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Sony Pictures Entertainment
US GAAP, Sony CAP and
SPE Accounting Policies and Procedures
-
Training Course
September 5, 2006
International Finance Directors Conference
Rome, Italy
1
Agenda
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

Welcome and Agenda
US GAAP, Sony Corporate Accounting Policies (CAP) and
SPE accounting policies and procedures
Q&A and Closing
2
Welcome and Agenda
Objective

Re-fresh current US GAAP topics and gain understanding of
Sony CAP and SPE accounting policies and procedures

Introduce SPE Technical Support and Compliance Group
resources and links
3
AGENDA
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Cash and Cash Equivalents
Accounts Receivable
Inventory
Film Costs
Broadcast Rights
Fixed Assets
Software and Website Development Costs
Investments
Investments in Unconsolidated Subsidiaries
Goodwill and Intangibles
Other Assets
4
AGENDA
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Accounts Payable
Accrued Expenses and Other Liabilities
Contractual Obligations
Deferred Revenue
Debt
Equity and Retained Earnings
Revenue Recognition
Barter Revenue
Expenses
Income Taxes
Pensions
Consolidation and Financial Reporting
5
CASH AND
CASH EQUIVALENTS
6
Cash and cash equivalents
Topics
Cash and
Cash Equivalents
Restricted Cash
Overdrafts
Minimum
Internal Controls
7
Cash and cash equivalents
Cash equivalents are investments that:

have an original maturity date of three months or less from the date of purchase

are readily convertible into a known cash amount and

are so near maturity that there is very little risk that the cash value will change
If the above criteria is not met, investments should be classified as short-term or longterm investments depending on maturity
Questions:
1.
2.
3.
Does a three-month Treasury Bill purchased three months from maturity date qualify
as cash equivalent?
Does a three-year Treasury note purchased three months from maturity date qualify as
cash equivalent?
Does a three-year Treasury note purchased three years ago qualify as cash equivalent?
8
Cash and cash equivalents
Answers:
1.
Yes, because original maturity is three months from the date of
purchase
2.
Yes, because original maturity is three months from the date of
purchase
3.
No, because original maturity is three years from the date of
purchase
9
Restricted Cash

Compensating balances with legal restriction as to withdrawal

Current vs. non-current classification of restricted cash:
 Relate to current liabilities – Restricted cash in current assets
 Relate to non-current liabilities – Restricted cash in non-current assets
10
Overdrafts

Bank overdrafts:





Book overdrafts:



total of checks honored by the bank without sufficient funds in the account to cover them
should be classified as a current liability
more common outside of the the United States
overdrafts on ZBA accounts are evaluated at the “parent” account level for possible
reclassification due to legal right of offset
represent outstanding checks in excess of funds on deposit
should be classified as a current liability except for ZBA accounts which are evaluated at
the “parent” account level for possible reclassification due to legal right of offset
Checks written but not Released:

Checks drawn but not released (e.g., not mailed) by the end of accounting period should
not be deducted from the cash balance but should be included with accounts payable or
other appropriate liability accounts
11
Overdrafts
Questions:
1.
Should Cr balance in a/c 100230
be re-classified to current
liability?
2.
Should Cr balance in a/c 100170
be re-classified to current
liability?
3.
Should Cr balance in a/c 100219
be re-classified to current
liability?
12
Overdrafts
Answers:

No, because this account is ZBA but should be evaluated at the parent
account level

No, because this account is ZBA but should be evaluated at the parent
company account level

Depends. If there are no cash accounts at Wells Fargo which this a/c has
legal rights to be offset with, then it should be re-classed to current
liability.
13
Minimum Internal Controls

Responsibilities for receiving, disbursing and reconciling cash should be segregated

Bank accounts can only be opened or closed with the approval of the SPE Treasurer
or Assistant Treasurer

Bank and investment statements should be reconciled to the G/L on a timely basis
(before the end of the next calendar month) each month for all accounts (except for
impressed accounts that should be reconciled on a quarterly basis), and reviewed by
at least a Manager in the Finance Department. Any exceptions to timing of
reconciliations should be pre-approved by Treasury and Technical Compliance and
Support Department

All suspense accounts should be analyzed and cleared on a monthly basis and
reviewed by at least a Manager in the Finance Department

Any restrictions on the availability of cash balances should be disclosed to
Corporate Reporting
14
ACCOUNTS
RECEIVABLE
15
Accounts Receivable
Topics
Recording and
Classification
Doubtful Accounts
Sales Discounts and
Reserves
Minimum
Internal Controls
16
Recording and Classification

To be recorded when they are both measurable and earned

SOP 00-02 receivables (refer to Revenue section)

Non-SOP 00-02 receivables (refer to Revenue section)

Percentage-of-Completion Receivables should be recorded based on the ratio of
current direct costs to total estimated direct costs

Long-Term Receivables – any receivable within a maturity date or expected
collection date greater than one year. Should be classified as long term and
discounted
17
Doubtful Accounts
Specific Reserve:


Determined based upon a specific account-by-account review
Should include both billed and unbilled receivables
General Reserve:
Made for the remaining pool of receivables (after deducting receivables covered by
specific allowance)

Requires aging of current period customer accounts. Historical data plus current trends
can be used for determination of allowance percentage for each of the categories (i.e. 130, 31-60, etc.)
Category
Days Past Due
Percentage of
Allowance *

Approval from Corporate
of allowance percentage from
I
1 - 30
Corporate. Needs to be revised
II
31-60
III
61-90
every three years or covered as
IV
91-180
part of Balance sheet review process
V
180+

Should be documented and retained

*
Each individual reporting unit needs to determine the percentage of allowance
18
Sales Discounts and Reserves
Questions:
1.
How is sales returns allowance calculated and when it should be recorded?
2.
Should the bad debt expense be recorded in operating expenses or contrarevenue?
3.
When should sales discounts be recorded? When should an allowance for sales
discounts be recorded?
4.
Can one allowance cover both sales returns and doubtful accounts?
19
Sales Discounts and Reserves
Answers:
1.
The amount of the allowance should be a percentage of sales based on the
division’s past experience and current market conditions. The allowance should
be recorded at the time the associated accounts receivable are recorded
2.
Bad debt expense should be classified as contra-revenue. It should be passed to
the “producing” entity similar to distribution related expenses in order to match
revenue and expenses and the producing entity/product
3.
Sales discounts offered to customers in exchange for early payment should be
recorded at the time the discount is taken. The allowance for sales discounts
should be established at the time of billing to reflect the amount of potential
discounts
4.
No, two separate allowances should be established
20
Minimum Internal Controls

Accounts Receivable sub-systems, as applicable, should be reconciled to
the G/L at least quarterly

Aging reports should be updated and reviewed on a monthly basis and any
significant changes in the aging, past due accounts and credit balances
should be investigated

The allowance for doubtful accounts, returns and other allowances should
be assessed for adequacy at least quarterly and adjustments approved by the
Controller or higher

All receivables should be reviewed on at least quarterly to ensure that they
have been properly classified between current and noncurrent

Any employee loans are generally prohibited. Exceptions must be approved
by SPE General Counsel
21
INVENTORY
22
Inventory
Topics
Definition
Acquisition Costs
Valuation
Minimum
Internal Controls
23
Definition and Acquisition Costs

Purchased or manufactured items for the purpose of resale including but
not limited to video cassettes, DVD’s, blue-ray disks, packaged
software/games, etc

Acquisition costs = invoiced cost + total of all incidental costs (e.g.,
freight-in, insurance, duty, etc.) – purchase returns and allowances

Receiving, inspection, storage, handling and interest costs are not included
in acquisition costs

Incidental costs that are less than 3% of total purchased inventory or
manufacturing costs may be excluded from acquisition costs
24
Valuation

Inventory shall be valued at standard full absorption cost (full
costing). Includes direct materials, direct labor, both variable
and fixed manufacturing overheads

Cost variances (the differences between standard costs and
actual costs, or previous standard costs and current standard
costs) shall be allocated between inventory and costs of sales.
Total net variances less than 1% of total manufacturing cost or
total purchasing cost may be charged or credited against cost
of sales. This is a Sony Corporation policy based on
materiality
25
Valuation

Inventory shall be valued at the lower of cost or market.
“Market” refers to either net realizable value (NRV) or
repurchasing cost, defined as follows:



Net realizable value = (Net selling price) – (Direct sales
expenses)
Repurchasing cost is the “actual purchasing unit price” or
“contract unit price” at the time of valuation
The following limits are placed on “market”:


Ceiling – selling price minus estimated cost of completion and sale
Floor – selling price minus estimated cost of completion and sale, and a
normal gross profit
26
Valuation
Example of applying the “ceiling” and “floor” tests
:
27
Valuation


Establish inventory reserve for slow-moving items:

Reserve is established based on past returns experience and current and
expected market conditions

Once an inventory item has been written down, this lower value is
considered cost for future comparisons with “market”
Any purchases or sales of inventory from/to SPE entities
(intercompany) and Sony affiliates should be identified and
reported to the Home Office for elimination
28
Minimum Internal Controls

Physical inventories each half-year or cycle counts on a
rotational basis should be performed and reconciled to the
inventory system and G/L

Inventory held by third parties should be reported or
confirmed by the third party and reconciled to the inventory
system and G/L at least annually

NRV test should be performed at least quarterly

Obsolescence reserves or write-offs should be reviewed and
approved by management in accordance with COFA
29
FILM COSTS
30
Film Costs
Topics
Definitions
Capitalization of
Film Costs
Amortization of
Film Costs
Ultimate
Revenues
Valuation of
Film Costs
Minimum
Controls
31
Definitions

Statement of Position 00-2 (SOP
00-2), Accounting by Producers
or Distributors of Films

Film - feature films, television
series, television specials, on any
medium (e.g. film, videotape,
digital)

The costs of producing a film and
bringing that film to market
consists of film costs,
participation costs, exploitation
costs, and manufacturing costs
32
Definitions


Film costs – Direct negative costs,
allocated production overhead, and
capitalized interest (if applicable) of
physical production of film or television
properties
Participation costs – parties involved in
the production of a film may be
compensated in part by contingent
payments based on the financial results of
a film pursuant to contractual formulas
(participations) and by contingent amounts
due under provisions of collective
bargaining agreements (residuals). Such
parties are collectively referred to as
participants, and such costs are referred to
collectively as participation costs.
Participations may be given to creative
talent, such as actors and writers, or to
entities from whom distribution rights are
licensed
33
Definitions



Exploitation costs – all direct costs
(including marketing, advertising,
publicity, promotion, and other
distribution expenses) incurred in
connection with the distribution of a film
Manufacturing costs - costs of
manufacturing or duplicating products,
including film prints, videocassettes and
digital video discs. Not included in film
costs
Film prints – those materials, produced on
behalf of a film distributor for delivery to
a theatre or other similar venue, that
contain the completed audio and video
elements of a film. Such materials are used
by the theatre or other similar venue to
exhibit the film to its customers
34
Definitions

