Twenty-First Century Fox 2008 Annual Report Download - page 73

NEWSCORP
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Revenue Recognition
Filmed Entertainment—Revenues from distribution of feature films are recognized in accordance with Statement of Position (“SOP”) No. 00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”). Revenues from the theatrical distribution of motion pictures are recognized as
they are exhibited and revenues from home video and DVD sales, net of a reserve for estimated returns, together with related costs, are recognized
on the date that video and DVD units are made widely available for sale by retailers and all Company-imposed restrictions on the sale of video and
DVD 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.
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. The Company defers the cable distribution investments and
amortizes the amounts on a straight-line basis over the contract period.
Filmed Entertainment and Television Programming Costs
Accounting for the production and distribution of motion pictures and television programming is in accordance with SOP 00-2, 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 SOP 00-2, 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 remaining unrecognized 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 market 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
72 NEWSCORP 2008 Annual Report