Hollywood accounting 2358469 223929011 2008-07-06T15:44:49Z 66.181.215.209 /* Production accounting */ {{Mergefrom|Monkey points|date=November 2007}} In [[accountancy]], '''Hollywood accounting''' is the practice of distributing the [[profit]] earned by a large project to [[corporation|corporate entities]] which, though technically distinct from the one responsible for the project itself, are typically owned by the same people. This has the net result of reducing the project's reported profit by a substantial margin, sometimes eliminating it altogether. This may be for [[income tax]] reasons, but more often it is to reduce the amount which the corporation must pay in [[royalties]] or other profit-sharing agreements. == Creative accountants == Hollywood accounting gets its name from the alleged frequent practice of it in the entertainment industry — that is, in the [[Film|movie]] studios of [[Hollywood, Los Angeles, California|Hollywood]]. Stereotypically, the creators of material which is adapted into [[screenplay]]s fall victim to Hollywood accounting. In [[John D. MacDonald]]'s novel ''Free Fall in Crimson'' (1981), an actress says to hero [[Travis McGee]]: <blockquote>"Darling! This is the Industry! The really creative people are the accountants. A big studio got over half the profit, after setting breakeven at about three times the cost, taking twenty-five percent of income as an overhead charge, and taking thirty percent of income as a distribution charge, plus rental fees, and prime interest on what they advanced."<ref>''Free Fall in Crimson'' (New York: Fawcett, December 1981), p. 163 of the paperback edition)</ref></blockquote> ==How it works== Hollywood accounting can take several forms. In one form, a subsidiary is formed to perform a given activity and the parent entity will extract money out of the subsidiary not in terms of profits but in the form of charges for certain "services." The specific schemes can range from the simple and obvious to the extremely complex. Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of [[overhead (business)|overhead]]: * Production overhead -- Studios, on average, calculate production overhead by using a figure around 15% of total production costs. * Distribution overhead -- [[Film distributor]]s typically keep 30% of what they receive from movie theaters ("gross rentals"). * Marketing overhead -- To determine this number, studios usually determine about 10% of all advertising costs. All of the above means of calculating overhead are highly controversial, even within the accounting industry. Namely, these percentages are assigned without much regard to how, in reality, these estimates relate to actual overhead costs. In short, this method does not, by any rational standard, attempt to adequately trace overhead costs. Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net profit,{{Fact|date=February 2007}} and the "losers" include such blockbuster films as ''[[Rain Man]]'', ''[[Forrest Gump (film)|Forrest Gump]]'', ''[[Who Framed Roger Rabbit]]'', and ''[[Batman (film)|Batman]]'', which all took in huge amounts in box office and video sales. All of this shows why so many big-name actors insist on "gross points" (a percentage of some definition of gross revenue) rather than net profit participation. The saying in Hollywood is "a percentage of the net is a percentage of nothing." This practice reduces the likelihood of a project showing a profit, as a production company will claim a portion of the reported box-office revenue was diverted directly to gross point participants. ==Examples== [[Winston Groom]]'s price for the screenplay rights to his novel ''[[Forrest Gump (novel)|Forrest Gump]]'' included a share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received nothing. That being so, he has refused to sell the screenplay rights to the novel's sequel, stating that he cannot in good conscience allow money to be wasted on a failure. [[Stan Lee]] filed and won a [[lawsuit]] after the producers of the movie ''[[Spider-Man (movie)|Spider-Man]]'' did not give him a portion of the gross revenue.<ref>[http://news.bbc.co.uk/1/hi/entertainment/film/2458083.stm BBC NEWS: Lawsuit filed by Spider-Man creator]</ref> The estate of [[Jim Garrison]] sued [[Warner Bros.]] for their share of the profits from the movie ''[[JFK (film)|JFK]]'', which was based on Garrison's book ''On the Trail of the Assassins''.<ref>[http://www.courttv.com/archive/legaldocs/business/garrison.html Court TV Legal Documents: Garrison v. Warner Bros.]