Why is Hollywood Accounting Problematic?
Hollywood Accounting is a controversial accounting practice that is used in the film industry to manage the financial reporting of a film's budget and profits (you may also know it as Hollywood Bookkeeping, or Hollywood Creative Accounting). The practice involves the use of complex accounting techniques and financial maneuvers to manipulate the financial statements of a film, often resulting in the film being shown as having little or no profit. In fact, some sources say 70-80% of films fail to ever make a profit, despite actually have massive box-office success. This has significant consequences for film investors, filmmakers, and talent, as well as for the film industry as a whole. There is a stigma that film is a "vanity investment" and it's time this changes.
How Hollywood Disguises Films’ Financial Performance
Usually, in a business, when profit-share contracts are created, there’s some standard wording that clearly identifies profit margins – usually a percentage of profits. In Hollywood, studios try to pay out based on a contractual definition of net profits instead of a percentage as a whole – this starts only after revenue exceeds 100% of expenses, and the expense tab just keeps on growing. This is why Hollywood stars tend to negotiate profits from the gross rather than net box-office revenue.
As film studios have to pay a lot of taxes, royalties, and profit-share agreements, the payouts to writers and producers are most often based on net profits -- which can be dramatically reduced by way of production, distribution, and marketing overhead costs.
Your Favourite Movies Didn’t Make a Profit
Some of your favourite movies didn’t make a profit – according to Hollywood Accounting. Matt Rickard’s Hollywood Accounting post has a neat little list of movies that suffered under Hollywood Accounting:
Star Wars: Return of the Jedi (budget: $32mm, box office: $475mm)
Forrest Gump (budget: $55mm, box office: $683mm)
Men in Black (budget: $90mm, box office: $589mm)
Coming to America (budget: $36mm, box office: $288mm)
Bohemian Rhapsody (2021) (budget: $55m, global box office $911mm)
Harry Potter and the Order of the Phoenix (budget: $150mm, box office: $942mm)
Check out the Harry Potter and the Order of the Phoenix balance sheet which shows how the Hollywood film revenue deficit is created.
Hollywood Accounting Consequences for the Film Community
One of the main problems with Hollywood Accounting is that it is used to mislead stakeholders about the financial performance of a film. This can result in investors putting money into a film that they believe will be financially successful, and then despite box office success, the expenses erase the revenues, resulting in a horrific financial loss. This limits the potential of investors being able to reinvest in new films, sustaining creatives in the film industry.
Another problem with Hollywood Accounting is that it can be used to avoid paying out profits to filmmakers, actors, and other talent. In many cases, the contracts for these individuals specify that they are entitled to a percentage of the film's profits. However, through the careful manipulation better known as Hollywood accounting, the film may be shown as having little or no profit, even if it has actually made a significant amount of money. This can result in filmmakers, actors, and other talent not being fairly compensated for their work on the film.
Finally, Hollywood accounting can have negative consequences for the film industry as a whole. By manipulating the financial statements of films, it can create an inaccurate portrayal of the financial performance of the industry. This can lead to a distorted view of the profitability of the film industry and can impact the funding and distribution of future films. Hollywood accounting is a problematic practice that can mislead investors, underpay filmmakers and talent, and distort the financial performance of the film.
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