IFRS Practical Issues

CO M M U NI C A T I O N S & ME D I A
IFRS Practical Issues

Accounting Strategies for the Media and Publishing Industries
AU DI T
Preface 3
Preface
The International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) have emerged as an ever greater focus of attention for reporting entities in recent years. Since 2005, listed companies in the European Union have been required to prepare their consolidated financial statements in accordance with IFRS, and all companies in Australia and New Zealand have been reporting their financial statements in accordance with their countrys equivalents of IFRS. The Canadian government is requiring publicly accountable enterprises to adopt IFRS in the fiscal year beginning on or after January 1, 2011, the U.S. expects to follow suit a few years later, and Japan plans to converge its GAAP with IFRS by June 2011. Middle-market companies are also showing a growing interest in IFRS accounting. There are a variety of reasons for this. For example, banks are increasingly requiring IFRS-compliant financial statements if entities want them to issue a credit rating, while international companies are using IFRS to enhance the transparency and comparability of their financial statements. This trend has now reached the media and publishing industries. Interpreting IFRS to account for issues relating to media companies, such as program assets, subscriber portfolios, and publishing, title, and distribution rights, plays a key role here because in many cases, there are no specific accounting rules for entities to apply. This is a translation of the German publication, IFRS in der Praxis. Although originally published for the German market, we trust that it will provide media and publishing companies everywhere with helpful advice in resolving selected IFRS issues that arise in the course of your business activities. It is not designed to be as exhaustive as an accounting manual, but presents practical strategies to industry-specific issues in IFRS accounting. By presenting industry-specific accounting issues, we also aim to help standardize accounting practices in the media and publishing industries, so as to enhance the comparability, usefulness, and acceptance of financial statements. We hope you find this publication interesting and informative.
2008 KPMG AG Wirtschaftsprfungsge-sellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International. KPMG and the KPMG logo are registered trademarks of KPMG International.
Table of Contents 5
Table of Contents
Preface .
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Introduction .
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Chapter A: Media and Publication Rights
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1 Publishing, Title, and Distribution Rights in the Publishing Industry . . . . . . . . . . . . 11 1.1 Are there differences in the accounting treatment of internally generated and acquired publishing, title, and distribution rights? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.2 What are the components of the cost of acquired publishing, title, and distribution rights, and how are their useful life and amortization method determined? . . . . . . . 13 1.3 When and how are capitalized publishing, title, and distribution rights tested for impairment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.4 What problems could result when identifying the relevant cash-generating unit for testing capitalized publishing, title, and distribution rights for impairment? . . . . 16 1.5 How are advances to artists and authors accounted for? . . . . . . . . . . . . . . . . . . . . . . . 16 2 Program Assets at Television Broadcasters and Rights Traders . . . . . . . . . 2.1 How are program assets recognized, measured, and reported in the balance sheet? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 How are program assets separated if program packages are acquired? . . . 2.3 How are acquired program assets measured after initial recognition? . . . . . 2.4 What reasons could lead to the impairment of program assets, and how is impairment calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 What specific problems arise from calculating fair value when testing film or program licenses for impairment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Does the accounting treatment of sports rights differ from the principles governing program assets described above? . . . . . . . . . . . . . . . . . . . . . . . . . .
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3 Film and Television Productions by a Production Company . . . . . . . . . . . . . . . . . . . . 23 3.1 How are film productions by a production company recognized in the balance sheet? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.2 How is the cost of a film production calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3.3 What reasons could lead to the impairment of productions, and how is impairment calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4 Online Media and Publishing Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 What is the required accounting treatment for the costs of developing online platforms to provide online media and publishing offerings? . . . . 4.2 What special issues arise when online platforms are operated by external service providers? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 How are arrangements governing online platforms operated by third parties accounted for if they contain a lease? . . . . . . . . . . . . . . . . . . .
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5 Media and Publication Rights in Business Combinations . . . . . . . . . . . . . . . . . . . . . . 32 5.1 How does an entity distinguish between the acquisition of distribution and exploitation rights and the acquisition of a business? . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.2 How are media and publication rights separated from goodwill during purchase price allocation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 5.3 How are media and publication rights measured during purchase price allocation? 35
IFRS Practical Issues Accounting Strategies for the Media and Publishing Industries
Chapter B: Order Processes in the Media and Publishing Industries
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1 Launch Costs and the Development of Content. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 How are the launch costs of a newly published title accounted for? . . . . . . . . . . . 1.2 What is the required accounting treatment for content that has already been developed for an individual publication before the end of the reporting period? 1.3 What is the required accounting treatment for costs incurred in developing basic content for publications? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Customer Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Are customer acquisition costs capitalized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 What special issues arise in relation to customer acquisition costs for customer agreements with no fixed durations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 How does the entity calculate the amortization period of customer acquisition costs that are eligible for capitalization if the contractual duration is short and the average subscription period is longer? . . . . . . . . . . . . . . . . . . . . . . . . 3 Acquisition and Operation of Printing Machines. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 What factors must be considered when accounting for acquired printing machines with regular maintenance intervals? . . . . . . . . . . . . . . . . . . . . . 3.2 How is the residual value of printing machines calculated and accounted for? . 3.3 To what extent are expected losses from long-term printing contracts accounted for? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Cable and Transponder Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Do agreements on renting cable and transponder capacity constitute a lease in accordance with IFRS? . . . . . . . . . . . . . . . . . . . 4.2 How are agreements on renting cable and transponder capacity accounted for if they constitute a lease? . . . . . . . . . . . . . . . . . . . . . .
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Chapter C: Revenue Recognition in the Media and Publishing Industries .
