Advertising revenue

When is advertising revenue recognised?

A media company's promise to an advertiser is to deliver advertising: airing spots in agreed programmes or time slots, serving impressions on websites and apps, or associating the advertiser with a sponsored programme. Each spot or batch of impressions is delivered at a point in time, so revenue is recognised as the advertising runs. A sponsorship of a series over a season is delivered over time, as the series airs. Amounts billed or paid in advance are contract liabilities until the advertising runs. See media accounting.

How are agency commissions treated?

Most television and much digital advertising is bought through media agencies, which traditionally receive a commission from the media owner, often 15% of the gross price. Whether the agency is treated as the media company's customer or as the advertiser's agent, the commission is not a cost of a service the media company receives: in substance, it reduces the price. So advertising revenue is reported net of agency commissions. Annual volume incentives paid to agencies are variable consideration, estimated and deducted from revenue as the related advertising runs. See variable consideration.

Advertising revenue: a campaign with an audience guarantee

A broadcaster sells a quarterly campaign of spots for a gross price of US$ 1,000 thousand, guaranteeing that the spots will reach an audience of 50 million impressions. The media agency's commission is 15%, so the broadcaster expects 850 thousand. All the scheduled spots air during the quarter but reach only 45 million impressions, 90% of the guarantee, so the broadcaster agrees to run extra spots in the next quarter to deliver the remaining 5 million.

The promise is to deliver 50 million impressions, so the broadcaster allocates the net price across impressions. By the quarter end, it has delivered 90% of the audience, so it recognises 765 thousand of revenue and holds a contract liability of 85 thousand, which becomes revenue as the make-goods air. If the contract instead required a cash refund for any shortfall, the 85 thousand would be a refund liability, and the broadcaster would estimate it at the start of the campaign as variable consideration rather than waiting for the ratings.

How are audience guarantees estimated during a campaign?

At each reporting date during a campaign, the broadcaster compares the audience delivered with the audience promised for the spots aired so far, using ratings data or ad-server counts. Where ratings are running below plan, it recognises revenue only for the audience actually delivered and defers the rest, even if the shortfall will be made up later. Make-goods use advertising time the broadcaster could otherwise sell, which is why persistent shortfalls matter commercially as well as for the accounts.

How is digital advertising priced and recognised?

Digital advertising is sold per thousand impressions, per click, per view or per action such as a purchase, often through automated auctions. The pricing basis does not change the principle: revenue is recognised as the impressions, clicks, views or actions occur, because that is when the promised service is delivered. Performance-based fees are variable consideration, but they are usually known by the end of each reporting period. Bonus impressions given free are part of the campaign and share its price.

Who is the principal in a digital advertising chain?

An advert may pass through an advertiser's agency, a demand-side platform, an exchange, a supply-side platform and an ad network before reaching a publisher's page. Each party assesses whether it controls the advertising space before it is transferred to the advertiser. A publisher that owns the space and sets the minimum price is usually a principal; technology platforms that match buyers and sellers and earn a fee are often agents reporting their fee as revenue. A party that is a principal but does not know the price the advertiser ultimately pays may have to estimate it or, where it cannot, recognise the amount it receives. See principal versus agent.

What other advertising arrangements need care?

Advertising exchanged for goods, services or other advertising rather than cash is non-cash consideration, measured at fair value; see barter and advertising swaps. Packages combining spots with sponsorship, digital impressions and event appearances contain several performance obligations, and the price is allocated by standalone selling prices. Payments a media company makes to advertisers, such as rebates, reduce revenue. For the advertiser's side of the same spending, see advertising and marketing costs.

How does US GAAP differ?

ASC 606 gives the same answers. In the US television upfront market, networks sell much of a season's advertising in advance with audience guarantees, and audience shortfalls are made up with extra spots known as audience deficiency units; networks defer the revenue for undelivered audience in the way described above. US broadcasters also report advertising revenue net of agency commissions. See sports media rights.

This guide is general information. It is not tax or legal advice for your situation.