E Sector Resident (Los Angeles, US)
+ 1 213 977 3916
[email protected]
Global Media & Entertainment Center Team
Defining digital revenue in media and entertainment
|
21
Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services.
Worldwide, our 152,000 people are united by our shared values and an unwavering
commitment to quality. We make a difference by helping our people, our clients and our
wider communities achieve their potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global
Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company
limited by guarantee, does not provide services to clients. For more information about our
organization, please visit www.ey.com.
About Ernst & Young’s Global Media & Entertainment Center
Whether it’s the traditional press and broadcast media, or the multitude of new media,
audiences now have more choice than ever before. For media and entertainment companies,
integration and adaptability are becoming critical success factors. Ernst & Young’s Global
Media & Entertainment Center brings together a worldwide team of professionals to help you
achieve your potential — a team with deep technical experience in providing assurance, tax,
transaction and advisory services. The Center works to anticipate market trends, identify the
implications and develop points of view on relevant industry issues. Ultimately it enables us to help
you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.
© 2011 EYGM Limited.
All Rights Reserved.
EYG No. EA0056
1109-1291921 L.A.
This publication contains information in summary form and is therefore intended for
general guidance only. It is not intended to be a substitute for detailed research or the
exercise of professional judgment. Neither EYGM Limited nor any other member of the
global Ernst & Young organization can accept any responsibility for loss occasioned to
any person acting or refraining from action as a result of any material in this publication.
On any specific matter, reference should be made to the appropriate advisor.