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Forrest Gump

This document discusses Hollywood accounting practices and how major motion pictures are often reported as financial losses despite being commercial successes. It uses the film Forrest Gump as a case study. The film grossed $661 million worldwide but according to Paramount's financial statements it lost $62 million. Hollywood accounting allows studios to designate substantial revenues as costs through practices like distribution fees, overhead allocations, and participation payouts to talent. This enables studios to report films like Forrest Gump as unprofitable on paper and avoid paying net profits to participants like the author on whose book the film was based.

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carmenng1990
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647 views

Forrest Gump

This document discusses Hollywood accounting practices and how major motion pictures are often reported as financial losses despite being commercial successes. It uses the film Forrest Gump as a case study. The film grossed $661 million worldwide but according to Paramount's financial statements it lost $62 million. Hollywood accounting allows studios to designate substantial revenues as costs through practices like distribution fees, overhead allocations, and participation payouts to talent. This enables studios to report films like Forrest Gump as unprofitable on paper and avoid paying net profits to participants like the author on whose book the film was based.

Uploaded by

carmenng1990
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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FORREST GUMP - ACCOUNTANT: A STUDY OF

ACCOUNTING IN THE MOTION PICTURE INDUSTRY

Hollywood accounting can be every bit as creative as a good movie script.


At least, that is what some lawyers and journalists seem to be telling us.
According to news reports, the hit movie Forrest Gump, which won 'Best
Picture of 1994' honors at the Academy Awards, claimed a worldwide
theatrical gross of $661 million through May of 1995. That amount excludes
videocassette and soundtrack revenues, and it does not include licensing fees
on Forrest Gump products such as wristwatches, ping-pong paddles, and
shrimp cookbooks. Yet, according to Paramount Studios, the film project lost
$62 million on a box office gross of $382 million through December, 1994
(see Table 1).
Forrest Gump is the latest of a string of hit movies to report a loss. Other
losers include Batman, Rain M an. Dick Tracy, Ghostbusters. Alien. On Golden
Pond, Fatal Attraction , and Coming to America. Each of these motion pictures
grossed well over $100 million, but in each case, costs were reportedly
greater than revenues.
The production costs for a film, part of what the studios refer to as
'negative costs', represent only a fraction of the cost of the project. In
addition, studios add advertising and promotion, distribution, and
financing costs to the total cost of the project. A significant portion of

Accounting in the Motion Picture Industry

Table 1. Statement of Profit and Loss for net profit participants on the
motion picture, Forrest Gump, through December 31, 1994
Box office gross revenues
Amount retained by movie theaters (approx. 50%)
Paramount's gross revenues
Negative costs:
Direct costs:
Production costs
Gross profit participation by director, actors,
etc. (16% of studio gross revenues)
Total direct costs
Studio overhead (allocated -15% of direct costs)
Total negative costs
Promotion and distribution costs
Advertising overhead (allocated-10% of promotion
and distribution costs)
Distribution fee (32% of studio gross revenues)

$382
191
$191

$66.8
30.6
$97.4
14.6
$112.0
$67.2
6.7
61.1
135.0

Financing costs (calculated at 3% above prime, on


unrecovered costs -the 'loss' below)
Total costs
Profit (loss) through December 31, 1994

6.0
253
($62)

the negative costs are the payments made to 'gross participants' on the
basis of a percentage of the studio's gross revenues. This leads to what
Hollywood accountants and lawyers refer to as the 'rolling break'. Two of
the costs (the amount retained by the theaters and the financing costs)
may, for some motion pictures, change with changes in the amount of the
box office gross and over time. Alex Ben Block, executive editor of The
Hollywood Reporter explains:
"A rolling break means that the break-even point - that point at which a
movie has gone from a loss to a profit -changes after the release of the film,
depending on the payments made to the star talent involved. A picture that
has a big profit participation by a star actor, director or producer is never
considered by studio accounting to break even." (McDougal,1991, p. F6).

How can the studios be losing so much money on their most successful
projects? Sometimes what is referred to as a loss is not really a loss at all.
Typically, profits are calculated based on contracts between the studios
and the film's 'net profit participants'. In a typical net profit participation
contract, 'profit' is calculated after deducting a distribution fee paid
directly to the studio, studio overhead (some of which is allocated to the
film as a percentage of the gross), and interest on the unrecovered costs,
whether or not the film was financed with debt. One studio executive, Rob
Friedman of Warner Bros., explains the accounting this way:
"What you are looking at is not the profit and loss statement of the overall
accounting of the motion picture. What you've got there is a statement

Accounting in the Motion Picture Industry

reflecting a contractual agreement of contingent compensation for a particular


individual. So whether it's Batman or any other motion picture, an accounting
statement always reflects an individual arrangement based upon certain
agreed-upon conditions. It's the studio's obligation to fairly and accurately
comply with the contractual arrangement agreed upon by both the studio and
that individual." (McDougal, 1991, p. Fl ).

In recent years, reported losses on hit motion pictures have resulted i n


lawsuits being filed by the net profit participants. In 1988, Art Buchwald
and Alain Bernheim were awarded $900,000 by the Los Angeles Superior
Court to cover their 19% participation in the net profits of Coming to
America, even though the studio claimed the film never made money.
Reported losses of more than $20 million on the movie Batman prompted
a series of lawsuits from the net profit participants.
Winston Groom, the author of Forrest Gump, retained an attorney to get
a share of the profits from the film, even though Paramount is reporting a
loss. Groom was paid $350,000 for the movie rights to the book and is
entitled to 3% of the film's net profits. Paramount says it expects Forrest
Gump to eventually show a profit, and has advanced Groom $250,000
against his net profit participation.
At issue in these lawsuits is the way the studios calculate 'net profit'.
Critics argue that some of the costs (such as the distribution fee), listed i n
a net profit participant statement (see Table 1), arc not really costs at all;
instead, they are studio profits disguised as costs. Overhead allocations
such as 'studio overhead' and 'advertising overhead' are based on arbitrary
allocations which, some have argued, are much greater than the actual
overhead costs which are attributable to the film. In addition, some of the
lawsuits have questioned whether the net profit participants should lose
compensation because of cost overruns which are largely under the control
of the director, the stars, and the studio.
Will Paramount ever report a profit for the film, Forrest Gump'? That
depends upon how you define profit and whose perspective you are taking.
Actor Tom Hanks and director Robert Zemeckis have already made more
than $20 million each, including a share of the 'gross'. However, from the
point of view of the 'net profit participants' (e.g., Winston Groom), the
film may or may not break even.
Required
1. What amount of box office gross revenues is required before Forrest
Gump earns a profit according to the 'net profit participation'
contract? Assume that the financing costs are fixed.
2. What amount of box office gross revenues is required before Forrest
Gump earns a profit for Paramount? Assume that the financing costs
are fixed.

Accounting in the Motion Picture Industry

3. Discuss the concept of the 'rolling break'. Does the break-even point
really change after the film is released? Explain.
4. Is Paramount's calculation of net profit fair to the net profit
participants?
5. Assume that Paramount expected Forrest Gump to gross $700 million
in total box office revenues over the life of the film. How much profit
on this film would Paramount have reported in its 1994 external
financial statements?
6. Would you expect Paramount's taxable income for 1994 to be the same
as its financial accounting income which was calculated in question 5,
above? Why or why not?

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