Ultimates represent the
estimated lifetime revenues
of the exhibition or sale of a
film or television product in
all markets and territories,
including revenues from the
sale of title-related products

Ultimates are used to
determine the amount by
which film costs should be
amortized each accounting
period
35
Capitalization of Film Costs





Should be recorded as a non-current asset
Film costs consist of 1) the production or “negative” costs of a film or television
product, including direct production costs such as ATL and BTL payroll, set
construction, wardrobe, sound, postproduction costs, etc. 2) development costs that
are directly related to a title, and 3) allocated production overhead
Production overhead includes allocable costs of individuals or departments with
exclusive or significant responsibility for production of films. Production overhead
should not include G&A costs, the costs of certain overall deals
Overall deals (e.g. the exclusive right to a writer’s creating product) should not be
included in film costs unless costs can be directly associated with the acquisition,
adaptation or development of specific projects
Interest related to production of a film can be capitalized. SPE’s practice – not to
capitalize the interest
36
Capitalization of Film Costs



If a project is not expected to be ultimately used in the
production of a film or television property, a loss should be
recorded immediately
Any project that has not been “set for production” within three
years from its capitalization should be expensed
A property is set for production when (a) management has
implicitly or explicitly committed to fund the production, i.e.
greenlight (b) the property has entered active pre-production
and c) principal photography is set to start within six months
37
Capitalization of Film Costs

Episodic television series costs can be capitalized only to the extent of
revenue contracted for the respective episode until its future secondary
market revenues can be estimated. An entity should expense as incurred
film costs in excess of this limitation on an episode-by-episode basis, and
an entity should not restore such amounts as film cost assets in subsequent
periods. An entity should expense all capitalized costs (including set costs)
for each episode as it recognizes the related revenue for each episode. Once
secondary market revenues can be estimated, costs may be capitalized to
the extent supported by the ultimates

In cases of an episodic television series over multiple seasons, where
secondary market revenue can be estimated, the series can be counted as a
single film in calculating amortization
38
Capitalization of Film Costs
Example – Accounting for costs of episodic television production prior to the
establishment of secondary market revenue estimates
Assumptions:

An episodic TV series is in first year of production

Secondary market revenue estimate – none

Cost of production, per episode after the first episode - $500,000 (assume that the most of the
set costs were accounted for as part of the first episode)

Exploitation costs, per episode - $5,000

Estimated ultimate revenue per episode: contracted $200,000
39
Amortization of Film Costs

Individual-film-forecast-computation method

Individual-film-forecast-computation method is calculated as:
Actual revenue for current period
x
Unamortized film costs
Future ultimate revenue starting from
Beginning of current fiscal year

Change in amortization due to change in ultimates – charge or credit to income
statement
40
Amortization of Film Costs
Example - Illustration of the Individual-Film-Forecast Method of Amortization, for a
Film in Its Initial Year of Release
Assumptions:




Film cost - $50,000
Estimated ultimate revenue - $100,000
Actual revenue earned in Year 1 - $60,000
Estimated ultimate participation costs - $10,000
Question 1 – What is film cost amortization in Year 1?
Question 2 – What amount of participation costs is accrued in Year 1?
41
Amortization of Film Costs
1.
Film cost amortization in Year 1:
$60,000 earned revenue * $50,000 film cost = $30,000
$100,000 ultimate revenue
2.
Participation costs accrued in Year 1:
$60,000 earned revenue
$100,000 ultimate revenue
* $10,000 ultimate participation costs = $6,000
42
Amortization of Film Costs
Example - Illustration of the Individual-Film-Forecast Method of Amortization, for an
Episodic Television Series
Question 1 – What is the amount of amortization for season 4 and 5?
Question 2 – What is the amount of accrual of participation costs for season 4 and 5?
Assumptions:
An entity produces and distributes an episodic television series. Five seasons of the series
are ultimately produced.
The entity's fiscal year end corresponds directly with the completion of each production
season.
The beginning of Season 4 is when secondary market revenue estimates are initially
established.
Costs of production are the following:
1.
2.
3.
4.



Seasons 1 to 3 - $36,000 (fully expensed prior to Season 4)
Season 4 - $16,000
Season 5 - $18,000
43
Amortization of Film Costs
Assumptions (cont’d):
5.
Earned and remaining ultimate revenues are the following:
As of Season 4
Earned and reported in Season 4
Earned and reported in Season 5
Remaining ultimate revenue, Seasons 1 to 4 $40,000
Remaining ultimate revenue, Season 5
As of Season 5
Earned and reported in Season 4
Earned and reported in Season 5
Remaining ultimate revenue, Seasons 1 to 4
Remaining ultimate revenue, Season 5
6.
Ultimate participation costs are as follows:
As of Seasons 1 to 3
As of Season 4
As of Season 5
$ 8,000
N/A
N/A
$48,000
N/A
$11,000
$40,000
$10,000
$61,000
$
0
$2,000
$3,000
44
Amortization of Film Costs
1.
Amortization of series costs:
Season 4
Season 5
2.
$8,000 /$48,000 x $16,000 = $2,667
$11,000 /$61,000 x $31,333 = $5,650
Accrual of participation costs:
Season 4
$8,000/$48,000 x $2,000 = $333
Season 5
$11,000/$61,000 x $2,667 = $481
45
Ultimate Revenues
Most Properties

Revenues should be estimated for up to the tenyear period following the initial release for noncatalog and non-episodic television series
properties
Episodic Television Series

Revenues should include estimates of revenue
over a period not to exceed ten years from the
date of delivery of the first episode or, if still in
production, five years from the date of delivery
of the most recent episode, if later. Revenue
estimates for secondary markets should be
included only if an entity can demonstrate
through its experience or industry norms that the
number of episodes already produced, plus those
for which a firm commitment exists and the
entity expects to deliver, can be licensed
successfully in the secondary market
46
Ultimate Revenues
Catalog Properties

Revenues for films acquired for the film
library should be estimated over a period
of up to twenty years from acquisition date
Film-Related Products

Revenues from licensing deals for the
marketing of film-related products should
be included only if either a) a contract for
a nonrefundable amount exists or b) there
is a history of revenues from similar deals.
In the case of film-related product sales
revenues, revenues should be included
only if there is a history of revenues from
similar products for similar types of films.
47
Valuation of Film Costs

Film costs must be recorded at the lower of cost or net realizable value
(NRV). The fair value of the film should be evaluated using discounted
cash flows. In cases where the fair value of a film is expected to be less
than its unamortized film costs, the film must be written down to fair value,
with the difference recorded as a loss. In no case can a film’s recorded
value be written up
Subsequent events

Need for a write-down occurred after the date of the balance sheet but
before issuance of financial statements – film costs have to be adjusted for
the write-down
48
Minimum Internal Controls

NRV testing should be performed at least quarterly for all significant titles

Amortization expense should be reconciled from the sub-system/schedule to the
G/L quarterly

“Catalog” balances should be reviewed at least quarterly to determine all
exploitation costs have been expensed as incurred

Production overhead costs should be reviewed annually to determine a) that
capitalized costs are still appropriate and b) whether any portion of non-capitalized
overhead costs should be capitalized

Capitalizable overhead should be allocated on a by-title basis at least quarterly

Ultimates should be prepared/updated for all significant titles at least quarterly in
consultation with operating management
49
BROADCAST
RIGHTS
50
Broadcast Rights
Topics
Definition
Of Broadcast
Rights
Capitalization and
Classification of
Broadcast Right
Amortization
Of Broadcast
Rights
Valuation
Illustration of
Accounting for
License Agreements
For Program
Material
Minimum
Internal Controls
51
Definition of Broadcast Rights

Statement of Position 00-2 (SOP
00-2), Accounting by Producers
or Distributors of Films and FAS
63, Financial Reporting by
Broadcasters

Broadcast Rights consist of
1)
2)
3)
rights to existing programming
acquired under a license
agreements
programming produced internally
principally for broadcast by
owned stations or networks and
rights to live programming
acquired under license
agreements and related
amortization thereof
52
Capitalization and Classification of
Broadcast Rights

Broadcast/Program rights and the related liability should be recorded on
the balance sheet when all of the following conditions have been met:





Current and non-current classification:



The license period has begun
The cost of each program is known or is reasonably determinable
The material is acceptable to SPE in accordance with the license agreement
The program is available for first showing or telecast
Asset – based upon the estimated accounting period in which the
programming will be aired
Liability – payment terms
Amounts paid to a licensor before the license period begins should be
classified as a prepaid expense
53
Capitalization and Classification of
Broadcast Rights

Key issue is the allocation of programming rights to individual programs when
they are purchased as part of a package. Costs should be allocated to individual
titles based upon the relative value to the programmer. Generally, the cost of the
individual programs is set out in the contract. If not, the programmer must
employ a systematic and rational allocation of the costs on a by-title basis

US GAAP allows licensed program rights to be recorded either at gross or net
(NPV). SPE policy is to record at gross value
54
Amortization of Broadcast Rights

Purchased rights (package) – allocation to individual programs based on the
relative values of the films or series, which is commonly stated in the
contract. If the value of the first airing is significantly greater than
subsequent airings, an accelerated method of amortization should be used.
Exception - cartoons, which allow for unlimited airing over a license period
- amortization over the period of the agreement

Feature product - on a program-by-program basis

Program series and other syndicated products - allocation needs only to be
made to the series level and not to the individual episode level. If the value
of the first airing is significantly greater than subsequent airings, an
accelerated method of amortization should be used

Internally developed programs - individual film forecast computation
method
55
Valuation of Broadcast Rights

Should be reported at the lower of unamortized cost or
estimated net realizable value on a program-by-program,
series, package, or daypart basis, as appropriate

Management should compare projected revenues to the
carrying value . The projected revenue should take into
consideration the anticipated airing pattern for the property
and the ad revenue associated with the airing pattern.
Subscription and affiliate fees need to be evaluated if they can
be included in projected revenue

A write-down from unamortized cost to a lower estimated net
realizable value establishes a new cost basis
56
ILLUSTRATION OF ACCOUNTING FOR LICENSE
AGREEMENTS FOR PROGRAM MATERIAL
Assumptions:
a. End of Fiscal Year-December 31
b. Contract Execution Date-July 31, 19X1
c. Number of Films and Telecasts Permitted-4 films, 2 telecasts each
d. Payment Schedule-$1,000,000 at contract execution date, $6,000,000 on
January 1, 19X2, 19X3, and 19X4
e. Appropriate Interest Rate for Imputation of Interest-12 percent per year
57
ILLUSTRATION OF ACCOUNTING FOR LICENSE
AGREEMENTS FOR PROGRAM MATERIAL
f.
Fees, License Periods, and Film Availability Dates:
g.
Telecast Dates and Revenues
58
ILLUSTRATION OF ACCOUNTING FOR LICENSE
AGREEMENTS FOR PROGRAM MATERIAL

