Media Industry Accounting Group Annual conference 2016

Transcription

1 Media Industry Accounting Group Annual conference 2016 Barcelona 17

2 Welcome and introduction Sam Tomlinson UK E: Slide 2

3 Welcome to Barcelona Slide 3

4 Introductions Name Company Role Objective(s) for the day Fascinating fact Slide 4

5 Administration CPE/CPD Request via to Slides and papers Available at and sent to you by Slide 5

6 Agenda Welcome and introduction Sam Tomlinson, Global entertainment and media outlook Phil Stokes, Coffee break Revenue recognition Gary Berchowitz and Sallie Deysel, Lunch Warwick Business School: The global macroeconomic outlook, and what it means for media companies Andrew Sentance CBE, Content financing and production: key accounting issues Sam Tomlinson, Tax issues for media companies Close Slide 6

7 Global entertainment and media outlook Phil Stokes UK E: Slide 7

8 A world of differences: capturing attention and value in today s global multi-speed media landscape 4.4% Projected industry growth

9 Never Before HAS CHANGE OCCURRED IN SUCH SHORT PERIODS OF TIME.

10 Disruptive forces are rapidly reshaping our world. Five inescapable world trends are acting together and driving change. Right now Demographic shifts Shift in global economic power Accelerating urbanisation Resource scarcity and climate change Technological advances 10

11 Disruptive forces are rapidly reshaping our businesses. Organizations must take actions now to prepare for the disruptive opportunities and evolving platforms of the next few years. Right now Technology forces Smart Device Proliferation and Ubiquitous Connectivity Societal Forces Consumerisation and Always On expectations Regulatory Forces Privacy and Shifting Regulatory Landscape 11

12 The world is in beta. Technologies, trends, markets and economies are in a constant state of flux. Right now Competitive advantage is transient It is no longer about longterm strategies to sustain a competitive advantage Organizations must have the agility, empowerment, and the confidence to change This may mean setting up new businesses and allowing outdated versions to die

13 The business environment is ripe for the disruptors. Disruptors see the future, build scalable platforms, and experiment restlessly and boldly. Right now Disruptors do not respect incumbent or classical organizational structures More importantly, they are not held back by those structures They have an insatiable focus on the customer They see the future, build scalable platforms, and experiment relentlessly 13

14 Organisations must innovate today. Leaders who do not listen to their stakeholders and change will be passed by as their markets and customers move without them. Right now Customers are digital Organisations can generate deeper insights than ever before Market dominance can quickly be lost to new entrants Siloed decision making is a signal of impending failure Innovation will drive success 14

15 The World is in Beta Profitable Growth in a Digital Age

16 By 2017 a new breed of customer will dominate - we call them Digital Natives

17 Enabling total customer centric business models Digital now enables businesses to compete on the basis of helping customers achieve their desired outcomes.

18 There is an increasing need to build digital trust The new trust dynamic: trust + opportunity = growth Opportunity

19 A roadmap for the biggest business challenges Know Define Evolve Create Accelerate Protect The new core competencies required to survive and thrive in the digital age Know your customers, markets and ecosystem Define your business strategy for the digital age Evolve your total business in response to digital disruption Create sustainable value for customers and shareholders through innovation Accelerate time to market through smart, sustainable delivery models Protect your assets from the threats of the digital age to build stakeholder trust

20 $ Consumer/ end-user and advertising spending 5 year historic and 5 year forecast data 54 countries 13 segments Internet advertising TV advertising TV and video Cinema Video games Music Radio Magazine publishing Newspaper publishing Book publishing Out-of-home advertising Business-to-business Internet access Slide 20

21 In a world that s in Beta, we believe successful companies need to focus on three major imperatives Trust Speed and Agility Constant Innovation Slide 21

22 For entertainment and media companies, this translates to three specific themes Develop seamless consumer relationships across distribution channels Put mobile (and increasingly video) at the centre Innovate around the product and user experience Slide 22

23 Global growth will be 4.4% CAGR to 2020 reaching $2.14 trillion. A look at the sources 6.8% 4.9% Revenue share, 2020 Access Consumer Advertising 2.6% 30% 31% Access Consumer Advertising 39% Slide 23

24 Global segment CAGR Global growth in aggregate spending ( CAGR) Internet advertising Internet access Cinema Video games TV advertising Total Out-of-home advertising Business-to-business TV and video Radio Music Book publishing Magazine publishing Newspaper publishing (1.5%) (0.1%) 3.0% 2.6% 2.1% 2.1% 1.7% 4.8% 4.7% 4.4% 4.3% 5.8% 6.8% 11.1% Slide 24