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1 Multiple-element Arrangements in the Media and Publishing Industries 1.1 How is revenue recognized when a subscription agreement is sold and a decoder provided (at a discounted price) at the same time? . . . . . . . . . . . . . 1.2 When are combined print and online products divided into their individual elements in order to determine the recognition of revenue? . . . . . . . . . . . . . 2 Advertising Revenue in TV and Print Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 When is revenue recognized from the provision of advertising space in newspapers/magazines and revenue from TV advertising? . . . . . . . . . . . . . . 2.2 How are bonus agreements with advertising customers accounted for? . . 2.3 How are barter transactions involving advertising services accounted for? 2.4 When is revenue from barter transactions recognized? . . . . . . . . . . . . . . . . . 2.5 How is advertising revenue recognized when it is dependent on audience ratings or sales figures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Newspaper and Book Publication Revenue with Wholesalers . . . . . . . . . . 3.1 In what amount does the publisher recognize revenue from transactions via wholesalers and retailers? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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4 Revenue Recognition in the Publishing Industry When Return Rights Exist . 4.1 How is revenue recognized when return rights exist? . . . . . . . . . . . . . . . . . . . . . 4.2 How is the amount of returns calculated? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Other Issues Related to the Recognition of Revenue by Media and Publishing Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 When is contract production revenue recognized? . . . . . . . . . . . . . . . . . . . . 5.2 Is revenue from the joint exploitation of TV rights reported gross or net? . 5.3 How is deferred income accounted for in a business combination? . . . . . . 5.4 Can the acquisition or sale of licenses via media and publication rights fall within the scope of lease accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contacts
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Introduction 9
Introduction
In addition to topics that affect all companies, such as accounting for financial instruments or deferred taxes, there are a number of industry-specific accounting issues that media companies must address. Examples of these are the accounting treatment of the wide variety of forms of multiple-element arrangements and of launch costs for new media offerings. More and more solutions that are uniform across the industry and viewed as best practice are emerging in these accounting areas. However, considerable differences in accounting are becoming apparent in many other areas. This illustrates that industry-specific IFRS expertise is a prerequisite for identifying the appropriate accounting policy for an entity. For the purposes of this publication, we primarily cover the following business areas in the media and publishing industry: Film, television, and radio Music Print. In this publication, the film, television, and radio businesses are subsumed under the term media company, while the print and music businesses are combined under the term publishing company. The organization of issues into individual chapters is based on the typical value chain of entities in the media and publishing industries:
Value chain in the media and publishing industries

Chapter A: Media and publication rights Publishing, title, and distribution rights Program assets Contract productions Online content Chapter B: Order processes Transmission capacity Launch costs Customer acquisition costs Printing contracts Chapter C: Revenue recognition Timing of recognition Multiple-element arrangements Gross or net presentation Barter transactions
Intellectual property
Content
Production
Exploitation/sales
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The goal of this publication is to give entities in the media and publishing industries a practical insight into selected industry-specific issues relating to IFRS accounting. We have presented industry-specific issues in the form of typical questions arising from IFRS accounting, which are then answered by reference to the appropriate IFRS. The IFRS accounting principles presented relate to the pronouncements effective on September 30, 2007.
Chapter A: Media and Publication Rights 11
Chapter A: Media and Publication Rights
Various types of rights are significant in the media and publishing industries. In the media, they mainly comprise film and television rights that account for the majority of the program assets held by a television broadcaster or the rights portfolio held by a film producer or rights trader. In publishing and publicity, they are primarily publishing, title, and distribution rights that a publisher holds for the purpose of exploitation. Media and publication rights are intangible values. The key factor is not the physical substance of the book or the film or sound storage medium, but the extensive opportunities to exploit the rights to the content. This gives rise to special accounting issues. The following chapter therefore describes the IFRS accounting principles governing such rights, with separate sections for the media and publishing industries. It then discusses the special accounting issues that arise in equal measure in the media and publishing industries from the electronic exploitation of such rights and in connection with business combinations.
1 Publishing, Title, and Distribution Rights in the Publishing Industry
A publishing right is defined as the exclusive right to reproduce and distribute a particular work (e.g., literature or music). It is therefore a right to use that is protected by copyright. The initial holder of the publishing right is the originator (e.g., the author or composer). The originator can assign the publishing right to another person, e.g., a publishing company. The holder of the publishing right is then entitled to exploit the right in a standard printed book format, for example. In contrast, title rights relate to the right to the name of the published work. They protect the title from imitation. Distribution rights enable the holder to distribute a title within a specific sales territory, to specific customers, or for a specific period. Examples are subscriber portfolios or a wholesalers right to distribute specific magazines exclusively to retailers within a defined territory.
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1.1
Are there differences in the accounting treatment of internally generated and acquired publishing, title, and distribution rights?
Publishing, title, and distribution rights can be generated internally by the publishing company or acquired from third parties. This leads to different accounting consequences. To meet the recognition criteria for an intangible asset, publishing, title, and distribution rights must first fulfill the general requirements for an asset (IAS 38.8). The entity must: Control the resource as a result of past events Expect future economic benefits to flow to it. IAS 38.18: Under IFRS, an intangible asset must be recognized if both the definition and recognition criteria for an intangible asset are met. As an asset, the right must also meet the definition criteria for an intangible asset. It must be: Nonmonetary Without physical substance Identifiable. In addition to the definition criteria, the following recognition criteria under IAS 38.21 must be satisfied: It is probable that the expected future economic benefits will flow to the entity. The cost of the asset can be measured reliably. The costs associated with internally generated publishing, title, and distribution rights may not be recognized as intangible assets because they are not deemed to meet the above IFRS recognition criteria (IAS 38.63 and IAS 38 BCZ 45/46). Internally generated publishing, title, and distribution rights have measurable future economic benefits for the publishing companywhich are required for recognition as an intangible asset under IFRSin the form of revenue from publication and are controlled by the publishing company. However, there is a presumption that they do not usually satisfy the requirement that the added value they generate must be capable of being separated from the publishing companys general performance as a whole, and therefore recognition is not permitted (IAS 38 BCZ 45/46). An acquirees publishing, title, and distribution rights that were internally generated in the past may only be separated from overall enterprise value and recognized, subject to certain criteria, in the context of business combinations. By contrast, the cost of publishing, title, and distribution rights acquired from third parties must be recognized as an asset because they meet the definition and recognition criteria for an intangible asset (IAS 38) with regard to identifiability and measurable future economic benefits.
Business combinations: For information on publishing rights in the case of business combinations, see Point A.5
1.2
What are the components of the cost of acquired publishing, title, and distribution rights, and how are their useful life and amortization method determined?