</ref> [[Art Buchwald]] received a settlement after his lawsuit ''[[Buchwald v. Paramount]]'' over Paramount's use of Hollywood accounting. The court found Paramount's actions "unconscionable," noting that it was impossible to believe that a movie ([[1988]]'s [[Eddie Murphy]] comedy ''[[Coming to America]]'') which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized. The film ''[[My Big Fat Greek Wedding]]'' was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast (with the exception of [[Nia Vardalos]] who had a separate deal) sued the studio for their part of the profits. The original producers of the film have sued [[Playtone]], [[HBO]] and [[Gold Circle Films]] due to Hollywood accounting practices because the studios have claimed the film ''lost'' $20 million.<ref>[http://www.latimes.com/entertainment/news/business/la-fi-hanks8aug08,0,4793695.story? Tom Hanks sues over 'Greek Wedding' profit]</ref> According to his publisher's website,<ref>[http://www.conlanpress.com/html/granada_f.html Peter S. Beagle Vs. Granada Media International (Re The Animated Last Unicorn)]</ref> fantasy novelist [[Peter S. Beagle]] is owed a substantial amount of money by [[Granada Ltd.|Granada Media International]], the current owner of the animated movie based on Beagle's book ''[[The Last Unicorn]]''. Beagle's contract entitles him to 5% of the net profits in the animated property, and 5% of the gross revenues from any film-related merchandising. Granada apparently claims the movie cost more to make than it took in, that it earned no money between 1986 and their acquisition of it in 1999, and the compounded interest on the loss adds up to several times what it cost to make. Beagle is currently attempting to raise sufficient funds to challenge Granada in court. Hollywood accounting is not limited to movies. An example is the Warner Bros. [[television series]] ''[[Babylon 5]]'' created by [[J. Michael Straczynski]]. Straczynski, who wrote 90% of the episodes in addition to [[executive producer|producing]] the show, would receive a generous cut of profits if not for Hollywood accounting.{{Fact|date=February 2007}} The series, which was profitable in each of its five seasons from 1993–1998, has garnered more than US$1 billion for Warner Bros., most recently US$500 million in [[DVD]] sales alone. But in the last profit statement given to Straczynski, Warner Bros. claimed the property was $80 million in debt. "Basically," says Straczynski, "by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against ''B5'''s profits."<ref>[http://groups-beta.google.com/group/rec.arts.sf.tv.babylon5.moderated/msg/05fd343142ac9f65?dmode=source rec.arts.sf.tv.babylon5.moderated: Additional from jms]</ref> [[Peter Jackson]], director of ''[[The Lord of the Rings film trilogy|The Lord of the Rings]]'', and his studio [[Wingnut Films]], brought a lawsuit against [[New Line Cinema]] after "an audit... on part of the income of ''The Fellowship of the Ring''." Jackson stated this is regarding "certain accounting practices," which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of ''[[The Hobbit]]'' were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct ''The Hobbit'', as had been anticipated.<ref>[http://www.theonering.net/staticnews/1163993546.html TheOneRing.net: Peter Jackson and Fran Walsh Talk THE HOBBIT]</ref> Fifteen actors are suing [[New Line Cinema]] claiming that they have never received their 5% of revenue from merchandise sold in relation to the movie, which contains their likeness.<ref>[http://www.usatoday.com/life/movies/news/2007-06-06-rings-suit_N.htm :15 actors sue New Line Cinema over 'Lord of the Rings' profits]</ref> Similarly, the Tolkien estate has sued New Line, claiming that while their contract entitled them to 7.5% of the gross receipts, the film studio has refused to pay them any share of the $6 billion dollar hit.<ref>[http://ap.google.com/article/ALeqM5ihcwC49Wj4qnTzZZ1hIYo6q7Xd8QD8UOD47G0 The Associated Press: Tolkien Estate Sues New Line Cinema]</ref> == Production accounting == '''Production accounting''' is a filmmaking term, used especially in [[Cinema of the United States|Hollywood]], referring to the [[project accounting]] of the cost of a film project. As with [[construction accounting]], salient issues are the accurate allocation of workers' time to specific projects (usually requiring each worker to fill out a weekly [[timesheet]]), and the correct assessment of indirect costs such as employee benefits. Specialized software to support production accounting has been developed.{{Fact|date=March 2007}} Note: '''Production Accounting''' is also an oilfield term to describe the accounting related to oilfield natural gas and oil production. ==See also== * [[WGA screenwriting credit system]] * [[Creative accounting]] * "[[Monkey points]]" ==References== <references/> * Engel, Ross and Bruce Ikawa. "Where's the Profit?" ''Management Accounting'', January 1997. * Josh Getlin. "[http://www.latimes.com/news/la-et-cheetah13feb13,0,367954,full.story Eaten alive in the studio jungle]". [[Los Angeles Times]], [[13 February]] [[2008]]. [[Category:Hollywood history and culture]] [[Category:Film production]] [[Category:Accounting systems]] [[Category:Ethically disputed business practices]]