25 Bigger Analysing the overall 4.4% CAGR Mature Next wave Average CAGR ( ) countries % 7.8% Slow growing Up and comers Aggregate market size (2020) 3.3% 3.4% Faster Slide 25

26 Strategic themes Slide 26

27 Shift 1 Demography: Youth will be served Our data suggests that the young will propel E&M growth through 2020 Slide 27

28 Shift 2 Competition: Content is still king Much of the E&M industry is growing more global, but cultures and tastes in content remain steadfastly local. Slide 28

29 Shift 3 Consumption: The joy of bundles The bundle isn t dead. Not by a long shot. Incumbents are offering their content on an integrated omnichannel basis. Consumers are also wanting slim bundles and flexible pricing models Slide 29

30 Shift 4 Geography: Growth markets The divergences are being driven by several factors, including differential growth rates among sectors, regulation, the degree of protection offered to incumbents, and ease of access. where to invest decision factors how to invest regulation Slide 30

31 Shift 5 Business models: Transforming with trust In many areas, the growth of technology and digitisation acts as a powerful centrifugal force Breaking up existing relationships; pushing large, generalist entities to give way to smaller specialists; and allowing smaller, nimble competitors to run circles around incumbents. Slide 31

32 Advertising as an engine of growth? Internet access Business-to-business Internet advertising Newspaper publishing Out of home advertising Magazine publishing Book publishing Only three E&M categories do not include revenue from advertising TV advertising TV and Video Radio Video games Music Cinema Slide 32

33 Ranking countries on advertising Country analysis of advertising revenue and growth Top 10 largest advertising country Top 10 fastest growing advertising country Countries that sit in both lists Slide 33

34 Key themes/trends 1 Advertising growth is fuelled by where consumers are increasingly spending their time Online, particularly mobile experiences 2 Internet advertising is the largest ad segment, fuelled in part by television and video experiences (and therefore ad revenue) moving online 3 Tracking consumer s location/experience and delivering ads at the right time throughout the day continues to be an area of innovation 4 Online ads have not replaced traditional ad revenues (either in total revenue or typical per unit ad rates), resulting in many opting for a preference for subscription models online 5 Immersive and/or live experiences are growing in popularity through esports, concerts and more creating hybrid (physical + digital) ad opportunities Slide 34

35 Advertising mix changes What s new? Share of overall advertising revenues (Digital revenues included in segments) Internet advertising is projected to gain 8.2% share, and digital advertising is driving growth across all segments. Publishing is projected to lose share, even with digital growth included in this segment. Video entertainment Publishing Internet Music % 6.5% 23.6% 22.5% 32.4% 32.1% 30.4% 30.7% Video games 0.6% 0.7% Other 6.6% 6.4% Slide 35

36 Growth drivers in internet advertising What s new? Even in Internet advertising, traditional business models (classified advertising) are giving way to newer platforms. Video and mobile ads are growing at the fastest rate. Projected growth in global internet advertising revenues, by the type of advertisement Paid Search: Mobile 17.7% CAGR, Wired 8.3% CAGR Other Display: Mobile 16.4% CAGR, Wired 5.8% CAGR Display Video: Mobile 31.4% CAGR, Wired 19.6% CAGR Classified: 5.3% CAGR Slide 36

37 Increases in online (streaming) video entertainment are driving online video advertising growth For both wired and mobile display internet advertising, video ads are growing at the fastest rate Global mobile and wired display advertising By platform revenue ($US mn) Other display Video Mobile other display $20,320 $31,075 $47,954 Mobile video $19, CAGR 5.8% 16.4% 19.6% 31.4% Video Internet advertising includes revenue from both traditional broadcasters (also counted in Online TV advertising ) and Internet-based websites, including YouTube. Internet video advertising not related to broadcasters is projected to represent 75% of total online video ad revenue highlighting that consumer behaviours are shifting toward alternative video consumption platforms. Slide 37

38 Knowledge of and connection to consumer I m a media company. Now what? Companies are now expanding their marketing playbooks to include more E&Mlike capabilities. Four ways to play in the evolving media industry Maximisers Content distributors Mash-ups Multitaskers Makers Content creators Module Service providers Path to market Source: Thriving in an Increasingly Digital Ecosystem, Peter Weill, Stephanie L. Woerner, MIT Sloan Management Review, Summer Slide 38