If acquired publishing, title, and distribution rights meet the recognition criteria for an intangible asset described above, they must be recognized at cost (IAS 38.24). Cost includes the purchase price and any other directly attributable costs required to use or sell the acquired rights (IAS 38.27). An example in the case of publishing rights is the cost of translating an acquired foreign-language book. When measuring intangible assets in the form of publishing, title, and distribution rights after initial recognition, the entity must first establish whether the rights in question have a finite or indefinite useful life. Indefinite does not mean infinite, but simply that there is no foreseeable limit to an assets useful life. Intangible assets with an indefinite useful life are not amortized (IAS 38.107), but are tested for impairment annually. Intangible assets with a finite useful life are amortized over their expected useful life (IAS 38.97). Useful life typically corresponds to the contractually assigned term of the right. If renewal options are agreed, potential renewal periods must be included in the useful life if there is evidence to support renewal by the acquirer (IAS 38.94ff). The following factors must be considered when assessing whether renewal is probable: Evidence that contractual rights are expected to be renewed in future (e.g., on the basis of experience) Evidence that all conditions for renewal are expected to be met The costs of renewal are insignificant in relation to the economic benefits for the entity that are expected from renewal. The annual amortization expense calculated on the basis of useful life must reflect the pattern in which the right is expected to be exploited (IAS 38.97). The straightline, units of production, or revenue-based method of amortization are possible depending on the type of right and the contractual arrangements. The revenuebased method is typically used for publishing rights because it suitably reflects the decline in value of the right. The revenue-based method is appropriate, for example if an entity expects to generate revenue primarily in the first few years it exploits a publishing right, and believes that exploitation will be significantly reduced in subsequent years. The straight-line method would not accurately reflect the pattern in which the right is exploited. Revenue-based amortization is calculated as follows:
Attributable revenue in the period Expected revenue in the remaining period in which the right is exploited
Impairment: For information on the impairment of capitalized publishing, title, and distribution rights, see Point A.1.3.
Carrying amount before amortization
Source: KPMG in Germany

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The denominator comprises the total expected remaining revenue at the beginning of the period under review. As a result of estimation uncertainty, estimated total revenue should be reviewed at the end of each reporting period so as to reflect the current situation as accurately as possible. Any difference in the amortization expense caused by the calculation of a new quotient must be recognized prospectively as income or expense during the period in which the estimates were adjusted (IAS 38.104). After initial recognition, an entity can also choose to measure an intangible asset with a finite useful life using the revaluation model, under which the exploitation right is recognized at its fair value at the end of the reporting period (IAS 38.72). However, as the revaluation model requires an active market for the right in question and no such market usually exists for publishing, title, and distribution rightsthis model is frequently not feasible in practice.
1.3
When and how are capitalized publishing, title, and distribution rights tested for impairment?
At the end of each reporting period, a publishing company must assess whether there is any indication that capitalized publishing, title, or distribution rights are impaired (IAS 36.9). Examples of indications or events that could lead to impairment are: The release of rival publications Changes in the requirements within the advertising environment affecting publications that rely heavily on advertising The adaptation of publications to reflect the wishes of target groups The discontinuation of series or the redesign of formats. If such events occur, the entity must examine whether the rights in question are impaired. Impairment exists if the recoverable amount is less than the current carrying amount of the right at the measurement date. Recoverable amount is defined as the higher of the rights fair value less costs to sell and its value in use (IAS 36.18). The following chart illustrates this relationship: Fair value less costs to sell is the amount obtainable from the sale of an asset or cash-generating unit in an arms-length transaction between knowledgeable, willing parties, less the costs of disposal (IAS 36.6). Estimating cash flows: Cash inflows or outflows from financing activities and income tax receipts or payments may not be included (IAS 36.50). Value in use is the present value of the cash flows obtainable from future exploitation of the right (IAS 36.6). It is calculated using the entitys cash flow forecasts that are based on the planned future cash inflows and outflows from the exploitation of the right. Present value is determined using a discount rate that reflects both a risk-free market rate of interest and the special risks of the right in question. The discount rate is usually based on the entitys weighted pretax cost of capital or other comparable market rates of interest (see point A.5.3).
Carrying amount
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Recoverable amount
higher of
Fair value less costs to sell
Value in use
If the recoverable amount of the right is less than its carrying amount, the difference must be recognized as an impairment loss in the income statement (IAS 36.59 and 36.60). At the end of subsequent reporting periods, the entity must assess whether there is any indication that an impairment loss recognized in prior periods for a right may no longer exist or may have decreased (IAS 36.110). If such an indication exists and the recoverable amount of the right has increased in the meantime, the impairment loss must be reversed. The impairment loss may only be reversed up to the amount of the original cost of the right less amortization that would have been recognized had no impairment loss been recognized. Each right must be tested for impairment individually if its recoverable amount can be estimated. If it is not possible to estimate the recoverable amount for an individual right, the rights must be combined into cash-generating units. A cash-generating unit is the smallest identifiable group of similar assets that collectively generate measurable cash flows for the publishing company, independently of other cash-generating units. There need not be any specific indications of impairment for rights with indefinite useful lives that are not amortized. They must be tested for impairment at least annually and whenever there are specific indications (IAS 38.108).
1.4
What problems could result when identifying the relevant cashgenerating unit for testing capitalized publishing, title, and distribution rights for impairment?
If a publishing company cannot determine the fair value of an individual publishing, title, or distribution right because it cannot attribute the value to an individual right, it must calculate the fair value of the smallest cash-generating unit to which the asset belongs (IAS 36.66). The question that usually arises for a publishing company is: What does the cashgenerating unit consist of? For example, a specific business magazine or book and the associated rights can be a cash-generating unit. However, the cash-generating unit can also comprise all the publishing companys business magazines or all its published detective novels.
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IAS 36.130: Additional disclosures are required in the notes when cash-generating units are defined.
A cash-generating unit is regarded as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (IAS 36.6). Material interdependencies between the assets are not sufficient. In the case of magazines or books, a cash-generating unit may only be recognized if the cash flows from the individual publications are interdependent. It is also possible to recognize a cash-generating unit at the level of individual brands or for the goodwill attributable to a publishing division. Cash-generating units must therefore always be identified on a case-by-case basis. If the cash-generating unit in question comprises several rights, an impairment loss determined after the goodwill attributable to the cash-generating unit has been written off must be allocated to the individual rights in relation to their carrying amounts.
1.5
How are advances to artists and authors accounted for?
Publishing companies often pay advances to prominent authors to contractually secure the exploitation rights to their publications (e.g., books, music, etc.). An advance may relate to full marketing rights, marketing rights limited to a specific period or territory (domestic/foreign), or publications in a specific format (e.g., only hardcover or paperback marketing of books). For the author, advances represent prepayments of expected royalties from the number of copies of the authors publications sold. The author retains the right to the intellectual property. Depending on its terms, the advance may relate to one or more future publications. Advances are not usually repayable by the author even if the actual number of copies sold, and therefore the royalties earned by the author, do not match the original advance. However, the author is paid any royalty entitlements that are in excess of the advance. The advance represents a prepayment for an intangible asset. When they deliver their manuscripts, authors assign the publishing company an exploitation right for publication. Capitalized advances are typically reversed over time against the authors royalty entitlements that arise from the corresponding sales figures. However, if the publication is not successful, its sales figures are often so low that the authors royalty entitlements over the entire exploitation period do not match the advance paid by the publishing company. If the publishing company has not stipulated any contractual repayment claim against the author to cover this eventuality, the accounting consequences are as follows:
If there are indications that the advance is impairedsuch as lower sales forecastsits carrying amount must be reduced. The impairment must be recognized at the time the indications of impairment are identified.
