www.pwc.com/miag MIAG Issue: 12 Media Industry March 2017 Accounting Group

Making sense of a complex world Revenue recognition: principal/agent arrangements – issues for media companies under IFRS 15

This paper explores some of the key IFRS 15 accounting considerations for principal/agent arrangements by med companies.

Contents

Introduction to MIAG 2

Revenue recognition: principal/agent arrangements 3

Background 4

Example 1: Book sales 8

Example 2: eBook sales 10

Example 3: Television content distribution 14

Example 4: Film production 16

Conclusion 18

Further reading 20

Contacts 23 Introduction to MIAG

Our Media Industry Accounting Group (MIAG) brings together our specialist media knowledge from across our worldwide network. Our aim is to help our clients by addressing and resolving emerging accounting issues that affect the entertainment and media sector.

With more than 4,200 industry- I would encourage you to contact us dedicated professionals, PwC’s global with your thoughts and suggestions entertainment and media (E&M) about future topics of debate for the practice has depth and breadth of MIAG forum, and very much look experience across key industry sectors forward to our ongoing conversations. including: television, film, advertising, publishing, music, internet, video and Best wishes online games, radio, sports, business information, amusement parks, casino gaming and more. And just as significantly, we have aligned our media practice around the issues and Sam Tomlinson challenges that are of utmost PwC UK importance to our clients in these Chairman, sectors. One such challenge is the increasing complexity of accounting for PwC Media Industry Accounting Group transactions and financial reporting of results – complexity that is driven not just by rapidly changing business models but also by imminent changes to the world of IFRS accounting.

Through MIAG, PwC1 aims to work together with the E&M industry to address and resolve emerging Sam Tomlinson accounting issues affecting this dynamic sector, through publications such as this one, as well as conferences and events to facilitate discussions with your peers.

1 PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity

2 MIAG Issue: 12 Revenue recognition: principal/agent arrangements

Revenue is – hopefully! – the largest item in the income statement so accounting judgements that directly affect revenue are invariably important. This 12th MIAG paper, a revision of our sixth paper, explores some of the key principal/agent accounting considerations for media companies under the new revenue recognition standard, IFRS 15 ‘Revenue from contracts with customers’.

Principal/agent assessments are However, in this paper, we apply the IFRS increasingly complex as digital 15 principles to those same examples, transformation results in an ever- hopefully in a way that highlights that increasing variety of content formats and the approach to the assessment is routes to reach the ultimate customers. different. Our scenarios are clearly not For the media company – often the designed to be exhaustive; but they will ‘content provider’ in such arrangements hopefully provide food for thought for – the assessment of whether it is selling media companies when considering the its content to a retailer, or to consumers impact of IFRS 15 on new and existing via a distributor, has a direct impact on routes to market. whether it recognises its revenues net or gross. This in turn affects two key metrics We hope you find this revised paper in opposite directions: revenue and useful and welcome your feedback. percentage profit margin. Careful selection and communication of Best wishes appropriate revenue recognition accounting policies for potential principal/agent arrangements is therefore a key part of managing capital markets stakeholders. Gary Berchowitz Sallie Deysel PwC South Africa PwC UK Although the indicators that are used in a principal/agent assessment under IFRS 15 are similar to those used under IAS 18, the underlying principle has changed to that of ‘control’. This revised paper considers the same practical examples as before, covering physical books, eBooks, television content and film production. Gary Berchowitz Sallie Deysel

Issue: 12 MIAG 3 Background

PwC’s Media Industry Accounting Group (MIAG) is our premier forum for discussing and resolving emerging accounting issues that affect the entertainment and media sector – visit our dedicated website: www.pwc.com/miag

Revenues in the media sector can arise IFRS 15 contains limited explicit from the sale of goods or rendering of guidance on identifying whether the services in areas as diverse as books, distributor is the media company’s newspapers, magazines, music, film, customer or merely its agent. However, television, video games and more. A IFRS 15 does contain extensive common feature of many media industries guidance for the distributor to is that the ‘content’ owned by the media determine whether it is the principal or company requires a third party distribution the agent with respect to the end route to reach the ultimate consumers. consumer. When the distributor is Distribution routes can be either traditional considered to be the principal in physical retailers or, increasingly, providing the media content to the end principal (and hence the media providers of telecommunications or consumer, the distributor is the company’s customer) if it controls the online retail sites. customer of the media company. In specified goods or services before they contrast, when the distributor is transfer to the end customer. These arrangements – of content owner, considered to be the agent in providing distributor and consumer – require the the media content to the end consumer, The assessment can be challenging for content owner (media company) to the end consumers are the customers of many media business relationships assess whether the distributor is: the media company. Consequently, it is because it is often difficult to determine useful in these arrangements to consider whether the distributor controls the • The customer of the media whether the distributor would be content before it transfers to the end company, in which case the media considered to be an agent or the consumer. It is also complicated by company would recognise the net principal in providing the media content digital transformation resulting in an consideration receivable from the to the end consumer. ever-increasing variety of content distributor as revenue; or formats and digital distribution routes, • An agent and the end consumers A company is acting as a principal when which do not have the benefit of are the content owner’s the nature of its promise is to provide historical experience and practice to customers, in which case the media the goods or services itself. A company is inform the accounting judgements. And company would generally recognise acting as an agent when the nature of its finally, with the introduction of IFRS 15, the gross consideration paid by the promise is to arrange for the goods or the principles and factors to consider end consumer as revenue, with the services to be provided by another party. have also now changed, meaning distributor’s fee usually recognised The key change in IFRS 15 compared to traditional arrangements may need to as a cost. the existing revenue recognition be reconsidered in light of the new guidance is that this assessment is based accounting guidance. on control. The distributor would be the