39 I m a media company. Now what? Makers Maximisers Module Mash-ups These are content creators who may not have a direct relationship with the target consumer. They focus on creating distinctive, compelling intellectual property and then on selling it to other distributors and aggregators. These enjoy a direct relationship with the customer while operating in a distribution environment characterised by their curation and control. These companies have little or no direct relationship with the end customer and exert less control over the distribution environment. Many are service providers who offer a technical set of plug-and-play products. These have direct customer relationships while exerting a high level of control over the user experience including the packaging of their own products and services alongside those from third parties. Examples: Film and TV studios Music labels Examples: Cable, satellite and mobile operators Theater chains Examples: Virtual reality company Audio tech company Examples: Diversified e-commerce company Slide 39

40 Returning to the 5 shifts Demography: Youth will be served Competition: Content is still king Consumption: The joy of bundles Geography: Growth markets Business models: Transforming with trust How do these shifts impact you? Slide 40

41 Maximising the value of content: Blending data and intuition 15-second download With traditional measures of content performance having been thrown into flux by the explosion in digital channels and consumption data, new ways are emerging to value and monetise content Including measures of engagement such as attention minutes. While the content majors may appear to have been put at a disadvantage to the distribution players by the flood of consumption big data, in fact their wealth of content intuition and insights represents a huge differentiating asset And one they can blend with analytics-driven insights to create a powerful hybrid. What role do big data and data analytics play in content marketing or purchasing decisions in your business? What metrics are you using today to measure content performance, and are those metrics changing? Slide 41

42 Addressable advertising: On the road to nirvana But with more disruption yet to come 15-second download Linear TV is now joining the move towards addressable advertising, targeting consumers though a blend of media usage data, demographic information and purchasing history. But questions remains for the three main stakeholders of advertisers, networks/publishers and consumers With profound impacts, some of them unexpected, set to emerge along the advertising value chain as addressability of ads advances. Two of the biggest hurdles to reaching the nirvana of addressable cross-platform ads are around improving the precision of targeting, and gaining a deeper understanding of individuals behavioural response to a given advert in a given context. As an advertising inventory owner, are you offering addressable advertising as part of your portfolio? If not, why not? As an advertising agency, are you actively promoting addressable advertising to your clients as part of their advertising mix? Slide 42

43 Audience measurement: Unlocking a treasure trove of insight 15-second download Online advertising has been winning market share from traditional broadcast advertising on the strength of its greater accountability and wealth of detailed data on user behaviour and engagement. But now TV is fighting back, with innovations in audience measurement based around analysing return path data (where available), social listening, and new aggregated insights into agency spend. The new data also enhances Pay TV service providers ability to cross-sell and upsell services to subscribers. How do you currently measure engagement, as opposed to reach and frequency? Would you be prepared to collaborate with others in the industry to drive greater standardisation in audience measurement? Going forward, future innovations in audience measurement will depend increasingly on industry collaboration, to provide advertisers with credible, comparable data for buying decisions. Slide 43

44 OTT: Disruption for the industry, choice for the consumer 15-second download An expanding flow of OTT content services are being rolled out in markets worldwide, both from new pure-play OTT entrants and traditional broadcasters adding an OTT service to their portfolio. Players that achieve relevancy can join the consumer s inner circle of trust. To stay there, they ll need to apply innovation and agility As entrants and incumbents jostle for position, the disruptive frenzy of activity is creating a complex, fragmented patchwork of often-overlapping content services, using a diverse array of business, operating and pricing models. How should incumbent broadcasters and content providers respond to And reach The growing ranks of cord-cutters and cord-nevers? How can entertainment and media E&M best engage with customers through digital channels to drive their own innovation and adoption by customers? Slide 44

45 Reaching the next five billion consumers 15-second download Mobile Internet connections worldwide are growing apace. They already outnumber fixed connections by three to one, and are projected to rise by over 5 billion to 7.6 billion in the next five years. This is a bigger global disruption than the Industrial Revolution, and presents entertainment and media companies with a massive new audience for content in emerging markets Albeit at much lower ARPUs than they re accustomed to in the developed world. What opportunities has your company identified springing from the next five billion consumers joining the global mobile Internet ecosystem? Which emerging markets do you feel you could target most effectively and profitably with consumer offerings? Slide 45

46 Contextual awareness and data responsibility 15-second download The mobile device is now the digital extension of the individual, sitting at the heart of their personal proximity network and constantly monitoring their activities and surroundings. The wealth of data from the handset opens the way to contextual awareness of the consumer s behavioural patterns and environment, enabling companies to anticipate their needs and address them with context-relevant choices, content and messaging. But consumers in some contexts find this targeting intrusive And there s a risk this unease may grow as addressability increases. So providers need to behave responsibly with data, and put the consumers in control of what data they share, and what value they get in return. What opportunities has the growing ubiquity of mobile devices opened up for your business and how do you anticipate these expanding in the future? Before targeting consumers, do you consider whether you should do this or just whether you can? Slide 46

