An amendment from the Financial Accounting Standards Board (FASB) recognizes the changing nature of TV show production over the years by aligning the accounting rules more closely with those governing film production. Under previous generally accepted accounting principles (GAAP) rules, production costs for episodic TV series were capitalized up to the amount of revenue contracted for each episode in the initial market until persuasive evidence existed that revenue from secondary markets would occur or an entity could demonstrate a history of earning such revenue in that market. 

The FASB made this distinction between films and episodic television series to address the risks inherent in producing episodic content through deficit funding arrangements, which often had a high risk of failure. In deficit funding arrangements, the licensing fee paid by the initial network exhibiting the show generally did not cover production costs, and most revenues were generated in the secondary market upon syndication. Therefore, GAAP precluded an entity from capitalizing all production costs related to episodic television content until it could support the expectation that the series would make it to syndication to recover those production costs and potentially earn a return.

While these rules may have worked well in the days of network TV and cable syndication, the FASB said they are becoming increasingly irrelevant in a world where more and more people watch shows through subscription-based streaming media platforms like Netflix or Hulu. Indeed, in the last year alone it was estimated that 2.8 million people dropped traditional TV subscriptions in favor of streaming platforms, with 1.2 million leaving in the third quarter.

“Considering significant changes in production and distribution models in the entertainment industry, some stakeholders questioned whether the capitalization guidance for episodic television series in Subtopic 926-20 provided relevant information for investors and other user,” said the FASB. 

Consequently, costs for episodic TV series will now be accounted for using the same, much simpler, rules that govern film productions: Costs are capitalized. For accounting purposes, now they are all films. For purposes of applying the individual-film-forecast-computation method to episodic television series, multiple seasons of an episodic television series are considered to be a single product.

However, the rules did create a new term in the master glossary, a “film group,” that generally describes what we’d understand to be an episodic TV show. It is described as “[t]he unit of account used for impairment testing for a film or a license agreement for program material when the film or license agreement is expected to be predominantly monetized with other films and/or license agreements instead of being predominantly monetized on its own. A film group represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other films and/or license agreements.”

Entities are now required to test a film or license agreement for program material within the scope of Subtopic 920-350 for impairment at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements. The rules now also require that an entity reassess the predominant monetization strategy when a significant change in the monetization strategy occurs, and to write off unamortized film costs when a film is substantively abandoned.