Film and TV production costs

Is produced content an intangible asset or inventory?

IFRS has no specific standard for film and TV content. A production the company will own and exploit through licences over many years, keeping the copyright, is usually an intangible asset under IAS 38, presented outside current assets. Content made to be sold outright in the ordinary course of business, with the copyright passing to the buyer, can be inventory under IAS 2. Some broadcasters present programme rights they will use within a year as current assets. The classification affects presentation and the impairment test, but the costs capitalised are broadly the same either way. See media accounting.

Which film and TV production costs are capitalised?

The asset's cost includes everything directly attributable to making the content ready for exploitation:

• Development: options on books or life stories, scripts and early budgets, once the project is likely to go ahead;
• Pre-production and shooting: cast and crew, sets, locations, equipment hire, insurance and completion bonds;
• Post-production: editing, visual effects, music, sound and delivery materials; and
• Production overheads directly attributable to the project, such as a production office set up for it.

General overheads of the studio, such as head office costs, are expensed. Borrowing costs are capitalised under IAS 23 where the production takes a substantial time and is funded with debt. Payments to talent that depend on future revenue, such as residuals and profit participations, are recognised as the revenue that triggers them is earned. See IAS 38 intangibles.

Film and TV production costs: a drama series

An independent studio makes a ten-episode drama series it will own and license to broadcasters and streaming services. It spends US$ 0.6 million on development after the project is approved, 9.0 million on pre-production and shooting, and 1.4 million on post-production. The country where it films pays a production incentive of 20% of qualifying spend of 10 million, 2.0 million, in cash whether or not the studio pays tax. The launch campaign costs a further 1.5 million.

The studio capitalises 11.0 million of production costs. Because the incentive is paid in cash regardless of taxable profits, it is a government grant under IAS 20, and the studio deducts it from the cost of the series, so the asset is carried at 9.0 million, which is amortised as the series is exploited. The 1.5 million launch campaign is expensed as incurred, because advertising never forms part of an asset's cost under IAS 38. See content library amortisation.

What happens to development costs on abandoned projects?

Studios develop many more projects than they make. Costs of early exploration, such as reading scripts or researching ideas before any project is chosen, are research and are expensed. Once a specific project meets the IAS 38 development criteria, including the intention and resources to complete it and the probability of future benefits, its development costs are capitalised. Studios review these costs regularly and write them off when a project is abandoned, or when it has not moved into production after a set period, because continuing delay is evidence that the benefits are no longer probable. See research and development under IAS 38.

How are production incentives treated?

Many countries and states pay incentives to attract film and TV production, usually a percentage of qualifying local spending. An incentive paid in cash, or set against any tax liability with the balance paid in cash, does not depend on taxable profits and is a government grant under IAS 20. It is recognised when there is reasonable assurance the studio will comply with the conditions and receive it, and either deducted from the asset's cost or presented as deferred income released as the asset is amortised. An incentive that can only reduce income tax payable is an income tax credit under IAS 12. See government grants.

How are shows commissioned by broadcasters treated?

When a producer makes a show for a broadcaster that pays for it and takes the main rights, the producer has a contract with a customer under IFRS 15. If the show is made to the broadcaster's specification, has no alternative use to the producer and the producer has an enforceable right to payment for work done, revenue is recognised over time as production progresses; otherwise, on delivery. Where the broadcaster pays less than the budget and the producer funds the gap, known as deficit financing, the producer keeps rights to sell the show elsewhere, and the costs it funds for those retained rights are capitalised as an intangible asset. See over time or at a point in time.

How does US GAAP differ?

ASC 926 requires film costs to be capitalised and exploitation costs such as marketing to be expensed, as under IFRS. Development costs for projects not set for production within three years of the first capitalised cost must be written off. Since ASU 2019-02, episodic television costs are capitalised on the same basis as films, removing an earlier limit that tied capitalisation to contracted revenue, and cash spent on producing content is classified in operating activities. See IAS 38 and ASC 730 compared.

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