Hollywood accounting (also known as Hollywood bookkeeping) refers to the opaque accounting methods used by the film, video and television industry to budget and record profits for film projects. Expenditures can be inflated to reduce or eliminate the reported profit of the project, thereby reducing the amount which the corporation must pay in royalties or other profit-sharing agreements, as these are based on the net profit.
How it works
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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:
- Production overhead: Studios, on average, calculate production overhead by using a figure around 15% of total production costs.
- Distribution overhead: Film distributors typically keep 30% of what they receive from movie theaters ("gross rentals").
- Marketing overhead: To determine this number, studios usually choose about 10% of all advertising costs.
All of the above means of calculating overhead are highly controversial, even within the accounting profession. 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, and the "losers" include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman, which all took in huge amounts in box office and video sales.
Because of this, net points (a percentage of the net income (i.e. gross income minus expenses), as opposed to a percentage of the gross income) are sometimes referred to as "monkey points", a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract.
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. 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.
Winston Groom's price for the screenplay rights to his novel Forrest Gump included a 3% share of the profits; however, due to Hollywood accounting, the film's commercial success was converted into a net loss, and Groom received only $350,000 for the rights and an additional $250,000 from the studio.
Stan Lee, co-creator of the character Spider-Man, had a contract awarding him 10% of the net profits of anything based on his characters. The movie Spider-Man (2002) made more than $800 million in revenue, but the producers claim that it did not make any profit as defined in Lee's contract, and Lee received nothing. He has filed a lawsuit against Marvel Comics.
The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK (1991), which was based on Garrison's book On the Trail of the Assassins. The case was settled in 1999, with Garrison's estate receiving a "very small settlement."
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 2002 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 Gold Circle Films due to Hollywood accounting practices because the studio has claimed the film, which cost less than $6 million to make and made over $350 million at the box office, lost $20 million.
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 producing the show, would receive a generous cut of profits if not for Hollywood accounting. 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[when?] 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."
Peter Jackson, director of 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. 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. Similarly, the Tolkien estate sued New Line, claiming that their contract entitled them to 7.5% of the gross receipts of the $6 billion hit. Overall according to New Line's accounts the trilogy made "horrendous losses" and no profit at all.
Michael Moore sued Bob and Harvey Weinstein for creative accounting to deprive him of his share of profits for the film Fahrenheit 9/11. Eventually, Moore reached a settlement with the Weinsteins and the lawsuit was dropped. 
Actress Lynda Carter was also upset with some of the marketing of her image that involved Hollywood accounting. Warner Bros. worked out a deal with the toy company Mego to create a Wonder Woman doll while the series was still on the air. In 1987, on The Late Show with Joan Rivers, Carter commented:
I think that you're probably familiar with a problem in Hollywood, and that is that they market you, and they use you. They did a mask of my face and put it on the doll, and they put my name on for the first run of it. And then they took my name off and said they didn't have to pay me anymore. So it's the kind of thing that you can be used so much in this industry. I make nothing. I don't even make anything from the reruns. Don't ever settle for net profits. It's called creative accounting.
Production accounting is a filmmaking term, used especially in 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.
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