Accounting in media businesses can sometimes feel like deciphering a mystery movie’s plot—blindfolded, with the sound turned off. With so many revenue streams (usually nested in equally complex contracts), where do you even start?
ASC 606 accounting standards often add another layer of frustration. However, they can also provide a solid framework for revenue recognition for media and entertainment companies, provided they have the right tools.
In this guide, we’ll dive into specific ways for media companies to cut through the challenges of ASC 606, simplifying complex revenue recognition reporting.
Understanding ASC 606 for Media Companies
As mentioned, ASC 606 lays out a five-step pathway for revenue reporting consisting of the following:
- Identify customer contracts; what agreements have you made with the customer?
- Determine performance obligations—or all the distinct goods or services promised in the contract.
- Assess the total amount of consideration, or payment, expected in return for delivering these goods or services.
- Allocate prices to each performance obligation.
- Recognize revenue when (or as) obligations are satisfied.
These guidelines understandably cast a wide net, and only in their aftermath have the industry-specific challenges bubbled to the surface.
These challenges often manifest as a tangled web of questions for the media and entertainment industries. Should subscription revenues be recognized upfront or over time? How do licensing agreements align with revenue timing? What about merchandising, co-opted digital advertising, or bundled services?
Unique Challenges for Media and Entertainment Entities
To answer these questions, consider a few common ASC 606 revenue recognition examples, challenges, and strategies that address them.
Bundled Contracts
One hurdle is answering the age-old question: What constitutes a distinct performance obligation?
Identifying them can be tricky, particularly when they’re hidden away in bundles including:
- Streaming subscriptions
- Advertising packages
- Merchandise
- Licensing agreements
For example, imagine a streaming service offering a monthly subscription with a branded promotional item. Under ASC 606 guidelines, the company must separate the subscription service from the merchandise, allocate the transaction price separately, and then recognize revenue as each obligation is fulfilled.
Variable Consideration
Another challenge lies in determining the value of obligations such as royalties, viewership-based pay, or ad revenue, where transaction prices can be slippery and variable.
In these cases, ASC 606 mandates that companies estimate the transaction price.
Determning the transaction price includes analyzing historical data or employing probabilistic models to predict these values. Occasional reassessments and readjustment of these estimates may be required.
Content Licensing
As with many lines in ASC 606, a single word can often make all the difference in determining revenue recognition and timing.
For instance, consider two types of content licensing agreements:
- “Right to use” grants static rights to content (e.g., perpetual film licenses), meaning revenue is recognized upfront.
- “Right to access” provides ongoing rights tied to updates or enhancements, such as episodic streaming licenses. Thus, revenue is recognized over time.
Intellectual property is a challenging subject. Determining license type often requires examining the contract closely to determine how these rights are defined, for what accounting period, and for any additional goods or services that need to be accounted for.
Subscription Services
The subscription economy is booming, and media companies are hopping on the trend. While subscription services often meet customer preferences, they also introduce new accounting challenges, especially when revenue is tied to ongoing or future content delivery.
Consider a few common scenarios:
- Deferred revenue from annual subscriptions gets reported as a liability on the income statement until the actual delivery of the payment.
- Free trials, likewise, defer payment until the trial converts into a paid subscription.
- Adjustments to subscription pricing must be consistently applied across records.
Companies need robust tracking systems to accurately track and manage the dynamic nature of subscription services.
Collaborative Arrangements
Revenue-sharing or cost-sharing agreements often blur the lines between collaboration and standalone revenue contracts. Navigating the terms of these agreements requires careful attention to the language used:
- Revenue-sharing contracts involve splitting revenue, as with licensing deals or streaming royalties.
- Cost-sharing agreements allocate expenses for shared resources or projects, such as co-produced content or co-opted marketing campaigns.
Despite their similarity, both arrangements have different accounting implications. Proper classification, and therefore documentation, is essential to ensure compliance.
Impact on Financial Reporting and Processes
It’s no understatement that ASC 606 completely changed the revenue reporting landscape. (Just glance at our ASC 606 revenue recognition guide to see what we mean.)
Given the variety of revenue streams and situational circumstances, these changes are particularly relevant to media and entertainment companies.
To achieve compliant reporting, you’ll need to navigate three key areas:
- Significant judgments: Some reporting decisions, like estimates on variable considerations or the standalone selling price of a bundled service, fall into this category since there is no single “correct” answer. Such judgments should be well-documented, regularly updated to reflect revenue changes, and transparently explain the methodologies used.
- Disclosures: ASC 606 greatly expanded disclosure requirements to ensure transparency regarding performance obligations and revenue recognition practices. Again, documentation is key; include the nature, timing, and satisfaction of performance obligations and the specific revenue recognition methods applied.
- Accounting Tech Stack and Systems: Many media and entertainment companies opt for automated revenue tracking and compliance software to keep up with the demands of ASC 606 reporting. RightRev’s easy-to-integrate revenue recognition solution allows you to effortlessly recognize revenue for subscription services including product bundles, allocate standalone selling prices, report on deferred revenue, and ensure easy audits through audit trails and tracked changes.
Closing the books in a post-ASC 606 world can seem unwinding a tangled web of data on a time crunch. The right software can alleviate the manual management of contract details and revenue calculations, enabling your team to shift focus from the minutiae of reporting to strategic decision-making.
Best Practices for Addressing ASC 606 Issues
By adopting the following best practices, media and entertainment businesses can stay ahead of common challenges and avoid costly pitfalls:
- Review contracts thoroughly: Be mindful of any modifications, as these can cascade across multiple performance obligations and revenue allocations. Keep extra-thorough documentation as you go (or let the software do it for you) just in case of an audit.
- Implement advanced software. ASC 606-specific software, such as RightRev, greatly simplifies compliance by automating critical calculations and reporting, reducing manual errors, and spotting discrepancies that might otherwise slip through the cracks.
- Train your team: Eliminate problems before they crop up by ensuring your finance and accounting teams stay updated on ASC 606 guidelines. Consider conducting training sessions on challenging topics like identifying performance obligations or estimating variable considerations.
- Conduct regular audits: Take a proactive approach and identify gaps through periodic internal audits. Make the most of these sessions, promptly addressing and documenting any findings for training and external audits.
By combining robust systems, well-trained teams, and a proactive approach, you can confidently navigate ASC 606 while maintaining compliance and a competitive edge.
How Media and Entertainment Entities Can Stay Ahead
Still, you want to do more than just keep pace with ASC 606—you want to stay ahead of it. How can you do that?
Knowledge is the first line of defense, so keep up with the latest ASC 606 updates and trends. Partnering with experts or consults can also fast-track your internal operations, providing the boost you need to eliminate any potential bottlenecks in your compliance strategy.
Finally, ditch the spreadsheets.
Arm yourself with the tools and software—like RightRev—that your team needs to turn ASC 606 compliance from an accounting nightmare to just another day in the office.
Navigating ASC 606 for Media Entities
Media and entertainment enterprises experience many revenue reporting complexities, and ASC 606 seems to compound them.
But here’s the good news: The right tools can turn these challenges into a routine part of your team’s workflow. The key to doing so lies in automated software—and when it comes to software built for ASC 606 compliance, RightRev is the ideal solution.
RightRev’s API-first platform lets you seamlessly plug into your existing applications to fully automate your revenue recognition—no matter how complicated your contracts get. And with the ability to create close the books in three clicks, you can replace those endless spreadsheets with strategic initiatives that truly matter.
Ready to make ASC 606 work for you? Reach out to RightRev today—experience the power of revenue recognition automation.