Asset and Liability Recognition (Gross Approach)

Expense Recognition (Gross Approach)
59
Minimum Internal Controls

NRV testing should be performed at least quarterly for all programs

Amortization expense should be reconciled from the sub-system/schedule to the
G/L at least quarterly

Production overhead costs should be reviewed annually to determine a) that
capitalized costs are still appropriate and b) whether any portion of non-capitalized
overhead costs should be capitalized

Capitalizable overhead should be allocated on a by-title basis at least quarterly

If estimates are used for allocations, under/overapplied overhead should be properly
reclassified to Film Costs or as a P/L item

Ultimates should be prepared/updated for all significant titles at least quarterly in
consultation with operating management
60
FIXED ASSETS
61
Fixed Assets
Topics
Capitalization
Depreciation
Impairment
Leases
Minimum
Internal Controls
62
Capitalization

SPE policy - fixed assets with useful lives of more than one year and acquisition costs
greater than $5,000 individually or as a group should be capitalized

The capitalization dollar threshold can be adjusted if local standards would require a lower
amount but this fact should be brought to the Corporate Finance attention

Free of charge assets with useful life of greater than one year and >$5,000 should be
recorded at fair value as fixed assets. Assets received through exchanges or purchased by
insurance, shall be recorded at fair value. The difference between fair value and book
value shall be charged /credited to income

Acquisition cost = asset cost (invoice value) + costs incurred to get the asset ready for use
(e.g. installation, freight, etc.). After acquisition, expenditures that increase the value of the
asset (e.g., adding new functions, improvements, or increasing useful life) should be
capitalized. Repair and maintenance costs or transfer costs of an asset shall be expensed as
incurred

The interest cost on specific borrowing made for long term construction projects maybe
capitalized and amortized over its useful life if certain conditions are met
63
Depreciation

Straight-line method to be used

The following is a guideline for estimated useful lives. However, significant
variances from these lives should be discussed with Corporate Finance:
Buildings
steel and/or concrete - 30 years, others -10
years
Building improvements
10 years
Leasehold improvements
shorter of 10 or term of lease
Machinery
5-7 years
Tools, equipment, furniture & other
fixtures
5 years
Automobiles
3 years
64
Impairment

There are two steps in determining if
a long-lived asset is impaired:
Step 1 – determine if carrying amount of
a long-lived asset is not
recoverable. If yes, move to step 2
Step 2- determine if carrying amount of
a long-lived asset exceeds
its fair value. If yes,

Not recoverable if net book value exceeds
the sum of the undiscounted cash flows
expected to result from the use and
eventual disposition of the asset (asset
group)

Fair value is the amount at which that
asset could be bought or sold in a current
transaction between willing parties. Use
quoted market price. If not available, fair
value estimate should be based on prices
for similar assets or, on the discounted
estimated future cash flows

The impairment loss is measured as the
difference between fair value and carrying
amount of a long-lived asset
Asset is impaired
65
Impairment
When to test for recoverability
Whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The
following impairment indicators are examples of such events or changes in circumstances:

A significant decrease in the market price of a long-lived asset (asset group).

A significant change in the extent or manner in which a long-lived asset (asset group) is being
used or in its physical condition

A significant adverse change in legal factors or in the business climate that could affect the
value of a long-lived asset (asset group), including an adverse action or assessment by a
regulator.

An accumulation of costs significantly in excess of the amount originally expected for the
acquisition or construction of a long-lived asset (asset group).

A current-period operating or cash flow loss combined with a history of operating or cash flow
losses or a projection or forecast that demonstrates continuing losses associated with the use of
a long-lived asset (asset group).

A current expectation that it is more likely than not (greater than 50%) that a long-lived asset
(asset group) will be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.

The existence of other factors which indicates asset impairment.
66
Leases
Leases

Lease - an agreement conveying the right to use property, plant, or equipment
(land and/or depreciable assets) usually for a stated period of time

Two main classes of leases from the standpoint of the lessee:


Capital leases – leases that meet one of more criteria discussed further
Operating leases – all other leases

SFAS No. 13, Accounting for Leases, establishes requirements for accounting for
leases

Accounting can be complex due to:



Amortization of leasehold improvements (lease term plus lease renewals)
Rent holidays
Landlord/tenant improvements
67
Leases
Capital lease –
need to meet one of
the criteria
Ownership is
transferred
to lessee by the end
of the lease term


Lease contains a
bargain purchase
option
Lease term is
75% or more of
useful life of
leased property
PV of minimum
lease payments is
90% or more of
fair value of leased
property
Capital lease is recorded as a tangible fixed asset subject to depreciation, with a
corresponding amount recorded as obligation
If the lease does not meet any of the criteria, it should be classified as an operating lease, with
lease payments charged to expense (straight-line basis versus cash basis of amortization)
68
Leases
Amortization of operating lease

Some operating leases include lease payments that are not of equal amounts, but
escalate during the life of the lease. Straight-line basis should be used for
amortization

Lease incentives (e.g., up-front cash payment to the lessee, payment of costs for
the lessee such as moving expenses, or the assumption by the lessor of the
lessee's preexisting lease, etc.) should be amortized over the term of the lease
using the straight- line basis

Rent holidays should be included in term of the lease when calculating
amortization

Rent expense should be recognized once the lessee has the legal right to use the
property irrespective of when rents are due (payable) under the lease agreement
69
Leases
Accounting for capital lease

Interest rate for determining present value - Ordinarily, the interest rate
(as applied to borrowings from a bank, etc.) that, at the inception of the
lease, the lessee would have incurred. If the lessor's rate is specified and
is lower than the lessee's incremental borrowing rate, then the lessor’s
rate shall be applied

The amount of an asset and obligation to be recorded for a leased asset at the inception of the lease, the lessee shall record the lower of the
present value of the total lease payments or the fair value of the leased
asset. The lease payments capitalized shall exclude any executory costs
(e.g., insurance, maintenance, and taxes in connection with the leased
property) to be paid by the lessor. An estimate shall be used for the
executory costs if the amounts cannot be determined from the lease
contract
70
Minimum Internal Controls

Fixed Assets roll-forward schedule should be prepared and updated on at
least a quarterly basis

At a minimum, a physical inventory count shall be made at least once
within a fiscal year verifying the existence of all fixed assets, excluding
assets under construction

Fixed Assets should be reviewed at least annually for any indications of
impairment

The use of other than straight-line method of depreciation must be
approved by SPE Corporate

SPE Insurance and Tax Departments should be notified of all significant
acquisitions and disposals
71
SOFTWARE AND
WEBSITE
DEVELOPMENT
COSTS
72
Software and Website Development Costs
Topics
Software
Development
Costs
Internal Use
Software
Software for
Sale
Website
Development
Costs
Minimum
Internal Controls
73
Software Development Costs

Key distinction is between:


Internal use software – one acquired, internally developed or
modified solely to meet SPE’s needs, for which no substantive plan
exists or is being developed to market the software externally and
Software for sale – one developed for external sale, consisting of
the creative development of computer programs, processes and
other related materials

Only direct costs (such as wages of internal IS staff involved directly in
developing the software) of development should be capitalized

Research and development costs should be expensed when incurred
74
Internal Use Software
Decision to capitalize or expense internal-use software development costs depends on
the stage of the development effort. Red – expense, green – capitalize.
Preliminary
project stage
(Analysis)
- Needs evaluation
- Requirements
analysis and
documentation
- Evaluation of
alternatives
- Technology gap
analysis
- Initial charter
and ROI
formulation
- Final selection of
alternatives
Application
Development
Stage
- Application
design
- Coding
- Installation of
hardware
- Testing and QA
- License fees for
purchased software
components
- Payroll costs for
persons working
directly on the
project
Post
Implementatio
n
Stage
- User training
- Application and hardware
maintenance
Upgrades
and
Enhanceme
nts
- Upgrades that add new
functionality
75
Software for Sale

Technical feasibility has to be established in order to capitalize

Capitalization must cease when the product is available for general release to customers

Capitalization vs. expense is similar to internal-use software costs. Specific requirement
that maintenance and customer support be expensed when related revenue is recognized or
when those costs are incurred, whichever occurs first

Amortization on a product-by-product basis, starting at the time the software is released to
customers


Amortization is calculated as the greater of (1) the ratio of the product’s current gross
revenues to the total of current and expected revenues or (2) the straight-line method. The
estimated useful life for software typically ranges from 3 to 7 years
The unamortized capitalized costs for each product must be compared to the net realizable
value annually, with the excess costs written off
76
Website Development Costs

Decision to capitalize or expense internal-use website development costs depends on the
stage of the development effort. Red – expense, green - capitalize
Planning
Stage
•Develop
business/
project plan
•Determine
website
functionalities
•Determine
existence of
needed
technology
•Formulate
conceptual
graphics and
content
•Identify and
evaluate
alternatives
•Select
alternatives
Web
application/
Infrastructur
e
•Procuring software
tools Development
for coding
Stage
•Coding applications
and security features
•Installation of
website application
to hardware
•Internet connection
/hosting
•Creating initial links
•Testing
•Crating
graphics/user
interface
Operation
Stage
•Training
•Website launch
•User administration
•Update graphics and
content
•Create links
•Maintain/upgrade
links
•Security review/user
analysis
77
Minimum Internal Controls

Software and Website costs should be reviewed at least annually for any
indications of impairment

Entries for software accounts in the G/L should be reviewed for significant or
unusual items at least quarterly

Significant capital expenditures should be compared to the budget/forecast and
significant variances investigated

For internally developed software, assess the project stage and nature of
expenditures to determine that the capitalization or expensing of expenditures is
appropriate.
78
INVESTMENTS
79
Investments
Topics
Types of
Securities
Classification of
Securities
Valuation of
Securities
Impairment of
Securities
Minimum
Internal Controls
80
Types of Securities


Debt securities – securities which carry obligations for the issuer to pay a certain
sum plus interest at a specified rate (e.g. government bonds, local government
bonds, debentures, convertible bonds, commercial paper, etc)
Equity securities – securities representing ownership rights in the issuer’s
business (e.g. common stock, preferred stock, warrants, call options, put options,
etc.). Income may be received on such equities through the payment of dividends
81
Classification of Securities



Held-to-maturity – debt securities with management’s positive intent and ability
to hold to maturity
Trading – securities (either debt or equity securities with readily determinable
fair values) that are bought and held principally for the purpose of selling them
in the near term. Trading generally reflects active and frequent buying and
selling, and trading securities are generally used with the objective of generating
profits on short-term differences in price
Available-for-sale – investments that are not classified as trading or as held-tomaturity securities
82
Valuation of Securities

Held-to-maturity securities are reported at amortized cost, subject to an impairment test.
Realized gains and losses for these securities are reported to earnings. Dividend and
interest income, including amortization of premium and discount, should also be included
in earnings

Trading securities are reported at fair value with unrealized gains and losses included in
earnings. Dividends and interest should also be included in earnings.