47 Four forces reshaping the digital advertising landscape 15-second download Digital and traditional advertising are not mutually exclusive or in competition with each other But all part of the evolving mix of advertising options and revenue streams being targeted across the industry. As the division between online and mobile ads blurs, and consumers attitudes to mobile advertising evolve, four forces are reshaping the ads landscape: mobile, video, and native and programmatic advertising. As a marketer, are you running to where the ball is going to be with respect to media planning by having a clear mobile and video strategy? Are you investing in creating experiences that support your users video and other needs? Slide 47

48 Entertainment and media megadeals: Beating a path to the door of the connected consumer 15-second download Entertainment and media megadeals have become a major feature of the M&A landscape in the US and Europe, with several blockbuster transactions announced over the past year, mostly by cable and satellite operators. What really links these deals is not their size, but their focus on building scale in infrastructure and customers. These goals play to two strategic aims: one defensive, in fending off the advance of the over-the-top players; the other offensive, in positioning to gain the upper hand in the connected home /connected consumer? Are you seeing different deal rationales at play within and between Different segments of E&M? and with other non E&M segments? To what extent is your market or markets experiencing a blurring of traditional boundaries between media, communications and technology? Slide 48

49 The shifting industry value chain 15-second download While the FCC in the US has moved to cement net neutrality in place A move widely seen as a victory for OTT providers over telcos The status of such regulation in markets across the world varies widely. Operators globally are undertaking a diverse array of initiatives in different markets to boost the value and returns on their networks, through additional services and innovations enabled by their networks. How do you believe the recent net neutrality ruling in the US will affect the provision of internet infrastructure in the long run? As the next billion people in emerging markets become connected, what are the implications for the distribution and consumption of media content? Slide 49

50 The tax agenda: Reputation risk Or an opportunity for differentiation? 15-second download Progress towards rewriting the international tax rulebook has continued during the past year, as governments have begun to follow up their rhetoric about tax morality with hard legislation. The changes in the tax environment are especially relevant to entertainment and media companies, given their heavy dependence on their reputation and brand among consumers. Do you feel the changes being made to the international tax regime represent the right responses to the requirements and realities of digital business? Has your business carried out a total tax contribution study across its markets? Slide 50

51 Revenue recognition Sallie Deysel UK E: Gary Berchowitz South Africa E: Slide 51

52 Temperature test How familiar are you with IFRS 15, the new revenue standard? 1. I ve spent some time considering how it applies to my company, so I ve had to read bits of it. 2. I recall a few bits from this session last year and/or have attended other training. 3. I m aware that there is a new standard. 4. I wrote the standard. Slide 52

53 Temperature test How much work have you (or others in your company) done on transition to IFRS Nothing. 2. We ve done a high level assessment of which revenue streams are most likely to be affected. 3. We ve been through a number of contracts and have set new policies. 4. We ve reassessed all of our contracts and are reporting internally under both GAAPs already. Slide 53

54 What are we covering today? 1. Latest updates. 2. Brief recap on performance obligations. 3. Deep dive on licensing. 4. Deep dive on principal versus agent. Slide 54

55 Latest updates 1 Current status and TRG 2 Clarifications 3 Topical issues Slide 55

56 Current status and TRG Effective date amended to 1 January 2018 for both IASB and FASB. Transition Resource Group has met six times (48 issues discussed). IASB has not scheduled any further meetings of the TRG in Not disbanded. Meetings may be scheduled if the need arises. FASB members of the TRG continue to meet. A meeting was held during April Clarifications issued by both the IASB and FASB. Slide 56

57 Clarifications Topic FASB IASB Convergence Identifying performance obligations Licences Identifying Performance Obligations and Licensing Issued April 2016 Clarifications to IFRS 15 Issued April 2016 Partially Partially Principal vs. agent Principal vs. Agent Considerations Issued March 2016 Same Transition Narrow-Scope Improvements Partially Collectability and Practical Expedients Issued May 2016 None None Presentation of sales taxes None None Non cash consideration None None Slide 57

58 Licences of intellectual property Implementation issue IASB FASB Licences How to determine the nature of a company s promise in granting a licence? Clarify and expand on principles to better explain when an entity s activities significantly affect the IP. Create two new categories of licences symbolic and functional That will determine whether revenue is recognised over time or upfront. When does the exception for sales- and usage-based royalties apply? Sales- and usage-based royalty guidance applies when the predominant item to which the royalty relates is a license (no splitting of the royalty). Does the licence guidance apply when the licence is not distinct? How do contractual restrictions impact the identification of promises in a contract? No further guidance. No further guidance (though see discussion in BC). The licence guidance should be considered, even if the licence is not predominant. Distinguishes between contractual provisions that transfer additional rights and those which do not affect the number of promised goods or services in a contract. Slide 58

