Without adjusting for inflation, the Harry Potter series of movies is the highest grossing film franchise of all time. In fact, Harry Potter and the Deathly Hallows – Part 2 (2011) is the highest grossing Warner Bros. movie ever made. Imagine you're running a lemonade stand with your buddy Steve. Your mom says you have to share half your profits with your sister.
This sort of Hollywood accounting doesn’t strictly adhere to the United States’ generally accepted accounting principles (GAAP), which is the standard bookkeeping that other major companies follow. And while these practices are ethically questionable, frowned upon by experts, and the source of countless court disputes over the years… it’s pretty much all legal. Creative industries thrive on innovation and collaboration, but they also depend on fairness and trust. The audit clause is more than just a legal formality — it’s a statement of principle. It affirms that artists deserve transparency and accountability in their business relationships and provides a mechanism to enforce those values.
Another form of Hollywood accounting is a reverse tobashi scheme, in which the studio unjustly cross-collateralizes the accounting of two projects and shifts losses from a flop onto a profitable project by shifting costs involving internal operations. This way, two unprofitable projects are created out of one on paper alone, primarily for the purpose of eliminating net participation liabilities. The specific schemes can range from the simple and obvious to the extremely complex.
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And while experts say this kind of creative accounting is perfectly legal, the tactics involve some of the most fantastical fictions ever devised in Tinseltown. And in 2008, Deborah Gregory, author of the popular young-adult fiction series "Cheetah Girls," complained that she had never seen a penny of the 4 percent net profits she was promised by Disney from the movies, DVDs and merchandising surrounding her book. Writer Art Buchwald won $900,000 from Paramount for his work writing the story treatment that inspired the 1988 Eddie Murphy comedy "Coming to America." The movie had made $288 million when Buchwald sued in 1990, but it still had not seen a net profit. But there’s yet to be any definitive assessment of the actual loss. Until there is, the $6.1 billion and $20.5 billion and $58 billion numbers are all just estimates.
If you've worked on the film, and are 'in on it' (and willing to co-operate), if the film is successful there's a good chance you'll receive some kind of surprise 'bonus' (who's real purpose is to stop the film having to commence net-point payouts). Here is an amazing glimpse into the dark side of the force that is Hollywood economics. The actor who played Darth Vader still has not received residuals from the 1983 film "Return of the Jedi" because the movie, which ranks 15th in U.S. box office history, still has no technical profits to distribute.
In any partnership of this kind, profits are divided in the contractual phase of pre-production with the funding party naturally taking the larger slice of the pie and the larger company (usually the same) handling distribution and accounting. Many reputable companies in the entertainment industry follow transparent accounting practices and honor their contractual obligations to talent and profit participants. The costs are then charged out to, for example, CGI companies, script companies, companies owned by actors and directors. It’s an efficient way of distributing profit and saving money if it tanks. It’s important to point out that the IRS already took this to court and “lost” as it was found that tax evasion wasn’t behind it, just accounting practices to suit the way Hollywood does business. What happens with Star Wars is not the only time box office hit movies have never returned a profit.
When you hear that a star has 20 percent of the adjusted gross, what does “adjusted gross” mean? But the definition of “adjusted” can affect income by millions of dollars. Behind all of these notable cases is someone who essentially got screwed on net points, and their subsequent lawsuits have yielded differing levels of success over the years.
Hollywood Creative Accounting, or How to Hide a Hit and Still Profit From It
After all we didn’t hear many entertainment companies swept up in the accounting investigations of the early ’00s. There is a grey area there, and the legality of this sort of profit sharing tends to be defined only when lawyers can prove damages. This usually requires the close inspection of a studio’s books and accounting methods and you can imagine how they might resist such scrutiny, especially when their own profits might be erased in fact as well as on paper. For the sake of this argument, let’s pretend Brandywine agreed to 30 percent of the net profits (the total revenue minus total expenses) of Alien, while Fox agreed to accept the remaining 70 percent. That’s where large box office revenues tend to cancel out the expenses. True, the more screens a film lights up, the more money it costs to make the prints to display on those screens, but in general the increasing number of tickets sold greatly exceeds that cost.
Corporations in other industries use them all the time to play accounting tricks. In other types of business, however, shell companies are typically used to hide losses to make a corporation's profits appear greater to shareholders and investors. It's the goal of hiding profits and not losses that makes Hollywood accounting unique. While this has been a subject of controversy and legal dispute, it's essential to understand that not all film studios employ such practices.
Instead, a “story by” credit went to Murphy, who received the grand sum of $400,000 for his idea — one of those murky numbers that is never mentioned when you hear what a star is getting paid. They twist and turn, bend and melt, and sometimes vanish altogether into an ether of obscurity. Reporters like myself spend hours each week trying to get the real ones, and then often fail miserably to decipher them. Actors, directors, writers, or producers will often negotiate “net points” which, in theory, would make them entitled to a percentage of whatever is left after the studio recoups expenses. It’s the way many people involved with a production are supposed to be compensated in a financial sense; although the term itself is pretty meaningless by design. Naturally in this way, Hulu would make a massive profit on the show, while Fox itself would show only mild income from the streaming rights.