4 MIAG Issue: 12 What is the relevant IFRS Following these amendments, the Whether or not the company controls the guidance? application guidance sets out the goods or services before they are following two step process that a transferred might not always be readily The new revenue standard provides company would apply in determining if apparent, especially if the item to be additional guidance on revenue it is a principal or agent in a contract transferred is an intangible item or a recognition under principal/agent with a customer: service, as is often the case for a media arrangements. Following the issuance of a. identify the specified goods or company. For that reason, the IFRS 15 IFRS 15 in May 2014, questions were services to be provided to the guidance includes indicators to help a raised on the principal/agent guidance, customer (which, for example, could company determine whether it controls including: be a right to a good or service to be the goods or services before transferring • Is control always the basis for provided by another party); and them and thus whether the company is a determining whether the company is principal or agent. Those indicators are b. assess whether it controls each a principal or agent? based on the principal/agent indicators specified good or service before that that were included in the previous IFRS • How the control principle and the good or service is transferred to the revenue recognition requirements. principal/agent indicators work customer. together? However, the indicators in IFRS 15 have a different purpose than previous revenue • How should the control principle be Identifying and understanding a recognition requirements in that they are applied to contracts involving company’s promise (i.e. its performance based on the concepts of identifying intangible goods or services? obligation), and determining if the company controls these goods or performance obligations and the transfer In light of the questions and subsequent services before their transfer to the of control of goods or services. The discussion thereof, in April 2016, the customer, is fundamental to indicators (a) do not override the International Accounting Standards determining if the company is the assessment of control; (b) should not be Board (IASB) decided to clarify the principal or an agent. A company viewed in isolation; (c) do not constitute principal/agent guidance and amend controls an asset if it has the ability to a separate or additional evaluation; and the related examples in the standard. direct the use of, and obtain (d) should not be considered a checklist substantially all the remaining benefits of criteria to be met, or factors to be from, the asset. This includes the ability considered, in all scenarios. Considering to prevent others from directing the use one or more of the indicators will often or obtaining the benefits of the asset. be helpful and, depending on the facts and circumstances, individual indicators will be more or less relevant or persuasive to the assessment of control.

Issue: 12 MIAG 5 Indicators in IFRS 15 that a company • The company has discretion in Are there any tax implications? should account for a transaction as establishing the price for the principal are as follows: specified good or service – This paper is concerned primarily with Establishing the price that the accounting, which should be consistent • The company has the primary customer pays for the specified good across companies reporting under IFRS, responsibility for fulfilling the or service may indicate that the rather than tax, which will vary with promise to provide the specified company has the ability to direct the each country’s local laws and tax goods or services to the customer use of that good or service and regulations. We note that sales tax is – This typically includes obtain substantially all of the generally calculated as a percentage of responsibility for the acceptability of remaining benefits. However, an revenue; so the assessment of principal/ the specified good or service (e.g. agent can have discretion in agent, which impacts revenue primary responsibility for meeting establishing prices in some cases. For recognition, might also affect sales tax. customer specifications). If the example, an agent may have some Some countries will have tax legislation company is primarily responsible for flexibility in setting prices in order to specifically designed to address fulfilling the promise to provide the generate additional revenue from its principal/agent debates, in which case specified good or service, this may service of arranging for goods or the accounting treatment adopted indicate that the other party services to be provided by other should in theory be tax neutral. involved in providing the specified parties to customers. good or service is acting on the However, even in such countries, the This paper addresses the assessment of company’s behalf. accounting treatment adopted might the key principal/agent considerations have implications with regards to sales • The company has inventory risk for media companies in various practical tax, since differing treatments for before the specified good or examples covering physical books, accounting and tax purposes might service has been transferred to a eBooks, television content and film catch the attention of local tax customer, or after transfer of production. Our scenarios are clearly authorities or accounting regulators. control to the customer (for not designed to be exhaustive; but they Direct tax authorities might also pay example, if the customer has a will hopefully provide food for thought close attention to sales to, or distribution right of return) – For example, if the for media companies as they consider by, related group companies to distributor obtains, or commits itself the new guidance for principal/agent understand the substance of intra-group to obtain, the specified content assessments under IFRS 15. In many transactions. before obtaining a contract with an cases, the answer may be unchanged, end customer, that may indicate that however, because the underlying We would always recommend the distributor has the ability to principles have changed, media consulting with a local tax expert to direct the use of, and obtain companies should not assume that their determine possible tax consequences of substantially all of the remaining conclusions under existing revenue a principal/agent assessment. benefits from the content before it is recognition guidance will remain the transferred to the end consumer. For same under IFRS 15. As always, the this indicator the general sales risk of answer for complicated real life the developed good could also be arrangements will depend on specific considered i.e. who bears the greater facts and circumstances. risk from the investment in content and distribution.