59 Principal versus agent Implementation issue IASB and FASB decisions Principal versus agent (gross vs. net revenue reporting) How should an entity identify the unit of account for the principal versus agent assessment? How should the notion of control be applied to services performed by another party? What is the relationship between the notion of control and the indicators? Clarify that an entity determines whether it is principal or agent for each specified good or service promised to a customer. An entity could be a principal for some specified goods or services and an agent for others. Clarify that a principal can control a service, even when another party performs the service, if it can direct that party to perform the service for customer on its behalf. Clarify that control is the underlying principle, the indicators assist an entity in determining whether it controls a good or service before it is transferred to a customer. Reframe indicators as indicators of a principal. Clarify that the indicators are not all-inclusive, and certain indicators may be more/less persuasive. Remove indicators related to credit risk and earning a commission. Clarify that an entity that performs a significant integration service is a principal. Slide 59

60 Identifying performance obligations Slide 60

61 Identifying performance obligations A performance obligation (PO) is a distinct promise to transfer a good, service or bundle of goods and services. A good or service that is promised to a customer is distinct if both of the following criteria are met: a) It is capable of being distinct (i.e. it has separate utility); and b) It is distinct in the context of the contract (i.e. the promise to deliver that good or service is separately identifiable from other promises in the contract). When assessing (b) the objective is to determine whether the nature of the promise is to transfer each of those goods or services individually or to transfer a combined item to which the promised goods or services are inputs. Slide 61

62 Identifying performance obligations What are some of the implications for Media? Set-top boxes (new example) Options might be material rights Application to licences Slide 62

63 Licences of intellectual property Slide 63

64 Before you start. Is the licensing guidance relevant? In the following scenarios, is there a distinct or predominant promise of a licence? Entity licenses a cinema chain to show its film over the next three months. In addition, entity promises to provide advertising memorabilia for display and radio advertising. Entity licenses a film and the customer has the digital copy. Entity licenses a film and the customer can only access it by live streaming from the entity s servers. Entity sells a box for accessing and storing films along with a licence to use its proprietary IP that allows the box to function. Remember The royalties constraint only applies to licences Slide 64

65 Licences Restrictions in licences And what if they are changed? Step 2 Identify performance obligations Apply the guidance for identifying performance obligations as with any other contract. Could be very judgemental. Might be GAAP differences compared to US GAAP. Right of use or right of access? Restrictions of time, geographical region or use Those restrictions define the attributes of the promised licence, rather than define whether the entity satisfies its performance obligation at a point in time or over time. Renewals Should a renewal or extension be treated as a new licence or as a modification of the existing contract? US GAAP example to specify that in general a company would not recognise revenue relating to a renewal until the beginning of the licence renewal period. In some cases, this may result in the recognition of revenue with respect to the renewal or extension at a later date using Topic 606 than using IFRS 15. Slide 65

66 Licences Identifying performance obligations Some examples Production Company (PC) licenses season 1-5 of Woof! (Its hit comedy where all the actors are dogs) to Distribution Company (DC) in Spain and Italy. These seasons were filmed some years ago (season 10 is currently in production). The licence starts on 1 January 2016 and ends on 31 December How many performance obligations would you identify? A) Five (Each season is a PO) B) One (There is a single licence for all five seasons) C) More than five (Each episode is a PO) D) Ten (Each year is a PO) Q: What if DC pays for the licence in 10 annual instalments? Slide 66

67 Licences Identifying performance obligations Some examples Woof! Is already a big hit in Japan. Production Company (PC) licenses seasons 8 12 of Woof! to Distribution Company (DC) in Japan. Season 10 is currently in production with the filming of season 11 and 12 planned over the next two years. These seasons will be transferred to DC when production is complete. The licence starts on 1 January 2016 and ends on 31 December How many performance obligations would you identify? A) One (There is a single licence for all five series) B) Five (Each series is a PO) C) More than five (Each episode is a PO) D) Four (8 and 9 together, 10, 11 and 12) Slide 67

