ADVERTISING REVENUE RECOGNITION ISSUES FOR CABLE NETWORKS

Transcription

1 ADVERTISING REVENUE RECOGNITION ISSUES FOR CABLE NETWORKS 0

2 General Principles Revenue is measured by an exchange of consideration and is not recognized as part of earnings until the revenue is realized and earned when the following criteria is met: 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 Collectibility is Reasonably Assured 1

3 Advertising Revenue Recognition Advertising revenue is recognized in the period in which the revenue is realized and earned as the advertising is provided in accordance with the contractual terms of the arrangement with the customer. Unearned revenues are deferred until delivery terms are met, including contractually based audience measurement metrics. Revenue must be recorded at its net realizable value. 2

4 Persuasive Evidence of An Arrangement Exits It is customary practice to enter into documented contractual arrangements generally under standard terms and conditions. A binding written agreement does not have to exist for persuasive evidence of an arrangement to exist. Other forms of written or electronic evidence must be present. 3

5 Delivery Has Occurred or Services Have Been Rendered If the advertising has an audience metric, delivery has occurred to the extent the ad has aired in accordance with the terms of the arrangement and the audience metric has been met. If the advertising does not have an audience metric, delivery has occurred when the ad has aired in accordance with the terms of the arrangement. In situations where delivery has not occurred, yet cash has been received or the amount has been billed, a deferred revenue amount is established. In situations where an ad with an audience metric has aired and the metric has not been met, an Audience Deficiency Unit (ADU) liability is established for the difference between what has been delivered and what should be delivered in accordance with the terms of the arrangement. 4

6 The Seller s s Price to the Buyer is Fixed or Determinable It is customary practice that the price to the buyer is fixed or determinable through the terms of the signed agreement. If the arrangement contains customer cancellation or termination clauses, revenue recognition is appropriate net of estimated refunds and or allowances when estimates of the expected refunds are reliable and can be made on a timely basis and there is sufficient historical basis that is supportive of the estimate and predicative of future events. In certain cases, a customer may have the legal right to a refund. Revenue recognition is limited to the extent that amounts are either no longer refundable or historical evidence is available to estimate future refunds. 5

7 Collectibility is Reasonably Assured In general, collectibility is related to whether or not it is probable that customers will pay and have the wherewithal to pay. If cash is not collected prior to delivery of ads, a standard credit check should be performed or reasonable history should exist prior to recognizing revenue. 6

8 Advertising with Audience Metrics Advertising is typically sold by the daypart and priced based upon CPMs (cost per thousand viewers) and is affected by the desirability of the viewer demographics, viewer ratings and market conditions for advertising time. Established cable networks are monitored by rating agencies (e.g., Nielsen) and normally provide for make good or recapture provisions that allow the cable network to subsequently air customer advertising to cumulatively obtain the reach contracted by the advertiser. In some cases, the advertisers may require a refund. 7

9 Audience Delivery Units (ADU) Cable networks subject to reach requirements are required to monitor actual audience delivery compared to agreed upon or minimum contractual delivery. To the extent that delivery has occurred in accordance with the terms of the agreement, revenue is recognized, however if the reach required by the agreement was not met, an ADU liability is established by reducing revenue. An analysis of the ADU liability should be performed on a regular basis and the liability should be adjusted to fair value. In determining fair value, the calculation of the ADU liability should be based upon current market rates. 8

10 ADU Liabilities ADU liabilities are released when: The metric contracted by the advertiser is met (normally by airing free spots) The cable network is released for the liability by specific evidence The cable network has confirmed with the client in writing that the obligation no longer exists to deliver against the advertising metric If the ADU liability is released, the release should be recorded as a component of advertising revenue. Treatment as revenue is appropriate since all obligations have been met and the ADU liability is clearly related to services that had been previously been provided. 9

11 Advertising without Audience Metrics Revenue recognition for advertising sold in connection with direct response advertisements or paid programming advertisements is generally limited to providing the advertisement. 10

12 Post Buy Analysis Most cable networks use Management Science Associates, Inc. (MSA) as a third party to compile actual audience delivery compared to agreed upon or minimum contractual delivery for the ads aired on the network. Each month, cable networks forward reconciled invoice information along with guaranteed demographics and CPMs for each deal or contract. MSA receives the Nielsen Daily People Meter demographic data containing the household and demographic audiences for every program of the broadcast day. MSA matches the date and time of each ad to the correct program in which it aired and produces the post. The post buy information is what is used by both advertising sales, to report to the ad agencies, and accounting, to prepare the ADU liability. 11

13 Nielsen C3 Ratings C3 ratings average commercial minute ratings of commercial minutes watched in live programming and in viewing over the three days after airing by viewers using digital video recorders. C3 ratings cannot be directly compared with the old ratings. The old ratings measured average viewership during the entire show including commercials. Advertisers pushed for commercial ratings because they have always wanted to know how many people are watching the actual commercials aired instead of how many people are watching the program. 12

14 C3 Ratings and Revenue Recognition Currently it takes Nielsen over three weeks from the time a show airs to release C3 ratings. Live Data (old method) ratings are received about one week after the time a show airs. The timing of receipt of C3 ratings data by MSA and the cable networks from Nielsen impacts the ability to calculate the related ADU liability during the accounting close. 13

15 Stewardship Stewardship is a software package that allows you to use the most recent rating information from Nielsen to monitor and forecast the performance of deals with guaranteed audience metrics. If used properly, stewardship allows cable networks to make corrections and deliver the guaranteed audience metrics during the contract or deal period. Given the delay in receiving C3 data, stewardship can also help accounting forecast ADU liability more timely for recording in the financial statements. 14