Available-for-sale securities are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a net amount in a separate component of
shareholders’ equity. Unrealized gains and losses are reported net of the related tax effect
in other comprehensive income (“OCI”). Upon sale, realized gains and losses are reported
in earnings. Dividend and interest income, including amortization of the premium and
discount arising at acquisition, should also be included in earnings.
83
Impairment of Securities

For held-to-maturity or available-for-sale securities, a company should determine whether
a decline in fair value below the amortized cost basis is other than temporary. If the decline
is other than temporary, the cost basis of the individual security should be written down to
fair value as a new cost basis, and the amount of the write-down should be included in
earnings as a realized loss. The new cost basis should not be changed for subsequent
recoveries in fair value. A recovery in fair value should not be recorded in earnings until
the security is sold

Each individual security should be evaluated for impairment, and as such, the practice of
providing a general allowance for unidentified impairment in a portfolio is not appropriate.

For trading securities, unrealized holding losses are included in earnings. It is not
necessary to evaluate trading securities for impairment.
84
Minimum Internal Controls

Entries to the investment accounts in the G/L should be reviewed at least
quarterly for significant or unusual items

Investment schedules or statements of investments held by third parties should
be reconciled to the G/L quarterly

All purchases and sales of investments should be reviewed and authorized in
accordance with the COFA . Any significant related gains or losses should be
calculated and the Tax and SPE Corporate should be notified

Significant investments should be reviewed at least annually to determine if
there are any indications of impairment

Appropriate consideration should be given to the classification of investments
between current and noncurrent, and to the difference between the cost and
market value of investments
85
INVESTMENTS IN
UNCONSOLIDATED
SUBSIDIARIES
86
Investments in Unconsolidated Subsidiaries
Topics
Definitions
Equity vs
Cost Method
Variable Interest
Entities (VIE)
Impairment
Minimum
Internal Controls
87
Definitions

The nature of the relationship between SPE and the subsidiary, in terms of influence,
ownership percentage and control, determines the appropriate accounting treatment for SPE’s
accounting of its investment in the subsidiary

The following are general guidelines for the categorizing of investments in subsidiaries:

Less than 20% - cost method

20% - 50% - equity method

More than 50% - consolidation


If SPE owns less than 20% but holds significant influence over subsidiary – equity method
If SPE is a primary beneficiary (has majority of risks and rewards compared to other
investors) in the subsidiary, irrespective of % of investment – consolidation.
88
Cost versus Equity Method
Cost Method

The investment in the subsidiary is recorded at its original acquisition cost, and is not
adjusted. The only investment activity recorded is income from any dividends received
from the subsidiary
Equity Method

Portion of the subsidiary’s income (loss) is recognized as investment income (loss), and
the original investment cost is adjusted for the subsidiary’s periodic income (loss). Any
dividends declared by the subsidiary are treated as reductions to the investment balance
Share of losses in an investee may equal or exceed the carrying amount of the investment
accounted for the equity method plus advances made. Equity adjustments should be discontinued
if the investment balance becomes zero unless the investor has guaranteed obligations of the
investee or is otherwise committed to provide further financial support to the investee . If the
investee becomes profitable again, income cannot be recorded on the investment until SPE’s share
of income covers previously unrecorded losses
89
Variable Interest Entities (VIE)

In early 2002, the FASB launched a project on the consolidation of specialpurpose entities (SPEs), after Enron’s collapse exposed a number of
worrisome accounting issues

FIN 46 issued in January 2003 and reissued in December 2003 as FIN 46R

Applying FIN 46 is COMPLEX

PwC generally recommends to pre-clear with the SEC the significant
transactions involving FIN 46 issues

Highly complicated area and any potential transaction of concern should be
discussed with Technical Support and Compliance Group
90
Variable Interest Entities (VIE)

Under GAAP, a company must consolidate any entity in which it has a
“controlling financial interest.” (>50% )

FIN 46 makes two critical changes:



Defines when a company should base “controlling financial interest” on factors
other than voting rights, including even things as distribution fees
Requires that a new “risk and rewards” model be applied
Consequently, GAAP now prescribes two accounting models for
consolidation:
1.
2.
The voting interest model where the investor owning more than 50 percent of an
entity’s voting interests consolidates
The risk and rewards model where the party who participates in the majority of the
entity’s economics consolidates. This party could be an equity investor, other capital
provider, or a party with contractual arrangements
91
Variable Interest Entities (VIE)
Variable Interest Entity (VIE) – an entity that possesses one of the following
characteristics:






The entity is thinly capitalized
Residual equity holders do not control the entity
Equity holders do not participate fully in entity’s residual economics
The entity was established with non-substantive voting interests
To identify potential VIEs, reporting enterprises must review all
arrangements with an entity to determine whether they:





Hold economic interests, voting rights or similar rights in the entity, or
obligations with an entity (e.g., in the form of derivatives)
Issue guarantees with respect to the entity’s assets and/or liabilities
Transfer assets to the entity
Manage the assets of the entity
Lease assets from an entity or provide it with financing
92
Impairment

Step 1: Determine Whether an Investment is Impaired - An investment is considered
impaired if the fair value of the investment is less than its amortized cost basis (the
carrying amount)

Step 2: Determine Whether Impairment is Other Than Temporary - An impairment
shall be deemed other than temporary unless positive evidence indicating that the
investment's carrying amount is recoverable within a reasonable period of time
outweighs any evidence to contrary

Step 3: Recognize an Other-Than-Temporary Impairment Loss Equal to the
Difference between the Investment's Carrying Amount and its Fair Value - An
other-than-temporary impairment loss should be recognized in earnings and the
fair value of the investment would then become the new cost basis of the investment
and it should not be adjusted for subsequent recoveries in fair value.
93
Impairment
Indicators of other-than temporary impairment:







The investee's financial condition and quality of assets are deteriorating, with no immediate
prospect of recovery
The investee has sustained significant losses in the current year
The regulatory, economic, or technological environment has changed in a way that is expected
to adversely affect the investee's profitability
There has been a significant decline in fair value of publicly traded securities of comparable
entities
The investee has announced, or the investor has become aware of, adverse changes or events
such as changes or planned changes in senior management, restructurings, or a sale of assets
The general market conditions in either the geographic region or the industry in which the
investee operates have weakened, with no immediate prospect of recovery
Factors that raise significant concerns about the investee's ability to continue as a going
concern, such as negative cash flows from operations, working-capital deficiencies,
investment advisors' recommendations, or non-compliance with statutory capital requirements
or debt covenants
94
Minimum Internal Controls

A permanent closing binder should be maintained for the acquisition and disposition of all investments in a
subsidiary

Entries to the investment accounts in the G/L should be reviewed at least quarterly for significant or
unusual items

Schedules supporting SPE’s share of investee financial statements should be reconciled to the G/L

All acquisitions or dispositions of any investment in a subsidiary should be reviewed and authorized in
accordance with the COFA. The Tax and SPE Corporate Departments should be notified for all transactions
greater than $5 million

Significant investments should be reviewed at least annually to determine if there are any indications of
impairment

SPE and subsidiary financial information should be reviewed for items that should be eliminated such as
inter-company payables/receivables, loans, minority interest, etc

Internal controls of the investee company must be reviewed annually to determine the viability and
accuracy of the subsidiary’s financial information
95
GOODWILL AND
INTANGIBLES
96
Goodwill and Intangibles
Topics
Business Combinations
And Goodwill
Intangible Assets
Other Than Goodwill
Minimum
Internal Controls
97
Business Combinations and Goodwill

Goodwill - excess of price paid for a business over fair value of its assets

Goodwill is not amortized

Goodwill should be tested for impairment on an annual basis, and
between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of goodwill below its
carrying amount. Examples of reasons to test for impairment include the
following:




A significant adverse change in the legal or business climate
An adverse action or assessment by a regulator
Unanticipated competition
Loss of key personnel
98
Intangible Assets Other Than Goodwill

Intangible assets other than goodwill may include:
Marketing related
Assets:
Customer related
Assets:
Artistic related
Assets:
Trade marks
Trade names
Non-compete
agreements
Customer lists
Non-contractual
customer
relationships
Motion pics
TV programs
Music videos
Contract based
assets
Licensing
and royalty
agreements
Broadcast
Rights
Non Compete
agreements
Technology-based
assets
Computer
software
Databases

Some intangible assets carry with them discrete useful lives. For example, a patent legally expires 17 years from issuance.
An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized

Intangible assets shall be tested for impairment on an annual basis, and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of intangibles below its
carrying amount

The area of purchase price allocation is a complicated area and should be discussed with Home office and SPE Technical
Support and Compliance group
99
Minimum Internal Controls

The basis for and method of determining the purchase price of an acquired entity
and decision factors for the acquisition should be documented at the time of
purchase

Transactions involving goodwill and other intangible assets should be approved
in accordance with COFA.

Goodwill should be reviewed for any indications of impairment, and the
estimated useful lives of intangible assets should be reviewed for changes, at
least annually. If there are indications of impairment or changes in useful lives, a
further analysis should be performed in coordination with the SPE Corporate

Entries for goodwill and other intangible asset accounts should be reviewed at
least quarterly in the G/L for significant or unusual items

Significant acquisitions should be reviewed for accuracy and the Tax and SPE
Corporate Departments should be notified
100
OTHER ASSETS
101
Other Assets
Topics
Definitions
Minimum
Internal Controls
102
Definitions


Other assets represent assets not classified elsewhere, can include prepaid
expenses, rent or other deposits, trust funds, insurance claims, debt issuance costs,
etc., both short- and long-term
Prepaid expense – payment (s) made for expenses not yet incurred

Expenses should be recognized as incurred (accrual basis versus cash basis), e.g.
audit fees, professional services, etc.