68 Licences Identifying performance obligations Over to you! In the following scenarios, how many POs would you identify? PC licences Woof! to DC giving DC the following distributions rights: A Seasons 1 5 in Germany, starting on 1 January 2016 and in Austria starting 1 January Licence term is ten years. DC licences Woof! to TV Channel (TVC) giving TVC the following broadcast rights: B Seasons 1 5 of Woof! in Germany for five years. The series must be broadcast so that the episodes are shown in the right order and an addition, the seasons must also be shown in the right order with one season shown in each year (i.e. season one in year one, season two in year two etc.). C Seasons 1 5 of Woof! in Germany. No restrictions on the order in which the episodes are shown. Licence term in ten years. But in years 5-8 the rights have been sold to a different broadcaster and so TVC cannot use the content in those years. Slide 68

69 Licences Distinct or predominant Right to use Right to use IP as it exists at a point in time. Revenue recognised at point in time. Right to access Right to access IP as it exists throughout the licence period. Revenue recognised over time. Slide 69

70 Licences Right to use Right to access Licensor performs activities that significantly affect the IP Rights expose customer to effects of those activities Activities are not a separate good/service Slide 70

71 Licences HOW to apply the licensing guidance? Which changes significantly affect the IP? Licensor performs activities that significantly affect the IP Function? Activities are not a separate good/service Form? Value? Activities expected to significantly change the form/functionality of the IP. or Ability of customer to obtain benefit from IP is substantially derived from or dependent upon the entity s activities. Slide 71

72 Licences Right to use or right to access? Image rights for clothing? Broadcast rights? Franchise rights to Woof! branded pet grooming salons? Woof! The soundtrack? Woof! When they were pups Spin off animation? Slide 72

73 Principal versus agent Slide 73

74 Principal versus agent Fundamental change IAS 18 IE 21 IFRS 15.B35 Risk and reward approach Control concept An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. IFRS 15 states that having risk and rewards of 74 ownership is one indicator of control Slide 74

75 Principal versus agent Definition of control Ability to direct the use of the goods/services IFRS 15 Para 33 Ability to obtain substantially all of the remaining benefits from the good/service Ability to prevent others from directing the use of the good/service Slide 75

76 Principal versus agent The indicators of control a) Responsibility The entity is primarily responsible for fulfilling the promise to provide the specified good/service, including the responsibility for acceptability of the good/service. Indicators of control b) c) Inventory risk The entity has inventory risk before the goods/service has been transferred to a customer or after transfer of control to the customer. Discretion The entity has discretion in establishing the price for the good/service, indicating that the entity has the ability to direct the use of that good/service and can obtain substantially all of the remaining benefits. Slide 76

77 Principal versus agent Tri-partite transactions Media company (MC) In most cases MC needs to determine whether DC or EC is its customer. IFRS 15 provides little guidance for MC. IFRS 15 provides significant guidance for DC. Helpful to analyse from DC s perspective. Distribution channel (DC) If DC is principal, then DC is MC s customer (net revenue). If DC is agent, then EC is MC s customer (gross revenue an cost of sale). End customer (EC) Slide 77

78 Principal versus agent Over to you! In the following scenario, is the media company selling to the distributor or the end customer? ebooks Publisher (P) sells e-books via online distributor (O). O has exclusive rights in the region. P provides content. O transforms the digital file to a suitable format (straightforward). O is responsible for delivery of content. P is responsible for accuracy of content. O sets price within an agreed range O remits 75% to P. O is obliged to refund customers if the need arises, but P would then reimburse any amounts paid by O. What is the specified item being transferred to the end-customer? Does O control that item before it is transferred? Slide 78

79 Principal versus agent ebooks What did you identify as the specified item? ebook transferred to end consumers (i.e. a right of use license) Does O obtain control of the ebook before it transfers to end consumers? Points to consider Ability to direct the use, obtain benefits and restrict others access Assessment by P O can direct how the ebooks will be marketed and delivered via their online portal and can prevent P from transferring the ebooks to other parties in that region because of the exclusivity agreement. The ebooks represent a licence and the underlying IP is not owned by O. It is not clear from the control definition and therefore the indicators are also considered. Primary responsibility for fulfilment Inventory risk O is responsible for technical infrastructure, download format and delivery. P is responsible for the content. This indicator is mixed but indicates that O is more likely to have the primary responsibility to the end consumer to fulfil the delivery of a working ebook. There is no traditional inventory risk for ebooks since there is no physical product. There is some investment recoverability risk for P (but likely recovered via more than one sales channel). O has minimal inventory risk since the transformation process is straightforward and no committed spend. The lack of physical inventory means this indicator is not very relevant so not determinative. Discretion to establish prices O sets the price charged to ultimate consumers. But narrow range limits O s ability to obtain substantially all of the remaining benefits from the ebooks. This indicator is mixed and but indicates P has more discretion than O. Slide 79