Impairment: See Point A.1.3
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2 Program Assets at Television Broadcasters and Rights Traders
Program assets is an umbrella term that, at television broadcasters, usually comprises feature films, series, shows, and other broadcastable productions that make up the broadcasters television schedules. It is a similar case with rights traders, which hold such productions as film assets for future exploitation. Individual rights on which these parts of program assets are based are also referred to as film rights or (film) licenses. Film rights comprise the rights associated with a film or program that a television broadcaster must hold in order to exploit it on the market. By contrast, films themselves are protected by copyright. Film rights are merely part of the rights to a film that are associated with copyright. The director is regarded as the actual originator of the film, although all rights to use and exploitation rights associated with the film are typically assigned contractually to the production company. As a result of its financing and organizational activities, the production company also receives related rights that allow it to reproduce and exploit the film, regardless of the originators existing rights. Prior works that were used to produce the film, such as the script, novel, or music, are protected separately by copyright and are therefore not part of the film. Forms of exploitation of a film right: Theater DVD Pay TV Free TV Internet Merchandising. Such film rights are usually acquired in the form of a film or television licensing agreement, for example with license sellers, or in the form of production agreements with producers. Among other things, a licensing agreement stipulates the type and amount of the license fee, the broadcast area, broadcast time, number of broadcasts, and the form of exploitation. This chapter discusses the accounting issues relating to the acquisition of thirdparty film rights and the special accounting issues resulting from the abstract and intangible nature of these rights from the perspective of the acquiring television broadcaster or film rights trader acting as an intermediary between producers and broadcasters. Any accounting differences between private television broadcasters that are funded by advertising (Free TV) and Pay TV are presented separately. Special accounting issues for film producers are addressed in detail in chapter A.3.
2.1
How are program assets recognized, measured, and reported in the balance sheet?
Definition and recognition criteria: See point A.1.1
Parts of program assets are generally acquired via licensing and production agreements that assign to the purchaser the exploitation rights to the film, series, shows, or other broadcastable production concerned.
The acquired license must be recognized as an intangible asset (IAS 38) because it meets the definition and recognition criteria. It represents an identifiable asset without physical substance that is controlled by the acquirer and whose exploitation is expected to lead to a future inflow of benefits. The acquired program assets must be recognized at cost (IAS 38.24). Cost also includes any directly attributable costs (including directly attributable overheads) required to bring the acquired program assets to broadcastable condition (IAS 38.27). In the case of film rights, for example, this often relates to dubbing or subtitling costs to translate an acquired foreign language film. However, cost does not include, for instance, storage costs and the cost of advertising the broadcasts. These represent expenses at the time they are incurred. Program assets are reported as current assets provided that they are available for broadcast during the media companys short-term schedules. However, program assets must be reported as noncurrent assets if they are intended for longer-term exploitation, for example in the case of a film rights trader who assigns the rights to various customers under multiyear licenses.
2.2
How are program assets separated if program packages are acquired?
Television broadcasters or rights traders often acquire film rights in license packages at a package price. For the purpose of initial measurement, such packages must be separated and the specific cost components of each license must be allocated to the relevant license contained in the package in accordance with the principle of itemized measurement. If such license packages comprise a large number of films of different genres and varying quality, straight-line allocation of cost across the individual titles in equal proportions is not usually appropriate. Rather, allocation should be based on commercial factors and depend on a films individual, proportionate fair value or revenue potential. Comparable market prices or, if they are not available, revenue estimates may be used for allocation. Note also that the acquired rights are usually subject to contractual restrictions relating to the method of distribution (theater, video/DVD, Pay TV, Free TV, Internet rights, merchandising rights), distribution territory, distribution period, and the number of possible broadcasts. The cost of the distribution rights is therefore often capitalized or allocated by the categories of title/territory/type of rights (Free TV, theater, home video, Pay TV). Fair value: For information on calculating fair value, see Points A.2.5 and A.2.6
2.3
How are acquired program assets measured after initial recognition?

Cost of program assets: See Point A.2.1
Acquired program assets are initially recognized as intangible assets at cost in the IFRS balance sheet. Measurement of such intangible assets after initial recognition is based on the same principles as for acquired publishing, title, and distribution rights
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described above (see details under point A.1.2). Program assets must therefore be recognized at cost less accumulated amortization and any impairment losses. The amortization of program assets with a finite useful life depends on the type of right (e.g., feature film, series, cartoon), the license period, and the number of permitted or planned broadcasts. Program assets are usually amortized from the beginning of the first broadcast. If a film right is used over an extended period, it must be amortized over its standard useful life; the amortization method should reflect the pattern in which the right is consumed. The straight-line, diminishingbalance, or units of production method would be conceivable depending on the form of exploitation (Pay TV, Free TV, or license trader). In practice, rights traders primarily use a special units of production method of amortization that is designed to appropriately reflect the decline in value of the film rights used over time, depending on the achievable revenue. The amortization expense is therefore calculated per period using the following revenue-based method, which is often referred to in practice as the film forecast computation method and which is comparable with the amortization method described in point A.1.2:
Carrying amount before amortization
Attributable revenue in the period Expected revenue in the remaining period in which the right is exploited
The denominator comprises the total expected remaining revenue at the beginning of the period under review. As a result of estimation uncertainty (estimated figures compared with the actual figures), estimated total revenue should be reviewed at the end of each reporting period so as to reflect the current situation as accurately as possible. Any difference in the amortization expense caused by the calculation of a new quotient must be recognized prospectively as income or expense in the income statement during the period in which the estimates were revised (IAS 38.104). In the Free TV segment, a program asset intended for multiple broadcast is typically amortized using a diminishing balance of amortization rates depending on the number of permitted or planned broadcasts. The diminishing balance of the amortization expense appropriately reflects the decline in value of the program assets. Experience shows that this value is highest on first broadcast, and falls with subsequent broadcasts or repeats. For example, the amortization rates for a film license that is intended to be broadcast three times can be calculated using the following progressive rates:
Amortization rate in % of the cost 1st broadcast 2nd broadcast 3rd broadcast
60 30 10
However, other rates are conceivable depending on the situation. Program assets intended to be broadcast once are written off when broadcast.
In contrast, the Pay TV segment does not base its calculation on expected revenue or a diminishing balance, but usually determines amortization according to the planned number of broadcasts, or the term of the relevant film license, using the straight-line method.
