Twenty-First Century Fox 2011 Annual Report Download - page 32

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and
accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company
may undertake in the future, actual results may differ from the estimates.
Revenue Recognition
Television, Cable Network Programming and Direct Broadcast Satellite–Advertising revenue is recognized as the commercials are aired, net of
agency commissions. Subscriber fees received from subscribers, cable systems and DBS operators are recognized as revenue in the period that
services are provided, net of amortization of cable distribution investments, in the case of Cable Network Programming revenues. The Company
defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period.
Filmed Entertainment–Revenues from distribution of feature films are recognized in accordance with ASC 926. Revenues from the theatrical
distribution of motion pictures are recognized as they are exhibited and revenues from DVD and Blu-ray sales, net of a reserve for estimated
returns, are recognized on the date that DVD and Blu-ray units are made widely available for sale by retailers and all Company-imposed
restrictions on the sale of DVD and Blu-ray units have expired. Revenues from television distribution are recognized when the motion picture or
television program is made available to the licensee for broadcast.
Management bases its estimates of ultimate revenue for each film on the historical performance of similar films, incorporating factors such as
the past box office record of the lead actors and actresses, the 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
actual results of each film through its life cycle.
License agreements for the broadcast of theatrical and television product in the broadcast network, syndicated television and cable television
markets are routinely entered into in advance of their available date for broadcast. Cash received and amounts billed in connection with such
contractual rights for which revenue is not yet recognizable is classified as deferred revenue. Because deferred revenue generally relates to contracts
for the licensing of theatrical and television product which have already been produced, the recognition of revenue for such completed product is
principally only dependent upon the commencement of the availability period for broadcast under the terms of the related licensing agreement.
Filmed Entertainment and Television Programming Costs
Accounting for the production and distribution of motion pictures and television programming is in accordance with ASC 926, which requires
management’s judgment as it relates to total revenues to be received and costs to be incurred throughout the life of each program or its license
period. These judgments are used to determine the amortization of capitalized filmed entertainment and television programming costs, the
expensing of participation and residual costs associated with revenues earned and any fair value adjustments.
In accordance with ASC 926, the Company amortizes filmed entertainment and television programming costs using the individual-film-
forecast method. Under the individual-film-forecast method, such programming costs are amortized for each film or television program in the ratio
that current period actual revenue for such title bears to management’s estimated ultimate revenue as of the beginning of the current fiscal year to
be recognized over approximately a six year period or operating profits to be realized from all media and markets for such title. Management
bases its estimates of ultimate revenue for each film on factors such as historical performance of similar films, the star power of the lead actors and
actresses and once released actual results of each film. For each television program, management bases its estimates of ultimate revenue on the
performance of the television programming in the initial markets, the existence of future firm commitments to sell additional episodes of the
program and the past performance of similar television programs. Management regularly reviews, and revises when necessary, its total revenue
estimates on a title-by-title basis, which may result in a change in the rate of amortization and/or a write-down of the asset to fair value.
The costs of national sports contracts at FOX and for international sports rights agreements are charged to expense based on the ratio of each
period’s operating profit to estimated total remaining operating profit of the contract. Estimates of total operating profit can change and
accordingly, are reviewed periodically and amortization is adjusted as necessary. Such changes in the future could be material.
The costs of local and regional sports contracts for a specified number of events are amortized on an event-by-event basis, while costs for local
and regional sports contracts for a specified season are amortized over the season on a straight-line basis.
Original cable programming is amortized on an accelerated basis. Management regularly reviews, and revises when necessary, its total revenue
estimates on a contract basis, which may result in a change in the rate of amortization and/or a write-down of the asset to fair value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated on a straight-line method over the estimated useful lives of such assets.
Changes in circumstances, such as technological advances, changes to the Company’s business model or capital strategy, could result in the actual
useful lives differing from the Company’s estimates. In those cases, where the Company determines that the useful life of buildings and equipment
should be shortened, the Company would depreciate the asset over its revised remaining useful life thereby increasing depreciation expense.
Intangible Assets
The Company has a significant amount of intangible assets, including goodwill, FCC licenses, and other copyright products and trademarks.
Intangible assets acquired in business combinations are recorded at their estimated fair value at the date of acquisition. Goodwill is recorded as the
difference between the cost of acquiring an entity and the estimated fair values assigned to its tangible and identifiable intangible net assets and is
assigned to one or more reporting units for purposes of testing for impairment. The judgments made in determining the estimated fair value
assigned to each class of intangible assets acquired, their reporting unit, as well as their useful lives can significantly impact net income.
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