6 MIAG Issue: 12 Issue: 12 MIAG 7 Example 1: Book sale-or-return arrangement

Scenario The arrangement includes a sale-or­ How should book publisher B return clause meaning that retailer R account for printed book sales? Book publisher B produces the content can return any unsold books at the same for a book and arranges the physical price per unit originally invoiced by In this scenario, book publisher B must printing. B enters into contracts with book publisher B. Books can be returned assess whether retailer R is: booksellers for the sale of books, to by R to B for a period of up to 12 months • Its customer, in which case book booksellers including retailer R. Book after original shipment. publisher B would recognise the net publisher B invoices retailer R for an consideration receivable of €9 as agreed price per unit. B suggests, but For this example, assume book publisher revenue; or cannot enforce, a retail selling price. B charges retailer R €9 for each book and R generally charges consumers the • An agent and the end consumers are suggested retail price of €10. publisher B’s customers, in which case book publisher B would generally recognise the €10 paid by the end consumer as revenue, and recognise €1 as an acquisition cost paid to retailer R.

invoice for delivered books Book publisher B Retailer R returned books for refund

Assessment of whether retailer R retailer R’s perspective and assess For example, retailer R can sell the controls the goods or services whether retailer R controls those goods books to any end consumer that it before transfer or services before they are transferred to chooses and prevent book publisher B the end consumer. In this fact pattern, from transferring the books to other In order to determine whether retailer R the specified goods or services are the parties once retailer R takes delivery of is the customer or agent of book physical books and there do not appear the books. Retailer R controls the publisher B, it is useful for book to be any other goods or services inventory of books that it holds and publisher B to consider whether retailer promised to the customer. manages that inventory to fulfil demand R would be considered to be an agent or from end consumers. the principal in providing the books to Book publisher B concludes that retailer end consumers. R does control the books before they are transferred to the end consumer, since Book publisher B should identify the retailer R has the ability to direct the use specified goods or services to be of the books before they are transferred. provided to the end consumer from

8 MIAG Issue: 12 As part of reaching this conclusion, book publisher B considers the indicators of whether retailer R would be considered the principal and therefore the customer of book publisher B:

Indicator Assessment by book publisher B

Primary • Although book publisher B retains responsibility for the content of the book (along with, potentially, the responsibility for book’s author), retailer R is primarily responsible for fulfilling the promise to provide the books to end fulfilling the consumers. Retailer R is primarily responsible for the acceptability of the books from the end consumer’s promise to provide perspective and would generally be the party that end consumers contacted if there was an issue with the the specified goods book e.g. blank pages or damage or services • This indicates retailer R controls the books before they are sold to end consumers Inventory risk • Although retailer R has obtained the books before they are sold to end consumers, book publisher B before or after retains the risk that they cannot be sold at a profit since books that are unsold within 12 months can be transfer of control returned to the customer (for • However, retailer R has physical possession of the books so the risk of damaged or stolen books resides example, if the with R. In addition, R has full inventory risk for books that were delivered more than 12 months customer has a right previously if these are not returned of return) • This indicator is mixed Discretion to • R sets the price for customers. While R generally uses the retail price suggested by B, R has latitude to establish prices vary from this • Indicates retailer R controls the books before they are sold to the end consumers

Conclusions

In summary, the goods and services revenue of €9 per book. (NB: revenue is extended multi-year return periods. In being considered are the physical not recognised for books that are such a scenario, careful consideration books. Retailer R appears to control expected to be returned by R as control would need to be given to whether the the books before they transfer to end of these books does not transfer between Retailer continued to have the ability consumers because retailer R can B and R. Accounting for returns is not to direct the use of the books to obtain direct the use of the books to obtain addressed in this paper.) substantially all of the remaining substantially all of the remaining benefits from the books. benefits from the books. Retailer R However, if some of the facts and also has the ability to prevent others circumstances were varied, the As always, the assessment in real life from directing the use of the books determination could be different. In should be determine by the specific and obtaining benefits from the some territories the book publisher facts and circumstances including books. This conclusion is confirmed by might have the legal right to set the contractual terms, applicable laws and considering the indicators. As such, selling price to the customer, and might local industry practice. book publisher B’s customer is retailer also retain more of the inventory risk R so book publisher B recognises given local arrangements such as