2.4
What reasons could lead to the impairment of program assets, and how is impairment calculated?
At the end of each reporting period, a media company must assess whether there is any indication that the program assets accounted for as intangible assets under IAS 38 (IAS 36.9) are impaired. Examples of indications or events that could lead to impairment are: Changes in the requirements within the advertising environment Adapting programs to reflect the wishes of target groups Restrictions under media law affecting the usability of films Expiration of the licensing right before broadcast Discontinuation of series. Impairment of intangible assets: See Point A.1.3
If such events occur, the entity must examine whether the licenses in question are impaired. The procedure here is identical to the principles for acquired publishing, title, and distribution rights described above.
2.5
What specific problems arise from calculating fair value when testing film or program licenses for impairment?
As discussed in chapter A.1.3, the fair value of a license usually amounts to its value in use. Television broadcasters whose primary source of sales revenue comes from broadcasting commercials experience the following problems in particular relating to film and program licenses when calculating the underlying cash flows to determine value in use: a) In the Free TV segment, cash flows from licenses mainly consist of the advertising revenue generated by broadcasting the licensed film or program. Advertising income depends largely on the number and composition of viewers. The successful generation of sales revenue entails broadcasting attractive programs at attractive broadcast times that primarily reach the audience defined by the advertising industry as its target group. For example, despite its appeal, an expensive blockbuster would generate much lower advertising revenue if broadcast on a weekday afternoon instead of a Saturday evening. Management can therefore play a key role in determining an entitys advertising income and ultimately its cash flow forecasts through its program scheduling. This means that planning the broadcast date gives the reporting entity substantial discretion with regard to the fair value of a license.
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When calculating the relevant cash flows, an entity must therefore ensure that it uses suitable models that reflect these fluctuations. For example, cash flow projections should use realistic assumptions on future broadcast times that are based on actual program scheduling and current estimates of the films appeal. The calculation principles used must also be applied consistently. b) Another issue arises if television broadcasters acquire expensive films (e.g., blockbusters such as Harry Potter or Lord of the Rings) and can predict that the cash flows achievable in the form of advertising revenue will be less than the cost of the film. The reason why media companies still acquire these expensive films is usually to improve their image and increase their market share. This has a positive knock-on effect on other programs that are broadcast before or after the film in question, as well as on the broadcasters overall image. These knock-on effects are therefore included in practice. This can be done, for example, by considering individual advertising spaces (e.g., Saturday evenings) when calculating cash flow forecasts. In this case, note that the advertising spaces represent a cash-generating unit, and therefore the cash flows from the individual programs within the advertising space are interdependent.
2.6
Does the accounting treatment of sports rights differ from the principles governing program assets described above?
Sports rights (or sports broadcasting rights) enable the purchaser to broadcast certain sporting events. These rights may relate to individual events, such as an international football match, or a series of sporting events, such as all of the match days in a football league season. In contrast to an acquired film license, for example, a sports right is not based on an exploitation right protected by copyright. Rather, the organizer declares to the purchaser that it will waive the exercise of its rights not to broadcast the sport. A sports broadcasting right therefore only arises legally when the sporting event is actually held or broadcast. If the rights relate to a series of sporting events, such as the broadcast of football league matches for an entire season, the sports right has the characteristics of a successive supply agreement because the required performance by the organizer in the form of the above-mentioned waiver of the exercise of its rights not to broadcast the sport only happens on the relevant match day. Advance payments made to the organizer represent prepayment on an intangible asset in the form of the sports broadcasting rights or the organizers waiver of the exercise of its rights not to broadcast the sport. The payments due for the sports broadcasting rights must be recognized as an expense when the sporting event is broadcast. If the contract comprises several sporting events or match days, the contractually agreed amount must be allocated to the individual events or match days according to their respective share. For example, the contractually agreed amount for broadcasting the matches in a soccer league season must be allocated to the individual match days using the straight-line method.
3 Film and Television Productions by a Production Company

Films, series, and shows are typically made by production companies. In practice, there is no uniform method of distinguishing between the various forms of production. On the one hand, a distinction can be made between in-house and third-party productions. This emphasizes the difference between in-house production activity and acquisitions from third-party production companies. With regard to the legal structure, a distinction can also be made between in-house, contract, and coproductions. This distinction must be made depending on the contractual arrangements and therefore directly affects how such productions are accounted for. In the case of in-house productions in this narrower sense, the producer alone bears the production and financing risks and is the producer of the film for copyright purposes. In the case of contract productions, a distinction is made between standard and service contract production. A regular contract production is defined as the production of a work by a production company on its own behalf and for its own account in the form of a contract for work. The producer bears the production risk, and the customer bears the economic risk. The purchaser, such as a television broadcaster, only has certain rights of consultation, which, for example, comprise the selection of content or film length. In contrast, a service contract production is defined as a contract for services entered into by the production company, for example with a television broadcaster, under which the producer of the film acts on behalf of the client. The producer becomes a mere service provider, and the client becomes the producer who bears the production and economic risk of producing the film. A coproduction brings together several producers to make a film. A distinction can also be made here between standard and service coproductions. In standard coproductions, a film is made by several producers that bear the production and economic risk in equal measures. All the producers are deemed to be the producer of the film. In service coproductions (also referred to as cofinancing), a film is made by several producers, but one producer bears the production and financing risk. This person enters into all agreements on his/her own behalf and for his/her own account and is the producer of the film. The other producer(s) typically make(s) financial contributions and receive distribution rights in return. The basis for such agreements is contract law, not company law. The following section discusses the accounting issues relating to film and television production and the resulting exploitation rights. The accounting principles governing the sale or licensing of rights are addressed during the discussion of revenue recognition principles in the media in Chapter C. The accounting treatment from the perspective of the purchaser of a right has already been described in connection with the acquisition of a license for program or film assets (see point A.2).
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3.1
How are film productions by a production company recognized in the balance sheet?