Other assets should be recorded at cost. The assets should be reviewed on a
quarterly basis to determine if changes need to be made to the carrying values as a
result of the following:



The asset should be amortized or charged to expense based on the nature of the asset and the activities
associated with the asset
The asset should be reclassified between long-term and short-term
The asset should be reviewed for any indication of impairment
103
Minimum Internal Controls

Deposits should be monitored to ensure they are returned timely to SPE
when the related deposit activity is concluded

Significant movements should be identified, and any unexpected or unusual
relationships between current month and prior month should be
investigated

Significant additions or deletions to other assets should be properly
classified between current and non-current and also reviewed against
underlying documents supporting the amounts and nature of the
transactions

Other assets should be reviewed at least annually for any indications of
impairment
104
ACCOUNTS
PAYABLE
105
Accounts Payable
Topics
Definitions
Minimum
Internal Controls
106
Definitions

All purchases should be initiated with a properly approved, complete purchase
order, or contract

Payment should not be made without evidence of receipt of goods or services, and a
written invoice or contact

Payment timing should be managed to allow for payment within stated terms but
not significantly before then

Accrued liabilities not generally invoiced should be classified as accrued expenses

A significant debit balance in accounts payable should not be offset against other
accounts payable, but instead treated as a receivable.
107
Minimum Internal Controls

All purchase commitments and payment requests must be approved in accordance with the COFA

Checks should be mailed directly to vendors, if applicable

Vendors granting early payment discounts should be identified and such discounts utilized

New vendors must be approved by at least the Director or Manager of the Accounts Payable Department

All data relating to a new vendor must be entered into the accounts payable system before issuing payment
(i.e. name, address, phone number, contact, Tax Payer ID number, etc)

Invoices must be properly authorized and matched to a purchase order and receiving report, if applicable,
before payment

Proper system controls should be in place to ensure there are no duplicate payments of invoices

Individuals in the Accounts Payable Dept should not be allowed to authorize invoices for payment, sign
checks or reconcile bank accounts.
108
Minimum Internal Controls

If there are any significant accounts being disputed with vendors, the proper
adjustments/accruals should be made

Significant movements should be identified, and any unexpected or unusual relationships
between current month and prior month should be investigated. If the entity is part of the SPE
Corporate Services Accounts Payable Group, this analysis will be done only on a consolidated
basis

The accounts payable sub-system, as applicable, should be reconciled to the G/L at least
quarterly. If the entity is part of the SPE Corporate Services Accounts Payable Group, this
analysis will be done only on a consolidated basis

The accounts payable G/L accounts should be reviewed for significant or unusual postings

The nature and significance of accounts payable cut-off accruals should be reviewed at least
quarterly and the proper reversing entry should be subsequently booked

Significant purchase commitments should be reviewed on at least a quarterly basis to
determine if any such commitments have become adverse
109
Minimum Internal Controls

Aging reports should be reviewed on a monthly basis and any significant changes in past due
accounts, debit balances, individually significant payables, unmatched receiving reports and
vendor invoices, items returned for which a credit has not been received, and differences
reported by vendors should be investigated. If the entity is part of the SPE Corporate Services
Accounts Payable Group, this analysis will be done only on a consolidated basis

The Goods Receipt/Invoice Receipt account should be reconciled for any unmatched
receiving reports and/or vendor invoices and adjustments should be recorded as appropriate

Any intercompany transactions should be reported to Corporate Reporting to determine the
need for any elimination of intercompany profit or loss, sales, and balances including other
SPE and other Sony related entities

All suspense accounts should be analyzed and cleared on a monthly basis and reviewed by at
least a Manager in the Finance Department

Any collateralized liabilities should be disclosed to Corporate Reporting

Any payables to employees or related parties should be disclosed to Corporate Reporting
110
ACCRUED EXPENSES
AND OTHER
LIABILITIES
111
Accrued Expenses and Other Liabilities
Discussion Topics
Definitions
Exploitation
Accruals
Employee-Related
Liabilities
Loss Contingencies
Minimum
Internal Controls
112
Definitions

Accrued expenses and other liabilities represent expenses incurred but not yet paid.
They include goods or services that have been received but not invoiced, interest,
payroll taxes, rent, deferred compensation, pension liabilities, deferred taxes, etc.,
both short- and long-term

Exploitation accruals include accruals for marketing, advertising, publicity,
promotion, and other distribution expenses incurred in connection with the
distribution of a film. Exploitation costs should be accrued when incurred but not
when committed
113
Employee-Related Liabilities
Most employees are entitled to vacation, holiday an sick pay
(“compensated absences”)

If all of the following conditions are met, a liability for employees’
compensation for future absences must be accrued:

1.
2.
3.
4.

SPE’s obligation relating to employees’ rights to receive compensation for
future absences is attributable to employees’ services already rendered.
The obligation relates to employees’ rights that vest or accumulate.
Payment of the compensation is probable.
The amount can be reasonably estimated
If conditions 1-3 are met, but the amount cannot be estimated, disclosure
is required
114
Loss Contingencies
FAS No. 5 Accounting for Contingencies establishes the guidelines for recording a loss
contingency. Some examples of loss contingencies include:







Obligations related to product warranties
Risk of loss of or damage to property by fire, explosion, or other hazards
Threat of expropriation of assets
Pending or threatened litigation
Actual or possible claims and assessments
Guarantees of indebtedness of others

The loss contingency should be accrued as a charge to earnings and reserve in the current
period if: (1) If it is probable that a loss or liability is incurred at balance sheet date (at the
end of each quarter) and (2) the amount can be reasonably estimated

Accrual of minimum amount in the range when no single amount within the range is a
better estimate than another
115
Minimum Internal Controls







Estimates used in the booking of significant accruals should be approved by a
Director or higher
Accrued liability amounts must be supported, with invoices, contracts,
computations, etc
Prior period accruals should be reviewed to determine if adjustments/reversals
are needed
Significant accrued liabilities must be examined and approved by the Accounting
Manager
Costs such as legal, accounting and consulting fees, should be reviewed for the
existence of additional accruals
Cash disbursements subsequent to “Cost Cutoff” should be reviewed for
potential accrual adjustments
All accrued liabilities should be examined to determine the term (long vs. short)
by which it should be classified
116
CONTRACTUAL
OBLIGATIONS
117
Contractual Obligations
Topics
Definitions and
Classification
Participation and
Residual Accruals
Minimum
Internal Controls
118
Definitions and Classification

Contractual obligations represent amounts due to individuals or entities for the performance
of services or provision of goods that are enforceable under legal documents. Contractual
obligations include long-term debt and leases, purchase obligations, pension and employee
related payments, legal settlements, royalty contracts, participations and residuals, etc.

Sony Corporation (Tokyo) requirement for semi-annual and annual footnotes submission.
Contractual obligations must be disclosed in a table that presents the amounts of payments
due in the current year, 1-3 years, 3-5 years, and more than 5 years. Obligations must be
presented in the following categories, although additional detail may be presented:





Long-term debt obligations
Capital lease obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities reflected on the balance sheet

Material contract provisions, including termination or renewal provisions, must also be
disclosed

Current (due within one year) versus non current (due within more than one year)
classification
119
Participation and Residual Accruals

Participation accruals relate to costs associated with payments to talent
for their contractual or union-required share of film revenues

Participation costs should be accrued (expensed) using the individual-filmforecast-computation method:
Unaccrued (that is, not yet expensed)
ultimate participation costs
at the beginning of the current year

Current period actual revenue
x
Estimated remaining
unrecognized ultimate revenue
as of the beginning of the
current fiscal year
In the absence of changes in estimates, participation costs are accrued in a
manner that yields a constant rate of profit over the ultimate period for each film
before exploitation costs, manufacturing costs, and other period expenses
120
Participation and Residual Accruals

At each balance sheet date, accrued participation costs should not be less than the amounts
that an entity is obliged to pay as of that date

Begin to accrue participation costs when a film is released and it begins to recognize revenue
from that film

Review and revise estimates of ultimate revenue and participation costs as of each reporting
date

If estimates are revised, new denominator should be calculated that includes only the ultimate
revenue from the beginning for the fiscal year of change. The numerator is unaffected by the
change. Revised fraction should be applied to the film’s unaccrued ultimate participation costs
as of the beginning of the fiscal year. Difference between expenses determined using the new
estimates and any amounts previously expensed during that fiscal year should be charged or
credited to the income statement in the period (for example, the quarter) during which the
estimates are revised
121
Minimum Internal Controls

Any significant, unexpected, or unusual relationships between current month, prior
month, and budgeted amounts should be investigated and explained

Contractual Obligation statements should be reconciled to the actual payments

Supporting statements/calculations should be prepared and reviewed by at least an
Accounting Manager

Contractual obligation advances must be approved in accordance with the COFA
and properly reflected as a prepaid asset if significant
122
DEFERRED
REVENUE
123
Deferred Revenue
Topics
Definitions
Minimum
Internal Controls
124
Definitions

Deferred revenue represents the receipt of cash or other assets in advance of the sale of goods,
“availability” of products, or performance of services. Sometimes called unearned revenue

Payment is made to secure future performance (e.g. the future rent of a facility) and is legally
refundable – classify as a deposit, no revenue is recognized


Payment is made with the intent of applying it against future amounts due – classify as
deferred revenue, income recognized as it is earned
Deferred revenues should be properly classified between long-term and short-term
125
Minimum Internal Controls

Significant movements and any unexpected or unusual relationships between
current month and prior month should be identified and investigated for deferred
revenue and the recognition of deferred revenue in income

Entries in the deferred revenue accounts in the G/L should be reviewed for
significant or unusual items

When applicable, deferred revenue should be supported with invoices, contracts,
computations/system reports and other supporting documentation

The Deferred Revenue sub system, if applicable, should be reconciled to the G/L by
contract or customer and reviewed for unusual items at least quarterly
126
DEBT
127
Debt
Topics
Definitions
Minimum
Internal Controls
128
Definitions

Debt represents an obligation owed to another entity that is required to be paid by a
specified date or on demand, and is generally collateralized or guaranteed by assets
of the company. Examples of debt include bonds, mortgages and notes

Key concerns include the proper calculation of carrying amount and amortization,
compliance with legal agreement terms, and complete disclosure

Before recording the obligation or retirement of any debt and debt related costs,
there should be a consultation with the Treasury Department, Legal Department and
Corporate Finance Department

Debt discounts or premiums:



Direct reduction or addition to the face amount of the debt
Should not be reported as deferred charges or deferred credits
Use effective interest method, or straight-line method if not materially different, to
amortize
129
Minimum Internal Controls

All debt payments should be properly approved in accordance with the COFA

SPE Corporate should be consulted on any new issuance or extinguishment of debt
in excess of $5 million

Reconciliations of statements from lending institutions and other partners to the
G/L should be completed at least quarterly

Corporate Reporting should be informed of any new debt for possible disclosure

Any violations of restrictive loan covenants that have been waived by lenders
should be documented

A list including all short-term notes payable, their due dates, and interest accrued
and paid during the period should be maintained
130
EQUITY AND
RETAINED EARNINGS
131
Equity and Retained Earnings
Topics
Definitions
Minimum
Internal Controls
132
Definitions

Common stock, additional paid-in capital (APIC), preferred and treasury stock,
unrealized gains and losses on marketable securities, cumulative translation
adjustments (CTA)

Equity reflects the ownership interest of a company. Retained earnings is a
component of equity, and refers to accumulated net income or loss; each period’s
income or loss is transferred to retained earnings

There is no ‘appropriation of profits’ concept in the US GAAP
133
Definitions



Additional paid-in capital – Paid-in capital in excess of par or stated value of
common stock
Common stock - A unit of ownership in a company, typically allowing voting
rights and the right to receive dividends when declared
Cumulative translation adjustment – An equity account that captures the changes
resulting from foreign currency fluctuations

Preferred stock - Stock that does not carry ownership rights but carries a
specified dividend