Issue: 12 MIAG 9 Example 2: eBook sales via online retailer

Scenario retailer O makes this payment but eBook How should eBook publisher E publisher E must return to O any cash account for eBook sales? Online retailer O sells eBooks with the previously received for that eBook. eBook content being provided to O by eBook publisher E must assess whether eBook publisher E. O is responsible for The agreement between online retailer online retailer O is: transforming E’s digital files into a O and the consumer states that O is digital format that can be sold on O’s responsible for delivery of the content to • Its customer, in which case eBook website and downloaded by consumers the consumer. If any defect is caused by publisher E would recognise the net on to their eReader device, although this E’s content, O reverts to E for correction. consideration receivable of €6.99 – ‘transformation’ process is relatively €7.10 as revenue; or straightforward and does not represent Online retailer O has signed an • An agent and the end consumers are ‘significant modification’. exclusivity agreement with eBook eBook publisher E’s customers, in publisher E in that region, meaning no which case eBook publisher E would The eBook price charged to consumers is other online retailer is able to sell E’s generally recognise the €9.99 – set by online retailer O but within eBooks in that region. €10.15 (depending on the actual narrow, contractually-determined selling price) paid by the end In this scenario, assume that online boundaries agreed with E. The consumer as revenue, and recognise retailer O charges consumers a price consumers pay the eBook price to O, €3.00 – €3.05 as cost paid to online between €9.99 and €10.15, as permitted which retains a set amount per sale (O’s retailer O. fee) and remits the remainder to eBook by its contract with eBook publisher E, publisher E. If a refund is provided to with E receiving 70% of the price paid the consumer for any reason, online by the consumer.

Content eBook

eBook publisher E Online retailer O Consumer

Cash (eBook price) Cash (eBook price) less O’s fee

10 MIAG Issue: 12 Assessment of whether online In addition, because the promised good sub-licence to each consumer is only retailer O controls the goods or or service represents a licence of created at the point of sale, online services before transfer intellectual property, online retailer O retailer O can direct how the eBooks would need to determine whether the will be marketed and delivered to any In order to determine whether online licence represents a ‘right of use’ or a end consumer that they choose via their retailer O is the customer or agent of ‘right of access’. For purposes of this online portal and prevent eBook eBook publisher E, it is useful for eBook example, we have assumed that the publisher E from transferring the books publisher E to consider whether online licence represents a right to use eBook to other parties as a result of the retailer O would be considered to be an publisher’s intellectual property as it exclusivity agreement. However, E does agent or the principal in providing the exists at the point when the license is not consider that the O’s ability to issue eBooks to end consumers. granted, i.e. the revenue for each eBook sub-licences to any end customer is sold is recognised at a point in time. clearly determinative of control. It is eBook publisher E should identify the also not clear whether O obtains specified goods or services to be provided eBook publisher E considers whether substantially all of the benefits given the to the end consumer from online retailer online retailer O controls the eBooks restrictions on pricing. O’s perspective and assess whether before they are transferred to the end online retailer O controls those goods or consumer. eBook publisher E notes that services before they are transferred to online retailer O might appear to have the end consumer. In this fact pattern, the ability to direct the use of the eBooks the specified goods or services are the before they are transferred to the end digital eBooks (i.e. a licence to consumers relating to the eBooks in that intellectual property) and there do not region as a result of the exclusive appear to be any other goods or services agreement. For example, although the promised to the customer.

Issue: 12 MIAG 11 Therefore eBook publisher E also considers the indicators of whether online retailer O would be considered the principal and therefore the customer of book publisher B:

Indicator Assessment by eBook publisher E

Primary • O is responsible for technical infrastructure and download format as well as digital delivery to the responsibility for consumer fulfilling the • If there is an issue with the digital content, end consumer is likely to contact online retailer O to resolve promise to provide the issues the specified goods • However, E is responsible for the content that, in the absence of a physical product, is the key sales driver or services • This indicator is mixed but indicates that online retailer O is more likely to have the primary responsibility to the end consumer to fulfil the delivery of a working eBook Inventory risk • There is no traditional inventory risk for eBooks since there is no physical product, although as noted any ‘returns’ would be O’s responsibility in the first instance • There is some investment recoverability risk for E given its investment in the author and editorial activities (though it is likely that the investment will be recovered via more than one sales channel i.e. by physical books as well as eBooks). In this scenario, O has minimal inventory risk since the transformation process is straightforward and does not constitute a significant modification • The lack of physical inventory means this indicator is not very relevant so not determinative