Cost in accordance with IFRS: See Point A.3.2
The principles in IAS 2, IAS 11, and IAS 38 must be applied when accounting for film productions in accordance with IFRS. The application of these individual IFRS principles is based on the contractual arrangements and the planned exploitation of the in-house production. A distinction must be made between the following scenarios: a) An in-house production that is intended for short-term exploitation by several clients without a client-specific contract and that is therefore not a contract production (e.g., the production of nature or scientific documentaries) falls within the general scope of IAS 2. Under IAS 2, in-house productions are recognized at cost. b) IAS 11 must be applied when accounting for contract productions. In contrast to IAS 2, IAS 11 allows the producer to recognize revenue proportionately in the course of the production to reflect the stage of completion if the following requirements under IAS 11.23 are met: Total production revenue can be measured reliably. It is probable that the economic benefits associated with the contract will flow to the production company. Both the production costs to complete the contract and the stage of completion of the contract production can be measured reliably at the end of the reporting period. The production costs attributable to the production contract can be clearly identified and measured reliably so that actual production costs incurred can be compared with prior estimates. If the requirements are met, the producer recognizes production revenue and costs as income proportionately by reference to the stage of completion of the production in the income statement. Production costs are calculated using the method under IAS 2 (see point A.3.2). c) The principles in IAS 38 must be applied to in-house productions that are made neither under contract productions in accordance with IAS 11 nor for short-term sale in accordance with IAS 2, but will be available to the producer for longer-term exploitation (e.g., for theatrical release, DVD, and TV sales channels). In accordance with the principles in IAS 38.57, a producer must recognize an in-house production at cost if the following requirements are met: The in-house production can be further developed so that it can be used or marketed. The producer has the intention and is able to further develop the in-house production for exploitation. The entity must explain how future economic benefits will flow to it from the in-house production.
Sufficient resources must be available to complete the in-house production. The expenditure incurred for developing the in-house production can be reliably estimated and attributed. In contrast to the accounting treatment under IAS 2 and IAS 11, which is based on the rather short-term marketing of productions, the accounting treatment of productions under IAS 38 is based on longer-term exploitation of the rights created by the production. This is particularly significant for the measurement of a production after initial recognition in subsequent periods. Measurement of productions after initial recognition: See Point A.3.4
3.2
How is the cost of a film production calculated?
The cost of an in-house production that is intended for short-term marketing corresponds to the fully absorbed cost in accordance with IAS 2 that is incurred in making the film production (i.e., directly attributable variable and fixed overheads must be included in addition to direct costs). Even if IAS 11 or IAS 38 is applicable, the calculation of the cost of the production in accordance with IAS 38 or the contract expenses in accordance with IAS 11 is based on the principles described below. However, other special issues must be considered when accounting for film assets in accordance with IAS 11 or IAS 38 (see point A.3.1). Examples of items included in the cost to produce a film are: The cost of the script Production costs (actors salaries, sets at the filming location, wardrobe, dubbing/subtitling, and editing costs) Proportionate depreciation of studio facilities and other equipment. Release costs are not part of this cost. They include the costs of exploiting the film, such as promotional and marketing costs, and represent expenses at the time they are incurred. Borrowing costs must be included in cost if the following requirements are met (IAS 23.5 and IAS 23.8): The production takes a substantial period of time. The borrowing costs can be directly attributed to the production. Attributable borrowing costs comprise borrowing costs that would have been avoided if the production had not been made. If a production company borrows a certain amount of funds for a specific production, the resulting borrowing costs are relatively easy to calculate. If there is no direct relationship between the borrowing and the production, the amount of the borrowing costs eligible for capitalization that relates to the funds borrowed for the production must be determined using a capitalization rate that represents the weighted average of the entitys borrowing costs during the period in question.
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Cost in accordance with IFRS: See Point A.3.2
While the current rules merely contain an option to include borrowing costs in cost, borrowing costs are required to be included in cost in reporting periods beginning on or after January 1, 2009. Early adoption of this requirement is recommended by the IASB.
The composition of production cost in IFRS are shown in the table below:
IFRS Direct material costs Direct labor costs Special direct production costs Variable material and production overheads Fixed material and production overheads Borrowing costs Production-related administrative overheads Research and development costs (incl. product development) Nonproduction-related administrative overheads Special direct selling costs Selling costs Required Required Required Required Required Optional* Required Prohibited Prohibited Prohibited Prohibited *Required for reporting periods beginning on or after January 1, 2009
3.3
What reasons could lead to the impairment of productions, and how is impairment calculated?
See the accounting principles governing acquired film assets in chapter A.2.4, which are identical with this case.
4 Online Media and Publishing Offerings

The electronic provision of media and publishing content on online platforms is becoming increasingly significant for both media and publishing companies. In the media industry, this primarily includes video-on-demand and pay-per-view services that give customers access to an entertainment offering in the form of feature films, series, sports broadcasts, and other programs on the Internet through a variety of payment options (e.g., subscriptions). In the publishing industry, increasing importance is being placed on books, magazines/ newspapers, and knowledge databases that are made available on the Internet. As the resulting issues in IFRS financial statements prepared by media and publishing companies are comparable, the key topics are discussed jointly for media and publishing companies.
4.1
What is the required accounting treatment for the costs of developing online platforms to provide online media and publishing offerings?
The four development phases during in-house development of a Web site in accordance with IFRS (SIC-32 ): Planning Infrastructure development Graphic design development Content development
Online media and publishing offerings are often provided on the entitys own electronic platforms. These are usually Internet sites that enable films to be played or books to be downloaded against payment, for example. These sites comprise both the corresponding domain address and the software applications used to provide the content. If the Web site is acquired by a third party, the payments made represent the cost of the Web site and must be initially recognized as an intangible asset (IAS 38). Cost also includes any directly attributable costs required to bring the Web site to working condition (e.g., customizing applications). However, if the Web site is developed by the entity itself or if it is developed by a third party on the basis of a contract for services, this raises the question of which costs are recognized as the production costs of the Web site and which costs represent expenses for the period. The costs of the planning phase may not be capitalized under IFRS, but must be recognized as an expense when they are incurred. They include the costs of: Developing a project plan Determining the required functionality Identifying the necessary hardware and other resources. However, costs incurred for infrastructure, graphic design, and content development (apart from content developed to advertise and promote an entitys own products and services, SIC-32.9 [b]) for a Web site or Internet platform must be recognized as production costs. Examples of such costs are the costs of software components and configuration/design services, or directly attributable staff costs.
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When the entity is developing the Internet platform, it must ensure that The completion of the Web site is technically feasible Sufficient development resources are available The entity actually intends to use the Web site after it is completed The technical requirements for using the Web site (for example, the relevant hardware infrastructure) are met The Web site will generate future benefits for the entity. However, costs incurred during the subsequent operation of the Web site must be recognized as an expense. These include expenses for training, administration, enhancements, and other expenditures to maintain an existing Web site in working condition.
4.2
What special issues arise when online platforms are operated by external service providers?