How Hollywood Accounting Can Make a $450 Million Movie 'Unprofitable'
When Lee raised the issue in court, the matter was quickly and quietly settled out of court. It’s presumed that Lee waived his claim to 10% of the net profits generated by films based on his creations at some point as part of this deal- not that they’d have been worth anything anyway because of how the books are cooked. In this case, it would appear the companies involved were simply keen on avoiding the bad publicity that would come from shafting one of the more popular people in the industry.
Famous Hollywood Accounting Battles
When you read about a film’s official budget in trade publications like Variety or The Hollywood Reporter, it’s worth remembering that this figure does not account for the money that the studio receives from government subsidies, tax shelter deals, or product placement. Right there in black and white are the beautiful words illustrating that a full three percent of the film’s profits are yours, yours and only yours. This wasn’t the hollywood accounting first time Paramount allegedly worked around paying a writer for his work. Way back in 1982 humorist Art Buchwald pitched a treatment to Paramount called “It’s A Crude, Crude World”, which was later renamed King for a Day. The story was about a member of African royalty (planned to be played by Eddie Murphy) coming to the United States and his misadventures while attempting to fit in, including a stint in poverty.
The screenplay went through many iterations with many writers and director John Landis was approached to direct, but the film went into development hell so Warner Bros. optioned the treatment. Not everyone in Hollywood supports the local accounting practices, however. Over the years, there have been signs that the studios' clever tricks would catch up with them. Talent can protect themselves by seeking legal advice during contract negotiations and ensuring their profit-sharing agreements are clear and comprehensive.
- That was renowned for exaggerating expenditures and other expenses to minimize profit sharing.
- Imagine you're running a lemonade stand with your buddy Steve.
- In spite of the $790 million in profits, Warner Bros. claimed that amount was actually minus $167 million.
- Thus, when summed up, such costs make the project look unprofitable on paper.
- While not all of that settlement has been disclosed to the media, the suit itself does give us a bit of a look into why this creative accounting takes place.
That’s because such Hollywood Creative Accounting is designed to be confusing as well as impossible to figure out. Hollywood accounting tries to maximise the tax rebates from the various states/countries where the movie is being made, while reducing the payments made to third parties (tax payments etc). Accountants talk about Hollywood accounting like a kind of wayward cousin, partly because it diverges from the United States’ generally accepted accounting principles, or GAAP — the standard bookkeeping that most US companies adhere to. “Hollywood accounting,” as a concept, is so specific to the entertainment business it has its own Wikipedia page. The next pages will examine how Hollywood accounting works, the types of movies affected — and why the system is likely to persist.
The real reason for this loss was the practice of Hollywood accounting. That was renowned for exaggerating expenditures and other expenses to minimize profit sharing. As a result of this, Tom Hanks' most beloved film, Forrest Gump, was labeled a "successful failure." Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or "creative" set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Expenditures can be inflated to reduce or eliminate the reported profit of the project, thereby reducing the amount which the corporation must pay in taxes and royalties or other profit-sharing agreements, as these are based on net profit. In most industries, corporations will use accounting tricks to hide losses from shareholders and investors to appear greater.
- By the time of Order of the Phoenix‘s 2007 release, Warner Bros. parent company owned half of the CW Network and all of HBO, Cartoon Network, CNN, TNT, TBS, HLN, Turner Classic Movies, Time Warner Cable, Warner Bros.
- The screenplay went through many iterations with many writers and director John Landis was approached to direct, but the film went into development hell so Warner Bros. optioned the treatment.
- A couple notorious examples that may have involved some “Hollywood accounting” include the Lord of the Rings lawsuits, involving Peter Jackson and J.R.R. Tolkien’s estate, and the Beatles’ decades of royalty battles with EMI.
- That $58 billion statistic comes from a 2007 report written by Stephen Siwek of the Institute for Policy Innovation.
- The costs are then charged out to, for example, CGI companies, script companies, companies owned by actors and directors.
And, thus, after all his tallying and tacking on a bit extra just for Fox being allegedly so unscrupulous, he ultimately doled out a $179 million ruling against Fox. After the story blew up, Paramount settled the matter out of court and offered Groom an undisclosed “seven figure contract” for the rights to the sequel to Forrest Gump. Soon after this, Groom mysteriously stopped accusing Paramount of trying to rip him off and explained that the whole thing had been blown out of proportion. If there is any lesson to be learned here, it’s that Hollywood Creative Accounting will always be a standard practice as long as there are pieces of the financial pie to share. Studios cannot change agreed-upon percentages, so the smartest and most money-making strategy is to simply make the pie itself smaller and smaller and smaller (often along with their ethics).
