Question

Disco-vary has two current projects it believes will be wildly popular. The first, tentatively titled BEAT, is a docudrama about musicians. Disco-vary is purchasing rights to stream seven segments for a flat cost of $15,000,000. Streaming will take place from June 2018 through May 2019. In addition to rights to these segments, the $15,000,000 payment also gives Disco-vary first rights to a second season. DDisco-vary employees value this right of first refusal at $1,000,000.

The second project is an original series about inner city basketball, HOOPS, and is developed and produced by Disco-vary. Filming began in February 2018 and costs in the first month are $6,000,000. Costs include location costs, salaries, equipment, and costs of scripts. Disco-vary anticipates that ultimate costs will be $18,000,000, and that streaming revenues will be $50,000,000. Filming is expected to wrap up in December 2018, with editing complete in 2019. RedFlix plans to stream the series in spring 2019.

Because it is a new start-up trying to attract viewers, Disco-vary is projecting a loss of $110,000,000 in 2018.   The CEO of Disco-vaty would like to treat all costs of BEAT and HOOPS as expenses in 2018 so that 2019 will be profitable.

Is it possible to account for the expenses in that 2018 year? I am under the impression that they will have a lot of expenses in 2018 but you cant say for certain the project and costs pertaining to the project will allow for no expenses in 2019.

Answer 1

As both the projects BEAT & HOOPS are starting in the year 2018 and wrapping up or streaming in either through 2018 or 2018 & 2019, the expenses related to these projects cannot be treated as expenses only for the year 2018. This treatment will not be prudent as the revenue & expenses are spread for both the years but the revenue for the year 2019 relating to these projects doesn’t have corresponding expenses, which has been written off as expenses in the year 2018.

This treatment also deflates the profit for the year 2018 and inflates in 2019. Which depicts a distort picture of profits for these two years.

Hence as per principle of prudence, it will be advisable to write off the expenses on a regular basis for the 2 years i.e. 2018 & 2019 for the period through which the series are streamed and Disco-vary expects the revenue from these projects.

So, the opinion of CEO of Disco-vary to treat all costs of BEAT & HOOPS as expenses in 2018 is not prudent as contrary to the general accounting principle of Prudency.