Hollywood Accounting Rider

From reading the pleadings in cases filed against film companies for allegedly under-reporting participations owed to talent, licensors, or financiers, a pattern emerges of standard complaints that come up repeatedly. In most of the cases, the relevant contracts have pages of fine print that expressly permit the accounting conduct complained of, so one solution is to request adding an overriding rider that deals with the problematic issues when the contract is negotiated. It may be a tough negotiation that will depend on each party’s leverage, but “you can’t score if you don’t shoot.” With that background, I offer the following short accounting rider, which is intended to counter all the common complaints of under-reporting participations owed.

The Rider

Notwithstanding anything to the contrary in the Agreement or any exhibits thereto, the following provisions shall govern the payment of all contingent amounts owed by Film Company to Payee under the Agreement (using the definitions in the Agreement and exhibits thereto) unless Payee consents to an exception in writing:

1. Gross Receipts

a. Gross Receipts shall include all gross receipts actually received by Film Company or its affiliates that are not “End Users” (companies with a direct link to the public, such as theaters, retail stores, broadcasters, cable companies, and VOD companies) from the exploitation of any rights relating to the Picture (and not just a limited subset of such rights).

b. Gross Receipts shall include an arm’s-length, fair market value allocation of any exclusivity payments, annual bonuses, etc. that are paid to Film Company in consideration for any grant of rights that includes any rights to the Picture.

c. All inter-affiliate transactions shall be disregarded other than with affiliated End Users. All transactions with affiliated End Users shall be on an arm’s-length, fair market value basis.

d. Gross Receipts shall include 100% of home entertainment revenues received (including for physical media and all VOD), not on a royalty basis.

e. There shall be no reserves for potential refunds deducted from Gross Receipts. Instead, any refunds shall be deducted when and if paid.

f. All receipts shall be reported on the cash method, except for refundable amounts paid prior to delivery. Thus, advance license payments shall be reported as Gross Receipts when and if they are nonrefundable and shall not be accrued over the term of the license.

g. If the Picture is licensed of sold in a package with other films, there shall be an arm’s-length, fair market value allocation to the Picture.

h. The Picture shall not be treated as “free goods.”

i. Withholding taxes shall be treated as a reduction in gross receipts and not as a distribution expense, and only actual withholding taxes may be taken into account (not hypothetical taxes based on a country’s general withholding rate).

2. Production and Distribution Expenses

a. All costs shall be calculated net of all discounts and rebates (including an allocable share of any advance payments and volume discounts, incentive fees, exclusivity fees, and the like).

b. All costs shall be reduced by all cross-promotion payments actually received (and there shall be no distribution fee on such amounts).

c. There shall be no mark-up of any costs.

d. Checking costs shall not exceed the lesser of 0.5% of theatrical Gross Receipts and $250,000.

e. There shall be no duplicate allocation of costs among multiple films.

f. There shall be no deduction of any of the following items:

i. Overhead, including employee salaries, their travel and other costs, and all “indirect costs” (as defined according to GAAP).

ii. Interest charges.

iii. Reserves or accruals for future expenses. Only amounts actually paid shall be deducted.

iv. Trade association dues.

v. Any payments to affiliates other than affiliates that regularly provide the same service for third parties in the ordinary course of business, and then at the lowest charge paid by third parties.

3. Distribution Fees

a. Distribution fees shall be __% for at-source distribution and 5% of all other Gross Receipts.

b. Distribution fees shall be charged based on Film Company’s Gross Receipts, and not the receipts of subdistributors.

4. Audits and Dispute Resolution. Payee shall have full audit rights, including the right for its auditors to review copies of all agreements relating to Gross Receipts and costs. All disputes subject to jurisdiction in federal or state courts in Los Angeles County. There shall be no arbitration, and no contractual limits on discovery of documents related to the Picture.