Time Magazine 2009 Annual Report Download - page 90

estimate of the third-party investor’s interest in profits or losses incurred on the film is determined by reference to
the ratio of actual revenue earned to date in relation to total estimated ultimate revenues.
Acquired film libraries (i.e., program rights and product that are acquired after a film has been exhibited at least
once in all markets) are amortized using the film forecast method. For more information, see Note 2.
Publishing
Magazine Subscription and Advertising revenues are recognized at the magazine cover date. The unearned
portion of magazine subscriptions is deferred until the magazine cover date, at which time a proportionate share of
the gross subscription price is included in revenues, net of any commissions paid to subscription agents. Also
included in Subscription revenues are revenues generated from single-copy sales of magazines through retail outlets
such as newsstands, supermarkets, convenience stores and drugstores, which may or may not result in future
subscription sales. Advertising revenues from websites are recognized as the services are performed.
Certain products, such as magazines sold at newsstands and other merchandise, are sold to customers with the
right to return unsold items. Revenues from such sales are recognized when the products are shipped, based on gross
sales less a provision for future estimated returns based on historical experience.
Inventories of merchandise are stated at the lower of cost or estimated realizable value. Cost is determined using
primarily the first-in, first-out method or, alternatively, the average cost method. Returned merchandise included in
inventory is valued at estimated realizable value, but not in excess of cost. For more information, see Note 5.
Film Cost Recognition and Impairments
One aspect of the accounting for film and television production costs, as well as related revenues (“film
accounting”), that impacts the Filmed Entertainment segment (and the Networks segment, to a lesser degree) and
requires the exercise of judgment relates to the process of estimating a film’s ultimate revenues and is important for
two reasons. First, while a film is being produced and the related costs are being capitalized, as well as at the time
the film is released, it is necessary for management to estimate the ultimate revenues, less additional costs to be
incurred (including exploitation and participation costs), in order to determine whether the value of a film has been
impaired and, thus, requires an immediate write-off of unrecoverable film costs. The second area where ultimate
revenues judgments play an important role is in the determination of the amount of capitalized film costs recognized
as costs of revenues for a given film in a particular period. This cost recognition is based on the proportion of the
film’s revenues recognized for each period as compared to the film’s estimated ultimate revenues. Similarly, the
recognition of participation and residuals is based on the proportion of the film’s revenues recognized for such
period to the film’s estimated ultimate total revenues. To the extent that ultimate revenues are adjusted, the resulting
gross margin reported on the exploitation of that film in a period is also adjusted.
Prior to release, management bases its estimates of ultimate revenues for each film on factors such as the
historical performance of similar films, the star power of the lead actors and actresses, the rating and genre of the
film, pre-release market research (including test market screenings) and the expected number of theaters in which
the film will be released. Management updates such estimates based on information available on the progress of the
film’s production and, upon release, the actual results of each film. Changes in estimates of ultimate revenues from
period to period affect the amount of film costs amortized in a given period and, therefore, could have an impact on
the segment’s financial results for that period. For example, prior to a film’s release, the Company often will test
market the film to the film’s targeted demographic. If the film is not received favorably, the Company may (i) reduce
the film’s estimated ultimate revenues, (ii) revise the film, which could cause the production costs to increase or
(iii) perform a combination of both. Similarly, a film that generates lower-than-expected theatrical revenues in its
initial weeks of release would have its theatrical, home video and television distribution ultimate revenues adjusted
downward. A failure to adjust for a downward change in ultimate revenues estimates could result in the
understatement of capitalized film costs amortization for the period. The Company recorded film cost
amortization of $3.187 billion, $2.796 billion and $3.293 billion in 2009, 2008 and 2007, respectively.
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)