Treasury stock - Stock reacquired by the issuing company; carries no ownership
or dividend rights.
134
Minimum Internal Controls

An equity roll forward schedule, including a reconciliation of shares authorized,
issued and outstanding, should be prepared and reconciled to the G/L on at least
a quarterly basis

All transactions affecting equity should be approved in accordance with the
COFA, should be in writing and should be in compliance with SPE’s by-laws,
corporate charter and requirements of regulatory agencies

Any significant, unexpected, or unusual relationships between current period,
prior period, and budgeted amounts should be investigated
135
REVENUE
RECOGNITION
136
Revenue Recognition
Topics
Definitions
Revenue Recognition
Under Motion Picture
Accounting
Revenue Recognition
Of Broadcast
Rights
Revenue Recognition
Examples
Consideration Paid
To Customers and
Sales Incentives
Gross Vs
Net Presentation
Minimum
Internal Controls
137
Definitions

Sale of goods and the performance of services such as licensing of film and other
intellectual properties, sale of products, rental of equipment and facilities,
subscriptions, distribution services, production services and advertising revenues

The major source of SPE revenue is the production and sale, licensing or exhibition
of its film, television and home entertainment products

Revenue offsets, such as sales discounts, returns and allowances, should be
distinguished from expenses and, in general, be deducted from gross revenue, as
they truly represent revenue that is never realized

Revenue should be realized and earned. The following four criteria should be 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, and
Collectibility is reasonably assured
138
Revenue Recognition Under Motion Picture
Accounting
Revenue from a sale or licensing arrangement of a film or television product is
to be recognized when the following conditions are met:
1.
2.
3.
4.
5.
Persuasive evidence of a sale or licensing arrangement with a customer
exists;
The film is complete and, in accordance with the terms of the arrangement,
has been delivered or is available for immediate and unconditional delivery;
The license period of the arrangement has begun and the customer can begin
its exploitation, exhibition or sale;
The arrangement fee is fixed or determinable; and
Collection of the arrangement fee is reasonably assured.
139
Revenue Recognition Under Motion Picture
Accounting

Revenue from the theatrical exhibition of motion pictures is recognized
as the customer exhibits or exploits the film.

Revenue from television licensing arrangements for film and television
product is recognized when the product is available and any restrictions
regarding the exhibition or exploitation of the product lapse.

Revenue from home video/DVD sales is recognized upon the street date,
that is, the date when home video products may be sold or displayed for
rental.
140
Revenue Recognition of Broadcast Rights



Ad Revenues – as a general rule, should be recognized when the ads are aired or delivery
has occurred. If advertising is sold in multiple-spot packages that may span multiple
periods, the total license fee should be allocated to the individual spots using a rational,
systematic and consistent process; ad revenues should ultimately be recorded at fair
market value, rather than the billing value
Subscriber Revenues –should be recognized as services are provided and accrued at month
end if not yet billed and the other general requirements of SAB 104 have been met
Affiliate Revenues – should be recognized on subscriber fees each month when the service
is provided and collectibility is reasonably assured. Since revenues are often based on the
number of subscribers and the actual number of subscribers may not be known for one to
three months, an estimate should be made at least quarterly and trued up when actual
payments are received. The estimate should generally be based on the most recent payment
actually received unless better information is available.
141
Revenue Recognition Examples
Example 1 - Allocation of Revenue for a Fixed Fee, Multiple Film Arrangement
Assumptions:
a. An entity grants to a customer the cable television broadcast rights to three films under a single
licensing arrangement in a particular market and territory. The arrangement calls for a fixed license
fee of $30,000. The arrangement provides for a pro-rata reduction in the license fee if Film 3 is not
completed and made available for delivery
b. At the date of the arrangement, Films 1 and 2 are complete; Film 3 is yet to be produced. An
evaluation of the relative fair values of the licensed rights to Films 1 and 2 indicate that Film 1
should be assigned 55 percent of the fixed license fee and Film 2 should be assigned 45 percent of
the fee. The amount potentially refundable if Film 3 is not completed and delivered is $10,000
The entity should allocate the license fee as follows:
Film 1 =
$11,000 ($30,000 license fee, less $10,000 potentially refundable for one incomplete
film, multiplied by 55 percent)
Film 2 =
$9,000 ($30,000 license fee, less $10,000 potentially refundable for one incomplete
film, multiplied by 45 percent)
Film 3 =
$10,000 (the refundable amount due if the film is not completed and made available
for delivery)
142
Revenue Recognition Examples
Example 2 - Revenue Recognition for a Variable Fee, Single Film
Arrangement With a Nonrefundable Minimum Guarantee
Assumptions:
a)
An entity licenses to a customer the home video rights to one film for a
period of two years. The licensing arrangement provides for a variable
fee to the entity equal to 30 percent of the customer's gross receipts from
the exploitation of this film during the license period. The licensing
arrangement also requires the customer to pay the entity a $50,000
nonrefundable minimum guarantee against the variable fee
b)
For purposes of this example, assume that the customer generates gross
receipts from the exploitation of the film equal to $100,000 in Year 1 and
$80,000 in Year 2. Also, assume that the entity has met all other revenue
recognition conditions of this SOP
The entity should recognize revenue as follows:
143
Revenue Recognition Examples
Revenue should be recognized as follows:
144
Revenue Recognition Examples
Example 3 - Revenue Recognition for a Variable Fee, Multiple Film Arrangement With
a Nonrefundable Minimum Guarantee
Assumptions:
a)
An entity licenses to a customer the home video rights to five films for a period
of three years. The licensing arrangement provides for a variable fee to the entity
equal to 30 percent of the customer's gross receipts from the exploitation of the
films during the license period. The licensing arrangement also requires the
customer to pay the entity a $50,000 nonrefundable minimum guarantee against
the variable fees for the five films. The variable fees are cross-collateralized for
purposes of determining any amounts due in excess of the $50,000
nonrefundable minimum guarantee.
b)
For purposes of this example, assume the customer generates revenue as
follows:
145
Revenue Recognition Examples
Revenue should be recognized as follows:
146
Consideration Paid to Customers and Sales
Incentives

Consideration (including sales incentives, free products, slotting fees, cooperative
advertising, and buydowns) paid should be recorded as a reduction of revenue
unless both of the following conditions are met:



SPE has received, or will receive, a benefit in exchange for the consideration that is
sufficiently separable from the customer’s purchase of products and services (sufficient
documentation must be provided by the purchaser to support the benefit received by
SPE)
A reasonable estimate of the fair value of this benefit is available
If the amount of consideration exceeds the estimated fair value of the
benefit received, that excess amount should be characterized as a
reduction of revenue. If the consideration recorded as a reduction of
revenue results in negative revenue for a specific customer on a
cumulative basis, the amount of the cumulative shortfall may be
recharacterized as an expense.
147
Consideration Paid to Customers and Sales
Incentives

A sales incentive offered to customers voluntarily and without charge that is
exercisable by a customer as a result of a single exchange transaction should be
recognized at the later of the following:



The date at which the related revenue is recorded
The date at which the sales incentive is offered
If the amount of future rebates or refunds cannot be reasonably estimated, a
liability should be recognized for the maximum potential amount of the refund or
rebate
148
Gross versus Net Presentation

Gross - the amount billed to a customer because it has earned revenue
from the sale of the goods or services

Net - the net amount retained (that is, the amount billed to the customer
less the amount paid to a supplier) because it has earned a commission or
fee

Gross versus Net revenue recognition is a matter of judgment that
depends on the relevant facts and circumstances
149
Gross versus Net Presentation
Indicators of Gross Revenue Recognition:









The company is the primary obligor in the arrangement
The company has general inventory risk (before customer order is place or upon
customer return)
The company has latitude in establishing price
The company changes the product or performs part of the service
The company has discretion in supplier selection
The company is involved in the determination of product or service specifications
The company has physical loss inventory risk (after customer order or during
shipping)
The company has credit risk
Indicators of Net Revenue Recognition:




The supplier (not the company) is the primary obligor in the arrangement
The amount the company earns is fixed
The supplier (and not the company) has credit risk
150
Minimum Internal Controls

Any significant, unexpected, or unusual relationships between current month,
prior month and the budget/forecast should be investigated from a P&L
perspective

Revenues from sales of products and services should be recognized in the
appropriate period, and accruals should be made for “lag” and system cut-off
issues

Entries in the revenue G/L accounts should be reviewed for significant or
unusual items

All suspense accounts should be analyzed and cleared on a monthly basis and
reviewed by at least a Manager in the Finance Department
151
BARTER
REVENUE
152
Barter Revenue
Topics
Definitions
General Barter
Transactions
Advertising Barter
Transactions
Minimum
Internal Controls
153
Definitions

Barter transactions are those transactions where goods or services are exchanged
for other goods or services, or for credit; little to no cash is involved in such
transactions

Important considerations when accounting for barter activity include:
1) identifying that a transaction represents a barter activity
2) properly accounting for the value of barter transactions
154
General Barter Transactions

Exchange should be based on fair value of assets (services)

The cost of a nonmonetary asset acquired in exchange for another nonmonetary
asset is the fair value of the asset surrendered to obtain it, and a gain or loss should
be recognized on the exchange

The fair value of the asset received should be used to measure the cost if it is more
clearly evident than the fair value of the asset surrendered
155
General Barter Transactions

A nonmonetary exchange shall be measured at cost, and not on the fair value of the
exchanged assets, if any of the following conditions apply:



Fair value is not determinable: neither the fair value of the asset(s) received nor the
asset(s) relinquished is determinable within reasonable limits
Exchange transaction to facilitate sales to customers: the transaction is an exchange of a
product or property held for sale in the ordinary course of business for a product or
property to be sold in the same line of the business to facilitate sales to customers other
than the parties to the exchange
Exchange transaction that lacks commercial substance
156
General Barter Transactions



A transaction should be considered monetary (i.e. not a barter transaction) if the
boot received is "significant." "Significant" is defined as at least 25 percent of the
fair value of the exchange
If the consideration consists of barter or non-monetary exchange such as a “free”
product or service, the cost of the consideration should be characterized as a cost of
sales when recognized in the income statement
The key concept in bartered or non-monetary transactions is that sufficient evidence
of the fair value of the items being exchanged must exist
157
Advertising Barter Transactions

Barter of unsold advertising time for products or services

Record barter at estimated fair value of the product or service

Barter revenue should be reported when:




Commercials are broadcast
Merchandise or services received or used
If merchandise or services are received prior to the broadcast of the commercial – report liability
If the commercial is broadcast first – report receivable
Exchange of advertising for advertising:



record at the carrying value of the advertising surrendered, which is generally zero
record at fair market value – if it can be demonstrated that the time exchanged has a determinable
market value through the historical practice of receiving cash, marketable securities or other
consideration that is readily convertible to a known amount of cash
158
Minimum Internal Controls