Online platforms are often operated by an external service provider rather than by the entity itself. The service provider typically handles both the development and operation of the platform for the entity, and frequently provides the related hardware (server). Remuneration of the service provider takes the form of ongoing payments over the life of the online platform. Leases as defined by IAS 17: A lease is the assignment of an asset for a specific period against payment. The external service provider often also receives one-time upfront payments for developing the online platform and is usually the legal owner of the platform itself. Such a contractual arrangement may represent or contain a right specially granted to a media or publishing company to use the platform in the form of a lease, even if a lease has not been explicitly agreed upon. What matters is the substance of the arrangement. Classification as a lease would entail applying the accounting principles for leases (IAS 17). The following questions can be used to assess whether such arrangements constitute or contain a lease in accordance with IFRS (IFRIC 4): Does the provision of the service depend on the use of one or more specific assets? Does the arrangement convey a right to use these assets? The following decision tree further defines the above questions and shows the criteria under IFRS that are used to assess whether an arrangement is or contains a lease:
Is a specific asset being used (IFRIC 4.7f.)? Yes Is a right to use being conveyed (IFRIC 4.9), i.e.: Does the customer have the ability to operate the asset or direct others to operate the asset, and does it obtain or control more than an insignificant amount of the output (IFRIC 4.9 [a])? Does the customer have the ability to control physical access to the asset and does it obtain more than an insignificant amount of the output or other utility of the asset (IFRIC 4.9 [b])? Is it unlikely that others will take more than an insignificant amount of the output or other utility during the assets useful life (IFRIC 4.9 [c])? Rule of thumb: 10% limit Yes
No
No
No
No
Has the contractually agreedupon fee for the customer been fixed per unit of output? No Is the fee based on market prices? Yes Yes There is an embedded lease.
Yes
Yes
No
If there is no specific asset, this indicates that the recipient of the online platform merely acquires an ongoing service. The payments for this service must be recognized as income according to the extent to which the service has been provided, i.e., usually pro rata temporis. However, a lease can only exist if specific, identifiable third-party assets are used. This is the case, for example, if the agreements provide for the use of specific servers on which the platform will be operated, or the use of specific programmed software is agreed upon. The first two criteria in the above chart that refer to the assignment of a right to use (IFRIC 4.9 [a] and [b]) often do not apply to the use of online platforms because they relate to the users ability to exercise physical control. As the user is normally located outside the providers premises, it cannot control access to the asset. However, an exception occurs if the user can control access to the platform, for example through exclusive power to allocate passwords, and therefore operates the platform itself. By contrast, the issue of whether the user pays a contractually agreed-upon fixed price or a price that is not a market price for using the online platform, and whether other potential users only use the platform to a minor extent (IFRIC 4.9 [c]), is the most decisive factor in practice.
There is no embedded lease.
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Determining the existence of a lease ultimately depends on the content of the arrangement governing the use of the online platform and the related hardware. As contractual arrangements differ substantially in practice, they must be examined on a case-by-case basis using the relevant criteria. If the entity concludes that the agreement in question is a lease as defined by IFRS, this leads to other special accounting issues (see point A.4.3).
4.3
How are arrangements governing online platforms operated by third parties accounted for if they contain a lease?
If an arrangement governing online platforms operated by third parties contains a lease, the rules in IAS 17 must be applied to the lease components and a decision must be made on whether the lease will be recognized as a finance lease or an operating lease. Identification of lease component: IFRIC 4.13ff. provides additional guidance on how to separate the lease components. This is determined by the substance of the arrangement. For the purpose of applying the requirements of IAS 17, payments and other considerations required by the arrangement must be separated at the inception of the arrangement or upon a reassessment of the arrangement into those for the lease and those for other elements on the basis of their relative fair values. The minimum lease payments described below may only include payments for leases (i.e., the right to use the asset) and exclude payments for other elements in the arrangement (e.g., updates). IAS 17 defines a finance lease as a lease under which substantially all risks and rewards incidental to ownership of an asset are transferred to the user. Legal ownership may also be transferred. IAS 17.10 and 17.11 contain a large number of indicators that suggest that a lease is a finance lease. The following two indicators apply in particular to online platforms operated by third parties: The lease term is for the major part of the economic life of the asset, for example the server or software. At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. The minimum lease payments for the online platform are defined as the payments over the lease term that the media company as the lessee is required to make (IAS 17.4). They do not include contingent rent and costs for technical services (e.g., updates) or taxes. If one of the above-mentioned scenarios applies to the media company, it is assumed that the platform agreement in question is a finance lease and the lessee as the beneficial owner must recognize the online platform. As an asset, the online platform is recognized at fair value or, if lower, at the present value of the minimum lease payments in the lessees balance sheet, and a liability in the same amount is
recognized at the same time (IAS 17.20). The online platform is amortized over the shorter of the lease term and the platforms planned useful life. If the transfer of ownership has been agreed upon, the platform is amortized over its planned useful life. The lease payments partly represent repayments of the liability (principal), and partly interest payments. The interest expense must be allocated over the lease term so that a constant interest rate is reported for the recognized liability over the periods. The interest rate to be used when separating the interest and principal repayment components corresponds to the lessors underlying discount rate for the lease, which is also referred to as the implicit interest rate. If it is not practicable to determine this, the lessees incremental borrowing rate must be used. If the requirements for a finance lease under IAS 17 are not met, the lease for the online platform is an operating lease. In this case, the lease payments by the media company as the lessee (with the exception of costs for services such as maintenance) are recognized as an expense in equal amounts over the periods of the lease term, unless another systematic method of allocation is more representative of the time pattern of the users benefit, even if the payments are not made in line with this allocation (IAS 17.33). The leased asset is not recognized in the lessees balance sheet because beneficial ownership remains with the lessor under an operating lease, rather than being transferred to the lessee. Leases entered into by the lessee require extensive notes disclosures, which are outlined in IAS 17.31 for finance leases and IAS 17.35 for operating leases.
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5 Media and Publication Rights in Business Combinations
The ongoing process of consolidation in the media and publishing industries is leading to the acquisition of companies or groups by competitors or investment groups. The media and publication rights associated with acquisitions typically account for a substantial portion of the purchase price. In the media industry, these rights relate to: Program assets, consisting of Licenses Contract productions Distribution rights Contractual relationships with advertising customers Internet domains Software licenses. In the publishing industry, however, the following rights are primarily acquired: Publishing rights Title rights Distribution rights Subscriber portfolios Prohibitions on competition Advertising contracts Contractual relationships with advertising customers.
In addition to acquiring an entire company, media and publishing companies usually take over the distribution, broadcast, and sale of programs, broadcast or title rights (possibly including brand rights) of third-party content providers on their own behalf or for their own account in the course of their business activities. The questions that arise in connection with these acquisitions are: How are such transactions accounted for under IFRS, and how significant are the acquired media and publication rights?