Discretion to • O sets the price charged to ultimate consumers establish prices • However, since the boundaries in this scenario are narrow, this limits O’s ability to obtain ‘substantially all of the remaining benefits from the eBooks’ • If boundaries were ‘broad’ this indicator might be different (there would be significant judgement in deciding whether a particular range is ‘narrow’ or ‘broad’) • This indicator is mixed and but indicates eBook publisher E has more discretion than online retailer O

12 MIAG Issue: 12 Conclusions

The assessment of eBook revenue likely be considered a sales-based royalty, (where the online retailer is viewed as recognition is, as always, dependent for which specific guidance exists under the customer of the eBook publisher). on specific contractual terms and IFRS 15. This is at least partly due to differing business practices, which are rapidly contractual terms and these changing as the eBooks market Alterations of this scenario’s fact pattern judgements under IFRS 15 will develops (e.g. cloud versus could result in a different conclusion. continue to be complex. downloads) and the variety of digital For example, if the online retailer is Since the publication of our original devices increases. merely a conduit and end consumers can (and do) contact the eBook publisher sixth MIAG paper, eBook (and similar) In the scenario described above, directly, this might indicate that the revenues have become more material taking into account the exclusivity online retailer is merely a platform and the variety of digital devices have agreement, O’s ability to choose how through which eBook publishers connect increased. We expect that the volume to market the product and issue with end consumers, rather than being and type of contracts between licences to any consumer of its choice the primary obligor. Similarly, if the publishers and online retailers will in the territory, the fact that on agreement to sell eBooks between E and continue to grow. As demonstrated in balance O appears to be the primary O was non-exclusive, this might lead to this example, the outcome can be obligor and the fact that O has some online retailer O concluding that it could different from the previous latitude to establish prices, we would not restrict others’ ability to sell the conclusions under IAS 18. eBook probably conclude that the online eBooks and therefore is less likely to publishers should reconsider these retailer is most appropriately viewed control them before they transfer to the types of arrangements under IFRS 15 as principal in its dealings with end end consumer. to ensure that the conclusions are still consumers. As such, eBook publisher valid when control is used as the would identify online retailer O as its There is currently some diversity in underlying principle. customer and recognise revenue on a practice among eBook publishers in Similar considerations to those set out net basis. It is worth noting that eBook assessing such relationships as above would apply for a music publisher would probably only principal/agent (with the eBook publisher selling music downloads or recognise revenue when online publisher selling to ultimate customers for a company selling an ‘app’ via an retailer O makes its subsequent sales using the online retailer as its agent) or online store. because the arrangement would most as a direct sale to the online retailer

Issue: 12 MIAG 13 Example 3:Television content distribution

Scenario The contractual arrangement between How should TVCo account for TelCo and TVCo allows TelCo to sell the revenues under this arrangement? A telecommunications company (TelCo) TV package of TVCo in conjunction provides services including telephone, TVCo must assess whether TelCo is: internet and cable television. All services with other TelCo products i.e. bundled are available standalone or combined in within TelCo’s various entertainment • Its customer, in which case TVCo is various ‘entertainment packages’. packages. TelCo pays a primarily fixed selling its content directly to TelCo Television content (the ‘TV package’) is up front fee to TVCo and assumes i.e. record net revenues; or provided by television company TVCo. customer credit risk. The contract • An agent and the end consumers are includes provisions for TelCo to pay the customers of TVCo, in which case Some of TelCo’s entertainment packages more than the ‘fixed’ fee if TVCo’s TVCo would generally recognise allow television broadcasting via the revenue at the amount received from content proves exceptionally popular internet. TelCo stores TVCo’s full library end consumers and the amount with TelCo’s subscribers. of a back catalogue of television material retained by TelCo as a customer so that TelCo customers have the acquisition cost. opportunity at any time to search and watch specific material (‘video-on-demand’).

Payment to TVCo Payment to TelCo (including payment for TV package)

TVCo TelCo Consumer

TV package Internet package: • internet connection preparing content to make it available via the • telephone internet storing material • video-on-demand to make it available as ...etc. video-on-demand

Assessment of whether the TelCo granted, i.e. the revenue for provision of data services that TelCo provides to the controls the goods or services the television content is recognised at a end consumers to determine whether before transfer point in time. TelCo is the customer or agent for the television content. In order to determine whether TelCo is the TVCo should identify the specified goods customer or agent of TVCo, it is useful for or services to be provided to the end TVCo considers whether Telco controls the TVCo to consider whether TelCo would be consumer from TelCo’s perspective and television content before it is transferred to considered to be an agent or the principal assess whether TelCo controls those goods the end consumer. TVCo concludes that in providing the television content to end or services before they are transferred to TelCo has the ability to direct the use of the consumers. In addition, because the the end consumer. IFRS 15 has clarified television content before it is transferred to promised good or service represents a that a company can be the principal for the end consumers. However, it is not clear license of intellectual property, TVCo some of the promised goods and services whether TelCo can obtain substantially all would need to determine whether the and an agent for others in a transaction the benefits relating to the television license represents a ‘right of use’ or a ‘right with a customer. In this example, TVCo content and restrict others from directing of access’. For purposes of this example, we has determined that the television content the use of the television content because have assumed that the licence represents a can and should be considered as a separate TVCo can still license the content to right to use TVCo’s intellectual property as performance obligation from the voice and other companies. it exists at the point when the licence is