80 Principal versus agent ebooks Is O principal or agent when it sells ebooks? On balance, O is principal and so P recognises the net amount remitted as revenue. That is what P is entitled to for selling ebooks to O. Please remember that this is not the answer for ebooks! How do your contracts actually work? Judgement is required. Slide 80

81 Principal versus agent What else might be tricky? Transactions involving IP and online transactions are generally difficult to assess. Online games, apps, music downloads, television content. Advertising space. Others? Are there other issues you d rather discuss? Service or licence (TV broadcast). Trying to estimate the transaction price when the agent discounts the price to the end consumer. Content for advertising (barter or variable consideration?). Something else? Please discuss in your table groups. Slide 81

82 The global macroeconomic outlook, and what it means for media companies Andrew Sentance UK E: Slide 82

83 Outline The post-crisis world economy. Global and European economic outlook. UK referendum on EU membership. Implications for media industry. Slide 83

84 The world economy in the 21st century World GDP, US$ trillion (Current prices) * Source: IMF Slide 84

85 Global growth close to long-run trend % per annum change in world real GDP and consumer prices 7 GDP growth Inflation GDP growth trend Source: IMF World Economic Outlook, April 2016 Slide 85

86 but the pattern of global growth is changing % per annum change in real GDP 10 Advanced economies Emerging and developing economies (2) (4) Source: IMF World Economic Outlook Slide 86

87 Asia-Pacific now the dominant region Percentage share of world GDP, current market prices and exchange rates 40% 35% US EU-28 Asia-Pacific 30% 25% 20% 15% 10% 5% 0% Source: IMF World Economic Outlook Slide 87

88 The world economy in 2030 tn at 2014 prices and market exchange rates China US EU-28 India Japan Germany Brazil UK France Russia Mexico Indonesia Italy S Korea Canada Spain Source: World in 2050 Report, February 2015 Slide 88

89 Big differences in recovery among G7 economies % average annual growth, 2009 Q2 to 2016 Q1 Canada US UK Germany France Japan Italy (0.2)% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% Source: OECD Quarterly National Accounts Slide 89

90 Growth divergences particularly noticeable in Europe % average annual growth, 2009 Q2 to 2016 Q1, 10 largest EU economies Poland Sweden UK Germany Belgium Austria France Netherlands Spain Italy (0.2)% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% Source: OECD Quarterly National Accounts Slide 90

91 Recent growth in major European economies % annual growth in year to Q1 2016, 10 largest EU economies Sweden Spain Poland UK Germany Belgium Netherlands France Austria Italy Source: Eurostat 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Slide 91

92 Uneven growth across the global economy 1.4 Canada Ireland UK 2.0 Germany 1.5 Russia Greece US 2.0 France Japan Mexico 2.7 Spain 2.6 Italy 1.1 China India Key 7.7 Australia x.x = GDP growth in 2016 Source: May 2016 Global Outlook Brazil -3.8 South Africa Slide 92

93 Major variations in regional growth prospects % average growth, , latest IMF forecasts Developing Asia Sub-Saharan Africa Middle East/North Africa Central and Eastern Europe Advanced Economies Latin America Former Soviet Union Source: IMF World Economic Outlook 0% 1% 2% 3% 4% 5% 6% 7% Slide 93

94 Dynamic services industries Key drivers of Western growth Financial services. Business and professional services. Digital economy/it/communications. Travel, tourism and culture. Creativity, design and media. Slide 94

95 How worried should we be about China? China = c. 13% of global economy; 9.5% of EU exports. Weaker Chinese growth = Lower energy and commodity prices, boosting consumer spending. China is undergoing an economic transition to slower, more service- oriented growth. Such transitions are not smooth so we should expect to see some degree of volatility as the economy adjusts. Chinese government has levers to offset excessive economic weakness if it threatens stability. Most significant worry would be if economic turbulence led to a major political upheaval. Slide 95

96 Real oil price since 1970 $/barrel at 2014 prices Real oil price ave Source: BP Statistical Review of Energy, updated is average for year to date ($38.4/bl) Slide 96

97 Brexit economic context 40+ years in Europe UK joined EEC in Since 1980s our economy has performed well within EEC/EU. UK is a business-friendly and flexible major EU economy and public spending/tax is relatively low share of GDP. UK economy relies on trade/investment. EU membership has supported jobs/investment in UK regions. Business regulation has increased, partly due to Single Market, but also due to rising standards/expectations. UK retains control of key fiscal and monetary levers of economic policy. Slide 97

