Solving The Revenue Recognition Puzzle

One of the challenges confronting finance professionals in today’s TV Everywhere world is determining the best way to account for programming deals that encompass both traditional broadcast and digital media distribution.

“The accounting world seems much more complex than in the past, and it is difficult to find any sane logic to the proper accounting for these new revenue models,” says Dwight Delapenha.

A Partner at Grant Thornton and member of MFM’s Accounting Committee, Delapenha is well-versed in the reporting complexities posed by these new sources of revenue. He outlines the accounting challenges for addressing multiplatform content distribution deals and provides some ideas on ways to address them in an article appearing in the current issue of MFM’s The Financial Manager magazine.

Back in the day of broadcast-only deals for programming, accountants used tried-and-true standards maintained by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission that said the revenue for these transactions should be recognized when:

• Persuasive evidence of an arrangement exists.
• Delivery has occurred or services have been rendered.
• The seller’s price to the buyer is fixed or determinable.
• Collectability is reasonably assured.

Delapenha says the complexity for complying with these rules began when broadcasting’s advertising-only revenue model was modified by cable television’s dual revenue stream of both subscription fees and advertising payments.

However, he says, “the most dramatic convergence involves how the Internet is altering television viewing habits.”

“Emerging business models must now incorporate contracts that pertain to a bundling of various ad commitments across a variety of media platforms; determine who will be the principal versus the agent in such contracts; and address the role of collaborative arrangements in revenue reporting,” he suggests.

Delapenha goes on to explain how the goal to gain access to an abundance of customers who watch broadcast television on multiple platforms involves compliance with additional accounting standards concerning multiple arrangements. These rules differ from the traditional method of accounting for broadcast programming revenues by establishing different conditions affecting revenue recognition, including what constitutes a unit of accounting and considerations affecting the relative selling price.

Another consideration that will influence the revenue recognition process is determining whether you are the principal or the agent. “Considerations as to which party is principal versus an agent arise as the principal has the right to report the transaction on a gross basis in its financial statements, and the agent can only report the transaction net,” Delapenha explains. He goes on to describe a “decision tree approach” for determining whether your company is the principal or the agent based upon the nature of the arrangement.

Another area of growing complexity for media industry accountants involves collaborative arrangements. “As more firms partner to produce projects in a loosely defined joint venture or other arrangement, such partnering exposes the participants to significant risks and rewards, depending on the commercial success of the activity,” Delapenha says. How each of the partners recognizes their revenues from the venture will be affected by such considerations as determining the appropriate units of accounting; the appropriate recognition requirement for a given unit of accounting; and the point when the recognition criteria are met, he advises.

Further complicating things is that the standards used for managing revenue recognition are likely to be modified by the convergence project between FASB and the International Accounting Standards Board (IASB). The single revenue recognition model proposed by the two organizations would replace most of the guidance provided under current FASB standards with International Accounting Standards (IAS) concerning revenue and construction contracts.

Delapenha says the proposed model is based on the core principle that requires an entity to recognize revenue in a manner that “depicts the transfer of goods or services to customers in the amount that reflects the consideration the entity receives, or expects to receive, for those goods or services.” To apply this principle, an entity would perform the following five steps:

• Identify the contract with a customer.
• Identify the separate performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to each separate performance obligation.
• Recognize revenue as the entity satisfies each performance obligation.

“The model will be different from the traditional (FASB) guidance and will require a fresh perspective to accounting for revenue in the digital media industry,” Delapenha says.

With a growing number of media companies operating internationally, complying with one set of accounting standards should help to simplify the revenue recognition process. However, as Delapenha notes, revenue recognition will become increasingly complex as we continue to add to the ways we distribute and sell video content.

We asked Delapenha to develop his article based upon the many favorable comments we received from attendees at last year’s Media Finance Focus conference who participated in a session on revenue recognition led by Brent Smith, senior director of accounting policy and research at Turner Broadcasting System, and Delapenha.

Given the importance and changing nature of revenue recognition, it will be one of the topics on the agenda for MFM and BCCA’s Media Finance Focus 2011 conference as well. One of the keynoters for this year’s conference who will have some very relevant insights into how our business models are evolving is Sanford “Sandy” Schwartz, president of Cox Media Group. Under his leadership, Cox Media Group has created an organization that is based upon offering a true, 360-degree selling environment for advertisers. It is achieving this by breaking down the traditional walls that stood between print, newspapers, broadcasting, cable and digital media sales functions. Cox Media Group’s success in adopting this strategy has been phenomenal. And Sandy’s insights on the stepping-stones for making it a reality will most definitely help us to deliver on our conference theme of “Empowering progress …  Inspiring growth.”

Additional keynoters slated for this year’s event include Sen. Michael B. Enzi (R-Wyo.); Dennis Lockhart, president-CEO of the Federal Reserve Bank of Atlanta; and Jason Bazinet, a senior analyst covering entertainment, cable and satellite equities at Citigroup. The conference will feature more than 100 presenters and provide the latest information on accounting, taxes, human resources, technology and credit and collection issues. More information about Media Finance Focus 2011 may be found on MFM’s website.

While those of us who aren’t in accounting management positions may not need to know the intricacies of revenue recognition, Delapenha’s insights into the process serve as a great reminder that there are accounting consequences to our business decisions that can affect the bottom line on our financial statements. 

I’d be remiss if I neglected to say that the observations in this article are examples only and not intended to serve as guidance for your business. For information about your specific situation, I encourage you to contact your audit professional.

I also encourage you to make sure all of your financial and business professionals are registered to attend Media Finance Focus, May 15-17 in Atlanta. With complexities like the ones outlined in this article cropping up everywhere, you cannot afford to be uninformed.

Mary M. Collins is president & CEO of the Media Financial Management Association and its BCCA subsidiary. Her column appears in TVNewsCheck every other week.You can read her earlier columns here.