FPC20220 - Film Production Companies: Taxation: Profit/Loss calculation: Income - timing

FA06/SCH4/PARA7 and PARA9

Where the film-making activities of a film production company (FPC) are been taxed in accordance with FA06/SCH4 ( FPC20010) income is recognised as expenditure is incurred (in line with current accounting principles), even where the film expenditure would not be taken to the profit and loss account because the company is creating a capital asset for exploitation ( FPC20230).

For a more detail explanation of this matching of income to expenditure see FPC20250.

This treatment results in profits being recognised as production progresses and not just at completion, unless there are specific contingencies outside the control of the person doing the work.

The underlying principles of revenue and profit recognition are embodied in Financial Reporting Standard 5 (FRS5) – ‘Reporting the substance of transactions’, in particular FRS5 Application Note G - ‘Revenue Recognition’. This reaffirms the principles contained in Statement of Standard Accounting Practice 9 (SSAP9) - ‘Stocks and long-term contracts’. This was further clarified by Urgent Issues Task Force Abstract 40 (UITF40) - ‘Revenue recognition and service contracts’, the conclusion of which is broadly comparable to the requirements of International Accounting Standard No. 18 (IAS18) - ‘Revenue’. IAS18 itself cross refers to IAS 11 –‘ –‘Construction Contracts’ - and requires the rendering of services to be recognised by reference to the stage of completion of the transaction at the balance sheet date.

The amount of income to be recognised at the end of an accounting period is given by the formula (FPC20250). This measures the state of completion of the film by reference to the production expenditure to date compared to the estimated total production expenditure on the film. We would expect future income to be discounted before being brought into this formula.

When the film is complete there will generally be no further expected expenditure on its production or, if sold, on its exploitation (if the film is retained and exploited there may of course be further expenditure on exploitation), so all the known estimated income will have been recognised and any further income should be recognised as it is earned.