14 MIAG Issue: 12 Consequently, TVCo considers the indicators in helping it determine the nature of TelCo’s promise to the end consumer and whether TelCo controls the television content before it transfers to end consumers:

Indicator Assessment by eBook publisher E

Primary • Although both companies clearly contribute to provision of these services, an ultimate consumer would responsibility for most likely view the supplier of the television content as TelCo, particularly where services are bundled or fulfilling the in the event of issues promise to provide • Indicates TVCo is selling its content to TelCo, with TelCo controlling the television the specified goods content before providing it to the end consumers or services Inventory risk • There is no traditional inventory risk since there is no physical product • However, TelCo commits itself to obtain the specified good (ie the television content) before this is transferred to the end consumer by virtue of the fixed up front payment • TelCo paying a fixed up front fee for the right of use of the content indicates that it has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the television content Discretion to • Each company is responsible for the price of its own products establish prices • TVCo sets the price it charges TelCo • TelCo sets the price charged to consumers for its entertainment packages and can combine TVCo’s content with other content • Indicates TVCo is selling its content to TelCo, with TelCo then controlling the content before it transfers to end consumers

Conclusions However, scenarios can be envisaged content by TelCo’ (content that Both companies are responsible for where the conclusion would be different. happens to be generated by TVCo). It providing services, with TVCo For example, if the video-on-demand might be helpful to consider both providing content and TelCo providing content was available solely on a TVCo and TelCo marketing materials infrastructure. In considering the pay-per-view basis, with the price set by when making this assessment. The definition of control, it is difficult to TVCo and no fixed payment required by ‘TVCo content access’ view would conclude whether TelCo controls the TelCo, this might indicate that TelCo did imply that TVCo’s customer is the end television content before it transfers to not control the content before it consumer, so TVCo should recognise the end consumer. However, on transferred to the end consumer. revenue gross, with the amount balance, when considering the retained by TelCo representing a indicators, this suggests that TVCo is In some scenarios it can also be relevant customer acquisition cost of sale. In selling to TelCo rather than using to consider who the end consumer contrast, the ‘TelCo content provision’ TelCo as its agent to sell to the believes has primary responsibility for view implies that TVCo is selling to ultimate customers. As such, TVCo providing the content i.e. do consumers TelCo so should recognise just the net should recognise only the net revenues believe they are ‘accessing TVCo revenue received. received from TelCo. content’ (via TelCo) or ‘being provided

Issue: 12 MIAG 15 Example 4:Film production

Scenario production company (ProductionCo) by How should MovieCo account for MovieDistributor, MovieCo hires the amounts it invoices to A film company (MovieCo) develops ProductionCo to produce the movie MovieDistributor? film concepts. Its activities include based on the agreed concept and budget. location scouting, logistics organisation MovieCo must assess whether it is and project and budget management. ProductionCo is responsible for the acting as: technical quality and delivery of the MovieCo has been commissioned by • Principal in selling the finished film movie with the final movie being another company (MovieDistributor) to it controls to MovieDistributor i.e. approved and accepted by work on the production of a film. recognise as revenue the full amount MovieDistributor. MovieCo is Accordingly, MovieCo has entered into a invoiced, including 10% mark-up; or responsible for areas such as logistics, contract with MovieDistributor covering project and budget management and • Agent acting on behalf of concept development for this film. scouting. After final acceptance, MovieDistributor (to source ProductionCo), in which case it MovieCo develops the concept, MovieCo provides an invoice to would recognise revenue to the calculates the budget and searches for a MovieDistributor for the total amount extent of its 10% mark-up (excluding third company that will produce the of the movie production including costs ProductionCo’s costs). movie – with these details being charged by ProductionCo and a 10% presented to MovieDistributor. After mark-up for MovieCo’s own services. approval of concept, budget and the

ProductionCo Invoice for production costs Must accept movie

Hired to Delivers movie produce movie

MovieCo Invoice for full film production – including MovieDistributor production cost of ProductionCo

Movie order

Concept: Must accept whole concept • develops concept • calculates budget • identifies production company