98 Economic consequences of UK leaving EU Trade and investment (Negative, long-term). Uncertainty associated with an economic shock (negative, short-term and medium-term). Migration (Mixed). More regulatory freedom (Positive). Lower fiscal contributions (Positive, but small). Slide 98

99 Impact of UK leaving EU Optimistic case Variation in GDP level compared with base case inside EU 1.0% Fiscal Regulation Uncertainty Trade barriers Migration Total 0.0% (1.0)% (2.0)% (3.0)% (4.0)% (5.0)% (6.0)% Source: report for CBI Slide 99

100 Impact of UK leaving EU Pessimistic case Variation in GDP level compared with base case inside EU 1.0% Fiscal Regulation Uncertainty Trade barriers Migration Total 0.0% (1.0)% (2.0)% (3.0)% (4.0)% (5.0)% (6.0)% Source: report for CBI Slide 100

101 /CBI analysis compared to other studies % loss of GDP due to UK leaving EU OECD CBI/ - FTA CBI- - WTO LSE - Low LSE- High Treasury - EEA Treasury - FTA Treasury -WTO Source: OECD Slide 101

102 Implications for media industry Significant divergences across the global economy affecting economic growth, consumer confidence and media spend. European outlook is improving With strength in N & E Europe and signs of turnaround in S Europe, led by Spain. Prospects for US/Canada growth also look reasonably solid. China and low oil price unlikely to destabilise global economy. Brexit risks to short-term and medium-term outlook in UK and EU are real. Media industry part of a cluster of dynamic service industries which should prosper in the medium-term, but businesses will need to adapt to changing technology and industry structure. Slide 102

103 More information and links UK Economic Outlook and Global Economy Watch: and Blogs: Slide 103

104 Content financing and production: key accounting issues Sam Tomlinson UK E: Slide 104

105 Content financing and content production Some key accounting issues Content financing arrangements (MIAG 11) Film industry has history of seeking external investment. Increasingly applies to television too. Financing arrangements can be complex Cost capitalisation and amortisation (MIAG 10) Film production (and increasingly television too) can be hugely expensive and time-consuming. Complexities include tax credits and interest capitalisation. Amortisation guidance has changed Does this mean profiles should too? Slide 105

106 Content financing and production Scenario 1 NewCo is set up and owned by FilmCo (40%) and Investor (60%). Directors, voting rights and eventual dividends are all proportionate to shareholding. NewCo will develop Film F to a pre-agreed plan and budget, using FilmCo subsidiaries to produce and distribute the film. NewCo board approves key decisions but cannot withhold approval unless it is a material change to original plan. How is FilmCo most likely to account for NewCo? A) Equity account as an associate B) Consolidate as a subsidiary C) Record its share of costs and revenues D) It depends. Q: What if FilmCo s interest was e.g. 15%? Slide 106

107 Content financing and production Scenario 2 NewCo is set up and owned by FilmCo (40%) and Investor (60%) as in scenario 1. The first X million of film profits must be paid to Investor, after which profits are distributed proportionately to shareholding. Which of these statements is true? 1. FilmCo would treat Investor s interest as non-controlling interest. 2. FilmCo would treat Investor s interest as debt. 3. FilmCo would treat Investor s share of results as interest. 4. FilmCo would treat Investor s share of results as operating costs. A) 1 only C) 2 and 4 B) 2 and 3 D) 2 and 3 or 4 Q: What happens if the film performs badly? Slide 107

108 Content financing and production Scenario 3 NewCo will be applying for tax credits in the country where the film is being produced. The tax credits will be available regardless of taxable profits. Which of these statements about the tax credits is true? 1. They can be recognised in the income statement in the year they are earned. 2. They can be deducted from balance sheet film costs. 3. They can be treated as deferred income. A) 1 only C) 3 only B) 2 only D) 2 and 3 Q: What if the tax credits had depended on taxable profits being available? Slide 108

109 Content financing and production Scenario 4 NewCo is making Film F over three years, followed by one year of distribution. As well as funding from FilmCo and NewCo, it also has a substantial bank loan. How should NewCo account for interest on the bank loan? A) Expense it all through income statement each year B) Capitalise it all throughout the project C) Capitalise it all up to when the film is ready for distribution D) None of the above Slide 109

110 Content financing and production Scenario 5 A recent amendment to IAS 38 affects the use of revenue-based amortisation profiles. Which of these statements is true? A) It applies from 1 January 2016 B) It disallows the use of revenue-based amortisation C) Amortisation profiles will have to change D) It doesn t apply to media companies Slide 110

111 Tax: Focus areas for media companies Slide 111

112 Feedback and closing remarks Slide 112

113 and thank you! Slide 113

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