Time Magazine 2012 Annual Report Download - page 85

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Gross versus Net Revenue Recognition
In the normal course of business, the Company acts as or uses an intermediary or agent in executing
transactions with third parties. In connection with these arrangements, the Company must determine whether to
report revenue based on the gross amount billed to the ultimate customer or on the net amount received from the
customer after commissions and other payments to third parties. To the extent revenues are recorded on a gross
basis, any commissions or other payments to third parties are recorded as expense so that the net amount (gross
revenues less expense) is reflected in Operating Income. Accordingly, the impact on Operating Income is the
same whether the Company records revenue on a gross or net basis.
The determination of whether revenue should be reported on a gross or net basis is based on an assessment of
whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as a principal
in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction,
the Company reports revenue on a net basis. The determination of whether the Company is acting as a principal or
an agent in a transaction involves judgment and is based on an evaluation of the terms of an arrangement. The
Company serves as the principal in transactions in which it has substantial risks and rewards of ownership.
The following are examples of arrangements where the Company is an intermediary or uses an intermediary:
•The Film and TV Entertainment segment provides distribution services to third-party
companies. The Film and TV Entertainment segment may provide distribution services for an
independent third-party company for the worldwide distribution of theatrical films, home video,
television programs and/or videogames. The independent third-party company may retain final approval
over the distribution, marketing, advertising and publicity for each film or videogame in all media,
including the timing and extent of the releases, the pricing and packaging of packaged goods units and
approval of all television licenses. The Film and TV Entertainment segment records revenue generated
in these distribution arrangements on a gross basis when it (i) is the merchant of record for the licensing
arrangements, (ii) is the licensor/contracting party, (iii) provides the materials to licensees, (iv) handles
the billing and collection of all amounts due under such arrangements and (v) bears the risk of loss
related to distribution advances and/or the packaged goods inventory. If the Film and TV Entertainment
segment does not bear the risk of loss as described in the previous sentence, the arrangements are
accounted for on a net basis.
•The Networks segment provides advertising sales services to third-party companies. From time to
time, the Networks segment contracts with third parties, or in certain instances a related party such as a
joint venture, to perform television or website advertising sales services. While terms of these
agreements can vary, the Networks segment generally records advertising revenue on a gross basis when
it acts as the primary obligor in the arrangement because in those cases it is the face to the advertiser and
is responsible for fulfillment of the advertising sold.
•The Publishing segment utilizes subscription agents to generate magazine subscribers. As a way
to generate magazine subscribers, the Publishing segment sometimes uses third-party subscription
agents to secure subscribers and, in exchange, the agents receive a percentage of the Subscription
revenues generated. The Publishing segment records revenues from subscriptions generated by the
agent, net of the fees paid to the agent, primarily because the subscription agent (i) has the primary
contact with the customer, (ii) performs all of the billing and collection activities, and (iii) passes the
proceeds from the subscription to the Publishing segment after deducting the agent’s commission.
Accounting for Collaborative Arrangements
The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to
jointly finance and distribute theatrical productions (“co-financing arrangements”) and an arrangement entered
into with CBS Broadcasting, Inc. (“CBS”) and the NCAA that provides Turner and CBS with exclusive
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