All recorded barter revenue must be supported by adequate
documentation of the fair value basis for recording

Assets related to barter transactions should be reviewed for impairment
at least quarterly and adjusted if necessary.
159
EXPENSES
160
Expenses
Topics:








Cost of Goods Sold
Selling Expenses
Advertising Expenses
Research & Development Expenses
Overhead, General and Administrative expenses
Restructuring charges
Employee Costs
Minimum Internal Controls
161
Cost of Goods Sold and Selling Expenses
Cost of Goods Sold

Repair and maintenance, utilities, rent, labor, materials, supplies, rights to
book/stage plays/original screenplays, insurance, taxes, and pension contributions,
film prints, videocassettes and digital video discs, etc.
Selling Expenses

Exploitation costs, including marketing, advertising, publicity, promotion and other
distribution expenses in connection with the distribution of a film-related product
should be expensed as incurred
162
Advertising Expenses
Advertising activities have two primary components:




Producing advertisements, such as the costs of idea development, writing
advertising copy, artwork, printing, audio and video crews, actors and other
costs
Communicating advertisements that have been produced, such as the costs
of magazine space, television airtime and distribution
Advertising expenses shall be expensed either a) as incurred or b)
deferred and expensed the first time the advertising takes placed. In the
case of direct-response advertising, costs are capitalized and amortized
over the expected period of future benefits
163
Advertising Expenses

The costs of producing advertising shall be expensed the first time the
advertising takes place. Costs of communicating advertising are not
incurred until the item or service has been received and should not be
reported as expenses before the item or service has been received. For
instance, the costs of television airtime and magazine advertising space
should not be reported as advertising expenses before the airtime is used
or the space is used

Some activities, such as product endorsements and sponsorships of
events, may be performed pursuant to executory contracts. Costs
incurred under executory contracts generally are recognized as
performance under the contract is received
164
Advertising Expenses


Promotion materials, such as brochures and catalogues should be
accounted for as prepaid supplies, until they no longer are owned or
expected to be used, in which case their cost would be a cost of
advertising. In case of such promotion materials are expensed when
purchased, unused materials should be picked up and accounted for as
prepaid supplies at least each quarter-end
In cases where SPE shares in the cost of a retailer’s advertising, costs
should be expensed if SPE could obtain the advertising provided by the
retailer from another source and the value of the benefit can be
estimated. Otherwise, the costs should be recorded as a reduction to
sales revenue
165
Research and Development Expenses

All costs must be expensed when incurred

Examples of research or development activities:





Laboratory research for discovery of new knowledge
Searching for applications of new research findings or other new knowledge
Conceptual formulation and design, investigation, testing or evaluation, or
modification or improvement of product or process (including
manufacturing equipment) alternatives
Design, construction and testing of preproduction prototypes and models
Engineering activity to advance a new product or process to a point where it
meets specific functional and economic requirements
166
Overhead, General and Administrative
(G&A) Expenses

Overhead, G&A and Other Expenses represent non-capitalized costs incurred for
operating activities including but not limited to salaries, bonuses, utilities, repair
& maintenance, general insurance, postage, travel and entertainment and rent

All expenses shall be recorded when incurred. Under no circumstances shall the
following ever be deferred:

Organization costs, pre-opening expenditures, plant opening expenses

Research and development costs

Market development costs

Cash Discounts. If a cash discount is calculated based on a normal interest rate
and days of early payment of accounts receivable, then it shall be recorded as a
non-operating expense. If a cash discount is not calculated based on the reasons
above, and can be characterized as a sales allowance, then it shall be treated as a
deduction from the sales amount
167
Restructuring Charges

Costs associated with an exit or disposal activity (hereinafter referred to as
“restructuring charges”) shall be recognized in the period in which the related
liability is incurred

Restructuring charges shall be recorded as an operating expense (Cost of Sales,
Selling, General & Administrative Expenses or other General Expense) in the
income statement

A liability for restructuring charges should be recognized and measured initially
at fair value in the period the liability is incurred. Fair value should be measured
by discounting future expected payments using the credit-adjusted risk free rate
in accordance
168
Restructuring Charges
Restructuring charges include, but are not limited to, the following:


Termination benefits provided to current employees that are involuntarily terminated
under the terms of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or an individual deferred compensation contract (referred to as one-time
termination benefits)

Loss on disposal, sale or impairment of long-lived assets

Inventory disposal or write-down

Costs to terminate a contract that is not a capital lease

Other associated costs including costs to consolidate facilities or relocate employees.
169
Employee Costs

Employee costs represent expenses for payments and future benefits to
employees for services rendered including but not limited to wages, pensions,
medical benefits, compensated absences, payroll processing fees, and employers’
portion of payroll taxes

A key consideration of employee-related costs is accurate calculation and
account coding. Inaccuracies not only impact the efficiency of payroll and
benefit processing, but can subject SPE to penalties imposed by the unions and
guilds representing certain employee groups
170
Minimum Internal Controls






All expenditures should be approved in accordance with the COFA
All period-end accruals should be properly calculated and approved by a
Manager or above on at least a quarterly basis
Purchases and expenses should be recognized in the appropriate period and
properly classified, and adjustments should be made for “lag” and system cut-off
issues
Plans to enter into restructuring activity must be authorized in accordance with
the COFA and communicated to Legal and Corporate Finance
All overhead accruals should be properly calculated and reconciled on a monthly
basis
Reconciliations of the payroll register or similar report to the g/l and cash
disbursement records should be reviewed for gross and net pay on a monthly
basis. If the entity is part of the SPE Corporate Services Payroll Group, this
analysis should be done only on a consolidated basis
171
INCOME TAXES
172
Income Taxes
Topics
Definitions
Accounting
Minimum
Internal Controls
173
Definitions




Income taxes – national, local and foreign (including franchise taxes) based
on income. Total tax expense or benefit is the sum of a company’s current
income tax expense or benefit and the company’s deferred income tax
expense or benefit
Current tax expense (or benefit) – the amount of income taxes paid or
payable (or refundable) for a year as determined by applying the provision
of the enacted tax law to the taxable income
Current tax payable – the accumulated balance sheet amount of income
taxes currently payable as of specified date
Deferred tax expense (or benefit) – the change during the year in a
company’s deferred tax assets and liabilities
174
Definitions



Deferred taxes – tax effects that are postponed for allocation (either as
increases or decreases) to income taxes expense in future accounting
periods
Deferred tax asset – the deferred tax consequences attributable to
deductible temporary differences and carryforwards. A deferred tax asset is
measured using the applicable enacted tax rate and provisions of the
enacted tax law
Deferred tax liability – the deferred tax consequences attributable to taxable
temporary differences. A deferred tax liability is measured using the
applicable enacted tax rate and provisions of the enacted tax law
175
Definitions




Permanent differences – the differences between pre-tax accounting income
and taxable income arising from transactions which, under applicable tax
laws and regulations, will not be offset by corresponding differences or
reversals in the future periods
Temporary differences – the differences between the tax basis of assets or
liabilities and their reported amounts in financial statements that will result
in taxable income or deductions upon its reversal at some future date
Taxable temporary differences – temporary differences that result in taxable
amounts in future years when the related asset or liability is recovered or
settled, respectively
Valuation allowance – the portion of a deferred tax asset for which it is
more likely than not that a tax benefit will be realized
176
Accounting

FAS 109, Accounting for Income Taxes

Accounting for income taxes requires the recognition of current income
taxes due or refundable, as well as deferred income taxes, in the financial
statements

FAS 109 mandates an asset and liability method for computing deferred
income taxes. The deferred income tax amount is a calculable liability or
asset, and future tax effects, rather than past or current tax effects, are the
basis of the deferred tax computation
177
Accounting
Steps to calculate deferred taxes:
1.
Identify the types and amounts of existing temporary differences and
the nature and amount of each type of tax loss carry-forward or tax
credit carry-forward
2.
Calculate the total deferred tax liabilities for taxable temporary
differences using the applicable tax rate
3.
Calculate the total deferred tax assets for deductible temporary
differences and tax loss carry-forwards using the applicable tax rate
4.
Calculate the deferred tax assets for each type of tax credit carryforward
5.
Reduce deferred tax assets by a valuation allowance
178
Accounting
Example – Year 1 - Company A has $500,000 in taxable temporary differences,
$200,000 in deductible differences, and no loss or credit carryforwards.
Applicable federal tax rate is 35%. No valuation allowance is needed
Year 2 – same as Year 1, except that taxable temporary differences are $300,000
Year 1:
Deferred tax liability - $500,000 x 35%
$175,000
Deferred tax asset - $200,000 x 35%
(70,000)
Valuation allowance
0
$105,000
Year 2:
Deferred tax liability - $300,000 x 35%
$105,000
Deferred tax asset - $200,000 x 35%
(70,000)
Valuation allowance
0
$35,000
Question – What is the amount of deferred tax expense or benefit in Year 2?
179
Accounting
Answer - Deferred tax benefit is $70,000 ($105,000 - $35,000)
180
Accounting
Examples of common temporary differences:






Revenues or gains that are taxable after they are recognized in the US GAAP
financial statements (FS) – e.g., receivable from installment sales
Expenses or losses that are tax-deductible after they are recognized in FS – e.g.,
a product warranty liability
Revenues or gains that are taxable before they are recognized in FS – e.g.,
subscriptions received in advance
Expenses and losses that are deductible before they are recognized in FS – e.g.,
depreciable property
A reduction in the tax basis of depreciable assets because of tax credits – e.g.,
amounts received upon future recovery of the amount of the asset for financial
reporting will exceed the remaining tax basis of the asset, and the excess will be
taxable when the asset is recovered
Business combinations
181
Accounting
Examples of common permanent differences:


Financial expenses that are not deductible for tax purposes – e.g., premiums paid
on life insurance policies for which the company is the beneficiary, certain
penalties
Financial income that is not taxable or tax-free income – e.g., interest received
on state or municipal bonds, life insurance proceeds received by the company on
death of its officers
182
Accounting

If a deferred tax asset is not expected to be realized, a valuation allowance
shall be recorded for the relevant amount. A tax planning strategy is
essential to reduce the amount of the aforementioned valuation allowances

Deferred tax liabilities/assets and related valuations shall be classified as
either current or non-current, based on when the reversal of temporary
differences will occur. Within the current or non-current classification, tax
liabilities/assets owed to the same tax authority may be offset and presented
net. Deferred liabilities/assets owed to different tax authorities may not be
offset

Accounting for income taxes may be complex and consultations with SPE
tax department are required
183
Minimum Internal Controls

An income tax roll-forward schedule to properly adjust the deferred tax
asset/liability based on current P&L activity should be prepared at least
quarterly

Tax account balances should be reconciled to supporting detail (tax returns,
schedules of differences between taxable income and accounting income)
at least quarterly

Tax filing and payment due dates, claims for refunds are monitored on a
regular basis

