Because FTR is available on pre-production expenditure but not on development expenditure it is important to understand the difference between the two.
Some costs relate both to the developments stage of a film and
to other stages of production. Examples of such costs would be
those incurred on the
script and the
producer’s fee. Where the costs of the film
attract FTR In each case it is necessary to establish to what
extent the expenditure on the script is incurred on establishing
whether a film can be made and what it should be like and how far
it is incurred on actually making the film.
The correct apportionment will vary according to
circumstances.
If a
producer worked substantially full-time on a film
for a year, with the first three months being taken up with
development and the remaining nine months with pre-production,
principal photography and post production it would be reasonable
for one quarter of the producer’s fee to be allocated to
development.
A
script could likewise be used during the
development stage of a film as well as the later stages of
production. If the original script was more or less unchanged
through this process then it may be reasonable to allocate its
costs according the extent to which reference is made to it during
the various stages of production in which it is used. But if the
script writer is paid for an initial fee for a first draft of the
script for development purposes followed by further instalments as
the film proceeds to the later stages of production and further
refinements are made to the script then it may be reasonable for
the allocation of costs to more closely follow the timing of the
payments and the use to which the various versions are put.
Expenditure on the rights to use a story or book as the basis of
a film is production expenditure. Expenditure on wider rights
– for example the right to use and exploit characters from a
book – beyond what is necessary to make the film, is not.
Ways of making films vary, and each case must be considered
carefully, but in general a payment for an
option over the right to use a book or story would
be speculative, while the purchase of the
actual rights needed to make the film is not
speculative expenditure, it is core expenditure.
Example 1
An independent producer likes a book and thinks that a film
might be made of it.
She does some preliminary work, including setting up a
company (SPV) through which any costs associated with the film will
be channelled, and seeking initial opinions from colleagues and
financiers.
All seems favourable, so to protect the position the company
pays for an option over the film rights.
There follows further development work, including
commissioning a screenwriter to write a screenplay. Finance is
found (greenlighting).
At this stage the SPV exercises the option so that it can
make the film.
The SPV’s payment for the rights (but not for the
option) is core expenditure.
Example 2
A studio buys outright the intellectual property in a series
of popular children’s adventure stories and sets to work to
make films of them. It does this by engaging separate SPV
production companies to produce and deliver a film of each
individual book.
Included with the costs borne by each SPV is a recharge by
the studio of the book rights relating to the film it has been
engaged to produce. The studio retains all other intellectual
property including merchandising rights.
The payments from each SPV to the studio are core
expenditure.
Similar considerations apply to payments made for options and rights connected to music, songs, literary works and stock footage that may be incorporated into the film during principal photography or post production.
