Defining digital revenue in media and entertainment

Transcription

1 Defining digital revenue in media and entertainment Establishing industry-wide consistency and comparability Media & Entertainment

2 Global Media & Entertainment Center

3 Table of contents The changing landscape... 3 Advertising... 7 Film and television... 9 Broadcast and cable networks Publishing Music Accounting and reporting considerations Looking back to chart a course for the future...20 Defining digital revenue in media and entertainment 1

4 2 Global Media & Entertainment Center

5 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

6 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 Digital media, Wikipedia website, en.wikipedia.org/wiki/ Digital_media, accessed 4 October Global Media & Entertainment Center

7 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

8 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? 50 49% 44% Percentage % 10 7% 0 No mention of digital Digital revenue is included in other segments Provides quantitative information for digital revenue Digital revenue is a separate segment 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

9 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

10 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

11 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 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. 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. Defining digital revenue in media and entertainment 9

12 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). In defining and reporting digital revenue, a company may want to consider how the content is purchased or consumed. 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 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 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. 10 Global Media & Entertainment Center

13 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

14 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

15 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

16 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. 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. 14 Global Media & Entertainment Center

17 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

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19 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) , 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 provides a number of indicators that companies should consider in the evaluation, some of which are stronger indicators than others. 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? Defining digital revenue in media and entertainment 17

20 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: Home delivery of a newspaper or magazine and online access through an app 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 , 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 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. 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. 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. 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. 18 Global Media & Entertainment Center

21 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 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. Film-forecast model 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 , Entertainment Films, Other Assets Film Costs. ASC 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. Defining digital revenue in media and entertainment 19

22 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. 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. 20 Global Media & Entertainment Center

23 Global Media & Entertainment Center Key contacts Telephone Global Area Leaders John Nendick, Global Sector Leader and Americas Sector Leader (Los Angeles, US) john.nendick@ey.com Farokh Balsara, EMEIA Sector Leader (Mumbai, India) farokh.balsara@in.ey.com David McGregor, Asia-Pacific Sector Leader, (Melbourne, Australia) david.mcgregor@au.ey.com Yuichiro Munakata, Japan Sector Leader (Tokyo, Japan) munakata-ychr@shinnihon.or.jp Global Media & Entertainment Service Line Leaders and Advisory Panel Members Mark Besca, Global M&E Assurance and NESA M&E Leader (New York, US) mark.besca@ey.com Mark J. Borao, Global M&E Advisory Services Leader (Los Angeles, US) mark.borao@ey.com Thomas J. Connolly, Global M&E Transaction Advisory Services Leader (New York, US) tom.connolly@ey.com Alan Luchs, Global M&E Tax Leader (New York, US) Global Service Line Leaders and Advisory Panel Members Howard Bass (New York, US) howard.bass@ey.com Glenn Burr (Los Angeles, US) glenn.burr@ey.com Ian Eddleston, Americas M&E Assurance and West Sub-Area M&E Leader (Los Angeles, US) ian.eddleston@ey.com Peter YF Chan (Hong Kong, China) peter-yf.chan@hk.ey.com Neal Clarance (Vancouver, Canada) neal.g.clarance@ca.ey.com Jonathan Dharmapalan, Global Telecommunications Leader (San Francisco, US) jonathan.dharmapalan@ey.com Pat Hyek, Global Technology Leader (San Jose, US) pat.hyek@ey.com Gerhard Mueller (Munich, Germany) gerhard.mueller@de.ey.com Bruno Perrin, EMEIA M&E Assurance Leader (Paris, France) bruno.perrin@fr.ey.com Chris Pimlott, Americas M&E Tax Leader (Los Angeles, US) chris.pimlott@ey.com Michael Rudberg (London, England) mrudberg@uk.ey.com Ken Walker (Los Angeles, US) kenneth.walker@ey.com Global Media & Entertainment Center Team Sylvia Ahi Vosloo, Marketing Lead (Los Angeles, US) sylvia.ahivosloo@ey.com Karen Angel, Global Implementation Director (Los Angeles, US) karen.angel@ey.com Matt Askins, National Accounting M&E Resident (New York, US) matt.askins@ey.com Raghav Mani, Knowledge Lead, (Los Angeles, US) raghav.mani@ey.com Jennifer Weiker, M&E Sector Resident (Los Angeles, US) jennifer.weiker@ey.com Defining digital revenue in media and entertainment 21

24 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 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 EYGM Limited. All Rights Reserved. EYG No. EA 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.