Any quarterly or year end accruals and top side adjustments should have
applicable tax related entries. Any such significant tax entries should be
provided to SPE tax department for their review and approval by both
domestic and, especially international territories
184
Pensions
185
Pensions
Topics
Definitions
Accounting
Disclosure
186
Definitions
FAS 87, Employers’ Accounting for Pensions, and FAS 88, Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits

Two common types of plans:



Defined benefit plan – one that defines an amount of pension benefit to be provided,
usually as a function of one or more factors such as age, years of service, or
compensation. For example, upon retirement participants may receive monthly
benefits of $10 for each year of service or annual benefit payments of one percent of
the final year’s pay for each year of service
Defined contribution plan – provides an individual account for each participant, and
specifies how contributions to the individual’s account are to be determined instead of
specifying the amount of benefits the individual is to receive. For an example, each
year the employer may contribute three percent of pre-tax income to the plan. A
401(k) plan is an example of a defined contribution plan
187
Definitions

Accumulated benefit obligation - The actuarial present value of benefits
(whether vested or nonvested) attributed by the pension benefit formula to
employee service rendered before a specified date and based on employee
service and compensation (if applicable) prior to that date. The accumulated
benefit obligation differs from the projected benefit obligation in that it includes
no assumption about future compensation levels. For plans with flat-benefit or
non-pay-related pension benefit formulas, the accumulated benefit obligation
and the projected benefit obligation are the same

Projected benefit obligation - The actuarial present value as of a date of all
benefits attributed by the pension benefit formula to employee service rendered
prior to that date. The projected benefit obligation is measured using
assumptions as to future compensation levels if the pension benefit formula is
based on those future compensation levels (pay-related, final-pay, final-averagepay, or career-average-pay plans)
188
Definitions
Net periodic pension cost comprises of:







Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service cost
Amortization of deferred gains and losses
Amortization of transition amount

Service cost - The actuarial present value of benefits attributed by the pension
benefit formula to services rendered by employees during that period. The
service cost component is a portion of the projected benefit obligation and is
unaffected by the funded status of the plan

Interest cost - The increase in the projected benefit obligation due to passage of
time
189
Definitions

Expected return on plan assets - An amount calculated as a basis for determining
the extent of delayed recognition of the effects of changes in the fair value of
assets. The expected return on plan assets is determined based on the expected
long-term rate of return on plan assets and the market-related value of plan assets

Prior service cost - the cost of retroactive benefits granted in a plan amendment

Gain or loss - a change in the value of either the projected benefit obligation or
the plan assets resulting from experience different from that assumed or from a
change in an actuarial assumption
190
Accounting

Immediate recognition of a liability (the minimum liability) when the
accumulated benefit obligation exceeds the fair value of plan assets. A liability
(unfunded accrued pension cost) is recognized if net periodic pension cost
exceeds amounts the employer has contributed to the plan. An asset ( prepaid
pension cost) is recognized if net periodic pension cost is less than amounts the
employer has contributed to the plan

If the accumulated benefit obligation exceeds the fair value of plan assets, the
employer shall recognize a liability (including unfunded accrued pension cost)
that is at least equal to the unfunded accumulated benefit
obligation. Recognition of an additional minimum liability is required if an
unfunded accumulated benefit obligation exists and (a) an asset has been
recognized as prepaid pension cost, (b) the liability already recognized as
unfunded accrued pension cost is less than the unfunded accumulated benefit
obligation, or (c) no accrued or prepaid pension cost has been recognized

Need to recognize a minimum liability is based on estimated obligations and
assets as of their measurement date. Obligations are estimated as of that date
based on a roll-forward of the beginning-of-the-year actuarial valuation
191
Accounting
Company A has a prepaid cost of $100 at year-end prior to calculation of the
additional liability. The accumulated benefit obligation (ABO) is $1,000
and the fair value of the assets is $900
Question – What is the amount of additional liability, if any, to be recorded the
required minimum liability?
192
Accounting
Answer – the additional liability is $200.
A minimum liability of $100 = $1,000 (ABO) - $900 (fair value of the assets)
plus
$100 (prepaid asset)
In this case, the company should present in its financial statements an accrued
pension liability of $100 ($100 prepaid asset minus $200 additional
liability)
193
Disclosure

FAS 132(R), Employers’ Disclosure about Pensions and Other
Postretirement Benefits, issued in December 2003

Requires new disclosure (very robust) about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefits plans.

Accounting and disclosure of pensions is very complex and require
consultation with SPE Technical Support and Compliance group

Any pension plans should be communicated to SPE Corporate Finance
and Technical Support and Compliance group
194
CONSOLIDATION AND
FINANCIAL
REPORTING
195
Consolidation and Financial Reporting
Topics
Consolidation
Foreign Currency
Translation
Intercompany
Transactions
Material Event
Disclosure
Minimum
Internal Controls
196
Consolidation

Consolidation is the process of combining the assets, liabilities and operations of
companies under common control, and presenting the result as if it was one
company

SPE consolidation is performed at the Home Office level

Hyperion is currently used as consolidation tool. Moving towards new
consolidation tool – BCS (Business Consolidation System)
197
Foreign Currency Translation


The initial step in foreign currency translation is to determine each entity’s
functional currency.
There are two main steps in the foreign currency translation:


Step 1 – Revaluation of transactions in other than local currency to local (functional)
currency financial statements
Step 2 – Translation of financial statements in local (functional) currency to reporting
(group) currency.
198
Foreign Currency Translation
Step 1 - Revaluation of Foreign Currency Transactions

For other than forward exchange contracts, the following shall apply to all
foreign currency transactions:



At the date the transaction is recognized, each asset, liability, revenue, expense,
gain, or loss arising from transaction shall be measured and recorded in the
functional currency of the entity by using the exchange rate in effect at that
date
At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency shall be adjusted to reflect the
current exchange rate
The exchange gains and losses should be included in net income (loss) for
the period. The exceptions are hedging instruments and intercompany
transactions of a long-term investment nature which gains and losses are
included in cumulative translation adjustment (CTA) account, a component
of equity
199
Foreign Currency Translation
Step 2 - Translation of Foreign Currency Statements

The functional (local) currency financial statements should be translated into the
reporting (group) currency utilizing period-end (for assets and liabilities), daily or
period average (for income statement accounts), and historical (for equity
accounts) exchange rates. As a result of these translation procedures, a Cumulative
Translation Adjustment (CTA) account will be created

The rate in the SAP system as of A/R and A/P cut off date should be used to revalue
and translate the assets and liabilities
200
Intercompany Transactions

Transactions between SPE consolidated entities and are required when transaction
impacts more than one company code (legal entity) belonging to SPE

One step intercompany (I/C) transactions - primarily executed between domestic
consolidated companies. The company originating the entry has the ability to
directly record the offset entry in the trading partner’s general ledger

Two step I/C transactions - generally occur between Home Office and international
territories and between territory and territory:




Is used in order for both parties to approve intercompany transaction
Automated two-step (“park and post’) – SPE preferred method
Manual two-step – should be used in very limited situations (clearing conversion and
creating transactions with non-SAP entity)
Five business days for receiving entity to approve or dispute the transaction
201
Intercompany Transactions


Settlement – remittance of cash and, in rare cases, non-monetary offset. In
SAP system, settlement occurs on the account/trading partner level.
However, it is not offset on the transactional level and therefore, even if
settled SAP will continue to treat the transaction as ‘open’. All ‘open’
transactions are revalued by the system.
Clearing – process of matching settled transactions on the transactional
level. The clearing process will ‘close’ items on the transactional level. In
this case the transaction is not considered ‘open’ by the system and will not
be revalued. Note: the SAP ‘clearing’ functionality is not yet fully in place.
202
Intercompany Transactions
Major push to be in-balance on a line item basis by September 2006 close






Must use the SAP automated “two-step process” to ensure all new activity is in-balance as posted
by both parties in the same accounting period
Must have direct-relationship on all transactions with correct Company Code and Profit Center
Must record all inter-company activity in “Transaction Currency” and let SAP make conversion
to the “local currency”
Must confirm all inter-company balances monthly in “transaction currency” with the SAP Report
“SP70A” and remain in-balance at every period-end
Must revalue inter-company balances denominated in foreign currencies at month-end (system
A/R – A/P cutoff rates) on your books with offset entries to unrealized gain / loss on foreign
exchange account (P&L)
Must use SAP’s A/R – A/P clearing function to maintain month-end balance of “open-items”
only to allow SAP’s “revaluation program” to work properly
203
Material Event Disclosure
Complete and timely disclosure of material events – within 24 hours to SPE
Corporate


Materiality level is updated by Sony Corporation (Tokyo) on a periodic basis.
SPE events are considered material if they exceed $10 million

Examples of material events:






Any mergers and acquisitions (M&A), joint venture or other strategic alliance transaction
Any acquisition or sale of any property, plant or equipment
Any impairment or write-off of assets or restructuring charges
Any event triggering direct or contingent financial obligations
Any lawsuit or potential lawsuit with possible monetary damage
Execution or termination of any material contact outside the ordinary course (including nonbinding letters or intent), which includes the following:

Any contract for the sale of products or services

Any licensing agreement (except for cross-license) regarding particular intellectual property
rights indispensable to the business of a particular product or service
204
Minimum Internal Controls

Significant changes in internal accounting controls or accounting systems should
be discussed with the SPE Corporate prior to implementation

A checklist of standard company forms submitted by each group company (or
other method) should be used to determine all required disclosures have been
summarized, and should be maintained and reviewed by Corporate Reporting

If foreign subsidiaries are recorded on a lag basis, a determination of the
potential impact on the financial statements should be performed quarterly and
accruals made if differences are material
205
SPE Technical Support and Compliance
Resources and Links

David Mastalski, Vice
President, Technical Support
and Compliance, SPE
Corporate Finance
E-mail: [email protected]
Phone: 1-310-244-8538

Svetlana Tyuleneva,
Director, Technical Support
and Compliance, SPE
Corporate Finance
E-mail:
[email protected]
Phone: 1-310-244-6509
206
SPE Technical Support and Compliance
Resources and Links

SPE Accounting Policies and Procedures will be posted to:
MySPE/Departments/Corporate/Finance/Compliance/Compliance
Resources/SPE Accounting Policies and Procedures

Significant Accounting Pronouncements from January 2003 to
September 2006 will be posted to:
MySPE/Departments/Corporate/Finance/Compliance/Compliance
Resources/Significant Accounting Pronouncements
Q&A and Closing
207
SPE Technical Support and Compliance
Resources and Links

SPE Accounting Policies and Procedures are/will be posted to:
MySPE/Departments/Corporate/Finance/Compliance/Compliance
Resources/SPE Accounting Policies and Procedures

Significant Accounting Pronouncements from January 2003 to
September 2006 are/ will be posted to:
MySPE/Departments/Corporate/Finance/Compliance/Compliance
Resources/Significant Accounting Pronouncements
Q&A and Closing
208