16 MIAG Issue: 12 Assessment of whether MovieCo locations, talent or script if necessary and, therefore, controls the finished controls the goods or services during production and communicating film before it transfers to before transfer these changes to the production MovieDistributor. MovieCo directs the company. And so MovieCo’s activities use of ProductionCo’s service as an MovieCo should identify the specified are highly interrelated with the input in creating the combined output goods and/or services to be provided to production that it has outsourced. that is the finished film. MovieDistributor and assess whether it controls those goods or services before MovieCo concludes that it controls the Thus, MovieCo concludes that it is the they are transferred to MovieDistributor. finished film before it transfers to principal in the transaction. MovieCo In order to identify the specified goods MovieDistributor based on the specific does not need to consider the indicators and/or service provided to the customer guidance in IFRS 15, which states that in IFRS 15 because the evaluation is MovieCo should determine if its if a company provides a significant conclusive without consideration of the performance obligation is to provide the service of integrating goods or services indicators based on the specific guidance finished film to MovieDistributor or to provided by another party into the in IFRS 15 (related to the principal versus assist MovieDistributor by sourcing good or service for which the customer agent analysis when integration services ProductionCo on its behalf. has contracted, the company does have are provided). MovieCo therefore control before the good or service is recognises the gross amount received MovieCo concludes that it has promised transferred to the customer. This is from MovieDistributor as revenue, with to provide MovieDistributor with a because the company first obtains the amounts paid to ProductionCo finished film. Although MovieCo has control of the inputs to the good or recognised as a cost of services. subcontracted the production of the film service that will be transferred (which to ProductionCo, MovieCo concludes includes goods or services obtained that the concept and production are not from other parties) and directs their distinct under IFRS 15 (i.e. there is only use to create the combined output that one promise which is an integrated is good or service that the customer finished film). This is because MovieCo will receive. MovieCo provides the is responsible for the overall significant integration service management of the contract, for necessary to produce the finished film example, organising changes to

Conclusions

MovieCo identifies the promised good MovieCo would therefore control the MovieDistributor. In that case, in the arrangement as the finished film before the sale and would recognise MovieCo would identify the nature of film. Because MovieCo is responsible the gross amounts received from its promise as merely the delivery of for combining the various goods/ MovieDistributor as revenue. the film concept and arranging for services to provide MovieDistributor ProductionCo and DistributorCo to However, changes in certain facts could meet each other. Therefore MovieCo with the integrated finished film, influence this assessment. For example, MovieCo is seen to control the inputs would not control the inputs to the the contract might specify that movie before they are integrated and needed to provide the finished film MovieDistributor will work directly with and directs the use of the inputs (i.e. would be an agent in the the production company. MovieCo has arrangement. ProductionCo’s efforts) to create the no involvement in production and just combined output (i.e. the finished receives a fixed fee after providing the film) that is the good/service that concept to MovieDistributor and MovieDistributor purchased. introducting ProductionCo to

Issue: 12 MIAG 17 Conclusion

Principal/agent assessments are We would not expect the principal/agent becoming increasingly complex as amendments in IFRS 15 to result in digital transformation results in an pervasive changes to previous gross/net ever-increasing variety of intangible assessments. It is possible, however, that content formats and routes to reach the some conclusions could change based on ultimate consumers. For the media the control principle and other company – often the ‘content provider’ clarifications to the guidance. in such arrangements – the assessment Management should plan sufficient time of whether it is selling its content to a to review and understand the terms of retailer/distributor, or to consumers via their contracts with customers and an agent, has a direct impact on whether vendors to ensure time for appropriate it recognises its revenues net or gross. conclusions to be reached under IFRS 15. This in tum affects two key metrics in opposite directions: revenue and We hope you find this paper useful and percentage profit margin. welcome your feedback.

This paper has considered the assessment To comment on any of the issues of the key principal/agent considerations highlighted in this paper please visit our under IFRS 15 in various scenarios dedicated website www.pwc.com/miag covering physical books, eBooks, or contact your local PwC entertainment television content and film production. and media specialist.

Our scenarios are clearly not designed to be exhaustive; but they will hopefully provide food for thought for media companies when considering the impact of IFRS 15 on new and existing routes to market. The answer for complicated real life arrangements will depend on the specific facts and circumstances in each case. Where transactions are significant, management should include disclosures in the financial statements that enable users to understand the conclusions reached. As always, planning ahead can prevent painful surprises.

18 MIAG Issue: 12 Issue: 12 MIAG 19 Further reading

www.pwc.com/miag www.pwc.com/miag MIAG Issue: 3 MIAG Issue: 4 Media Industry April 2012 Media Industry June 2012 Accounting group Accounting group

Making sense of a Making sense of a complex world complex world Broadcast television: Accounting for royalty Acquired programming arrangements – issues rights for media companies

This paper explores the This paper explores some critical considerations of the key challenges under under IFRS relating to the IFRS in accounting for recognition, presentation, royalty arrangements by both amortisation and licensors and licensees. impairment of acquired programming rights.

