Hollywood accounting
April 18, 2016 1:01 PM   Subscribe

I've been reading about Hollywood accounting. If the numbers are made up, what good are the accounts? Why doesn't the government mind?
posted by gorcha to Law & Government (8 answers total) 1 user marked this as a favorite
Because they're following accepted accounting practices. It's like playing Scrabble against a person with a perfect knowledge of the dictionary: it feels unfair, but it isn't a violation of any part of the rulebook.

Part of this is that "accepted" accounting practices were simply not designed with taxation as the primary objective, and part of it is that there's a lot of money and influence on the side of people who like the rules exactly the way they are. Also, if you take an accounting or finance course you will learn at least two different ways of recording the same set of facts.
posted by SMPA at 1:14 PM on April 18, 2016

Which is to say that "Hollywood accounting" is more like an incredibly sophisticated group of financial experts continuously adjusting their methodology to get the required results. They can do this in part by building in enough complexity to justify many different courses of action; the way movies are financed is crazy compared to a typical business.
posted by SMPA at 1:19 PM on April 18, 2016 [2 favorites]

There's no 'The Government' in this case. The fancy accounting is to keep the studios from having to do any profit-sharing with people who were promised "points on the back end" as part of their contracts, as well as an ironclad ability to make any kind of claim about profitability they want to in order to justify any decisions they make. They want to make 20 Batman movies -- OMG THE LAST BATMAN MOVIE WAS A HUGE HIT, JUST LOOK AT THE NUMBERS! They want to never work with Quentin Tarantino again -- OMG QUENTIN TARANTINO MOVIES ALWAYS BOMB, JUST LOOK AT THE NUMBERS! Etc.

It's not creative accounting to avoid tax obligations, at least not the version of this that is discussed in the media. (No idea what kind of crazy book-cooking goes on at the deepest levels of studio finance, and how that compares to any large corporation.)
posted by Sara C. at 1:49 PM on April 18, 2016 [4 favorites]

the government only cares if the TOTAL revenues of the business and the TOTAL expenses of the business are being fairly and accurately recorded and a net profit is being arrived at that taxes are calculated against.

If you're a producer or actor being paid based on profits for a particular project, there are lots of ways to make that profit seem less than it is without cheating as far as the government is concerned. A large business has departments which charge other departments just as if they were external customers. For example, you can charge the project for inflated prices - charge a lot for publicity work, commissary support, equipment usage, etc.
posted by randomkeystrike at 2:19 PM on April 18, 2016

Not just that but in the US you often have two sets of books - tax books and books for the investors.
posted by JPD at 2:54 PM on April 18, 2016

As noted above, when you hear the term Hollywood accounting it is referring to how a studio allocates expenses to the various projects. For example, I suspect they allocate a portion of say the CEO's salary to each movie or each project as part of an administrative fee. So, while a movie may cost $40 million to make in actual costs directly associated with the filming and editing, and it has say $80 million in box office receipts, it does not mean it made $40 million. All sorts of studio expenses are dumped on the project which has the effect of that project and the points not making money. From the IRS standpoint, they look at the entity, say MGM as a whole as the sum of all its parts so the studio will still show whatever the true net profit is for all the projects, but the individual projects may be skewed.

The same thing happens in most large businesses. For example, at Goldman Sachs, since they pay bonuses based on department profitability, there are constant "debates" about what is a valid expense to put on that department. THe trading department will want to have less of the compliance expense dumped on their department but corporate will want to allocate all or most on the department. Each department, trading, investment banking, real estate, etc, will have some of the corporate expenses allocated to their department.

As a small aside and complicating factor, in the film industry, I believe there are some tax shelter implications to movie making. Where the tax implications are allocated can be huge too.
posted by AugustWest at 6:21 PM on April 18, 2016 [1 favorite]

The difference AugustWest brings up probably isn't much to do with tax shelters (independent film used to be a tax shelter in certain situations, back in the 70s and 80s, but IIRC that's no longer the case), but is to do with the fact that most films, even big budget studio tentpoles, are technically completely separate entities from the studio that is funding them. This is more about liability than it is about taxes: if a camera operator gets run over by a train due to bad decisions made by the producers of a film, it's better for the studio if the operator's family can't sue because technically the liability was assumed by This One Particular Project, LLC, which doesn't actually hold significant assets and will be dissolved as soon as production is completed.

Either way, the separate company thing is part of what makes the accounting so complicated, just as AugustWest explains. In the 1950s, every aspect of filmmaking was done by a department of the studio (costumes, props, sets, equipment, makeup, casting, story, etc etc etc), and thus the accounting worked kind of like any big company. A movie was just this month's product, not an entity that had its own completely independent set of books. Nowadays every movie is a separate company that technically deals with the studio as a business-to-business relationship rather than as one division or team within a larger company. I've been working in this industry for years and it makes my head hurt to think about it.
posted by Sara C. at 6:46 PM on April 18, 2016 [1 favorite]

The numbers are real, everyone understands them and the accoutants are competent. For a studio project, gross participation is a share of a project's success, net is a lottery ticket with very long odds.

Scammery and audits tends to come outside of the world of studio net accounting.
posted by MattD at 5:09 AM on April 19, 2016

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