EP6-2012-01-23-02 32-SW_MIAG Issue 4v7.indd 1 22/06/2012 17:13:40

MIAG Issue: 3 MIAG Issue: 4 MIAG Issue: 5

Broadcast television: Acquired Accounting for royalty arrangements Content development and cost programming rights – issues for media companies capitalisation by media companies

This paper explores the critical This paper explores some of the key This paper explores the critical considerations under IFRS relating to considerations under IFRS in considerations relating to the the recognition, presentation, accounting for royalty arrangements by classification, capitalisation and amortisation and impairment of both licensors and licensees. amortisation of content development acquired programming rights. spend under the applicable IFRS standards IAS 2 Inventories and IAS 38 Intangible Assets, focusing on the television production, educational publishing and video game sectors.

20 MIAG Issue: 12 www.pwc.com/miag www.pwc.com/miag MIAG Issue: 7 MIAG Issue: 8 Media Industry May 2014 Media Industry May 2015 Accounting Group Accounting Group

Making sense of a Making sense of a complex world complex world Revenue recognition: Online gaming: Real payments to issues in virtual worlds customers – issues for media companies

This paper explores This paper explores some some of the key IFRS of the key IFRS revenue accounting considerations recognition issues in the for payments by media world of online gaming. companies to their customers.

MIAG Issue: 6 MIAG Issue: 7 MIAG Issue: 8

Revenue recognition: principal/agent Revenue recognition: payments to Online gaming: Real issues in arrangements – issues for customers – issues for virtual worlds media companies media companies This paper explores some of the key This paper considers the assessment This paper explores some of the key IFRS revenue recognition issues in the of the key principal/agent IFRS accounting considerations for world of online gaming, covering considerations in various practical payments by media companies to their principal/agent considerations, virtual examples, covering physical books, customers, covering the purchase of items and virtual currencies, and eBooks, television content and advertising space, physical and digital multiple element arrangements. film production. ‘slotting fees’, outsourced advertising sales and video game prizes.

Issue: 12 MIAG 21 www.pwc.com/miag www.pwc.com/miag www.pwc.com/miag MIAG Issue: 9 MIAG Issue: 10 MIAG Issue: 11 Media Industry June 2015 Media Industry May 2016 Media Industry June 2016 Accounting Group Accounting Group Accounting Group

Making sense of Making sense of a a complex world complex world Film cost capitalisation, Making sense of Media investments a complex world in technology amortisation and impairment Film financing companies arrangements

This paper explores some of This paper explores some of This paper explores some of the key IFRS accounting the key considerations the key considerations issues that can arise when under IFRS for film cost under IFRS for film making investments in capitalisation, amortisation financing arrangements. technology companies. and impairment.

MIAG Issue: 9 MIAG Issue: 10 MIAG Issue: 11

Media investments in Film cost capitalisation, amortisation Film financing arrangements technology companies and impairment. This paper explores some of the key This paper explores some of the key This paper explores some of the key considerations under IFRS for film IFRS accounting issues that can arise considerations under IFRS for film cost financing arrangements. when making investments in capitalisation, amortisation technology companies. and impairment.

22 MIAG Issue: 12 Contacts

Global leader Australia Mexico Deborah Bothun Rosalie Wilkie Miguel Arrieta [email protected] [email protected] [email protected] +1 646 471 9048 +61 2 8266 8381 +55 5263 6000 Ext 5857

UK leader Brazil Netherlands Phil Stokes Estela Vieira Ennel van Eeden [email protected] [email protected] [email protected] +44 20 7804 4072 +55 11 3674 3802 +31 88792 4540

MIAG leader Canada Russia Sam Tomlinson Lisa J. Coulman Evgeny Klimenko [email protected] [email protected] [email protected] +44 20 7804 0726 +1 416 869 8685 +7 495 223 5027

China Singapore Wilson Chow Charlotte Hsu [email protected] [email protected] +86 755 8261 8886 +65 6236 7668

France South Africa Richard Bejot Vicky Myburgh [email protected] [email protected] +33 1 5657 6039 +27 11 797 4305

Germany Spain Christoph Gruss Inmaculada Izarra [email protected] [email protected] +49 69 9585 3415 +34 915 68 5176

Hong Kong Switzerland Cecilia Yau Patrick Balkanyi [email protected] [email protected] +852 2289 1385 +41 587 922 676

India United Kingdom Smita Jha Sallie Deysel [email protected] [email protected] +91 98 1114 1190 +44 20 7212 5845

Italy United States Andrea Samaja Bud Schwartz [email protected] [email protected] +39 2 6672 0555 +1 973 236 4172 Japan Hideaki Zenba [email protected] +81 80 3158 6368 Issue: 12 MIAG 23 Notes

24 MIAG Issue: 12 Notes

Issue: 12 MIAG 25 This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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