5.1
How does an entity distinguish between the acquisition of distribution and exploitation rights and the acquisition of a business?
The accounting treatment under IFRS depends on whether the accounting principles governing business combinations (IFRS 3) are applicable to the acquisition of a company or parts of a company.
A transaction is a business combination if a media or publishing company acquires a business (IFRS 3.4 in conjunction with Appendix A). A business exists if the acquired object comprises an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic benefits. A business generally consists of input factors, processes, and output variables that are used to generate revenue. As a rule, the acquirer of a business must therefore also acquire the infrastructure that is necessary to continue the business activities, which may include key management personnel. The following seven criteria for determining the existence of a business are derived from the above-mentioned criteria for defining a business within the meaning of IFRS 3: Integrated set of activities and assets Management of activities Provision of economic benefits for investors Input factors Processes Output Generation of revenue.
Business acquisitions must be distinguished from acquisitions in which individual intangible assets (IAS 38) (e.g., rights) are transferred. On the basis of the abovementioned criteria, distribution and exploitation rights that are acquired without the associated business activities usually do not satisfy the definition of a business, since neither an extensive process nor an integrated set of activities and assets have been acquired. They do not therefore fall within the scope of IFRS 3, but must be accounted for as intangible assets using the principles in IAS 38. This contrasts with cases in which, in addition to mere distribution rights, the associated business activities are acquired, such as the underlying infrastructure, customer management, and any brand name. Such cases also involve the acquisition of existing processes or infrastructures as well as management activities that represent a business as a whole, which is comparable with the acquisition of an organizational unit. These cases therefore involve a business combination.
5.2
How are media and publication rights separated from goodwill during purchase price allocation?
If the acquisition of a business unit represents a business combination as defined by IFRS 3 (see point A.5.1), the cost of the acquired company is compared with the value of the acquired net assets at the acquisition date. The net assets are generally measured at the fair value of all identified assets, liabilities, and contingent liabilities at the acquisition date. Goodwill is a residual and represents the difference between the cost of the acquisition and the fair value of the net assets. In this context, acquired media and publication rights therefore play an important role in business combinations in the media and publishing industries. As intangible
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assets, media and publication rights must be recognized separately from goodwill in a business combination if: They are identifiable They are controlled by the entity Their fair value can be measured reliably It is probable that there will be a future inflow of benefits (IFRS 3.45).
In addition to the reliable measurement of the intangible assets fair value (see point A.5.3), identifiability usually poses the greatest problems for media and publishing companies in practice. Identifiability is regarded as being fulfilled if the intangible asset: Is separable, i.e., if it is possible to separate the intangible asset individually or together with a related agreement or with a separable unit of assets and liabilities from the acquired business unit and to sell, transfer, license, rent, or exchange the asset (regardless of whether the entity intends to do so), or Is guaranteed by a contractual or other legal right. The illustrative examples in IFRS 3 contain a sample list of five categories of intangible assets that must be recognized separately from goodwill and about which there is a rebuttable presumption that they fulfill the recognition criteria (IFRS 3.IE). A distinction is made primarily between the following categories of intangible assets that must be recognized in the context of media and publication rights: Marketing-related intangible assets, e.g., mastheads or Internet domain names Art-related intangible assets, e.g., title rights to literary and musical works and rights to films Contract-based intangible assets, e.g., publishing rights, distribution rights, broadcast rights, and other rights to use and exploitation rights, as well as usage and exploitation licenses. The intangible asset need not have been accounted for in the acquirees last financial statements prepared before the acquisition. Note that an internally generated publishing right may not be capitalized in the single-entity financial statements (see point A.1.1). However, internally generated intangible assets represent assets that must generally be capitalized from the acquirers perspective when identifying the acquirees net assets under a business combination, if the intangible assets meet the recognition criteria described above. For example, an internally generated publishing right is identifiable and therefore eligible for capitalization under a business combination because it is based on a contractual relationship (i.e., a purchase agreement). Another example that must be recognized as an intangible asset is an unpatented technology, such as a videoon-demand online platform, if it is separable and will generate future benefits for the entity. However, if the requirements for the separate recognition of an intangible asset are not met, the related economic benefits are recognized as part of goodwill.
5.3
How are media and publication rights measured during purchase price allocation?
Media and publication rights must be initially recognized at fair value in a business combination. Fair value is the price that would be (deemed to be) paid for such a right between knowledgeable, willing parties in an arms-length transaction. It must also reflect experience and pricing arrangements relating to other current and comparable transactions. Fair value is therefore a standard measurement basis. There are three methods of determining the fair value of media and publication rights, which must be used by entities in the following order (IFRS 3.B16 [g]): a) Market price method: Fair value is determined on the basis of quoted market prices in an active market. If no active market exists, fair value must be determined indirectly on the basis of comparable market transactions. The individual contractual nature of media and publication rights usually leads to the problem that no active market exists for these rights. In this case, multiples that reflect current transactions and practices in the media or publishing industry and that determine fair value on the basis of current market transactions can be used (IAS 38.41[a]). b) Present value method: If no (comparable) market prices are available, IFRS also permits present value measurement methods to be used, in particular discounted cash flow models (IAS 38.41[b]). The basic principle of these methods is to discount future earnings contributions that are generated by the media or publication right in question using a capitalization rate appropriate to the risk. They are the most frequently used methods to determine the fair value of media and publication rights. When determining the present value, the entity or the expert commissioned to measure the rights typically faces three central tasks: Calculating the earnings contributions in the form of cash flows attributable to the right in question (see a.2.6) Determining the asset-specific capitalization rate Forecasting the useful life of the right in question and the related discount period. To calculate the asset-specific capitalization rate, the (hypothetical) rate of return required by a fictional purchaser of the right in question must be determined, taking into account the asset-specific risks. In practice, the capital asset pricing model (CAPM) is frequently used. This determines the capitalization rate by combining a risk-free component with a risk premium. The returns on prime-rated long-term government bonds are typically used to determine the risk-free component. However, the risk premium is calculated on the basis of a risk premium for the entire entity adjusted for the asset in question. Method 1: Market price method
Method 2: Present value method
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The entity must also determine the (remaining) useful life of the right in question, over which the identified cash flows are discounted at the capitalization rate. A distinction must be made here in particular between rights with a finite and an indefinite useful life (see point A.1.3). Method 3: Cost method c) Cost method: The cost method may only be used if all the other above-mentioned methods are proved to have failed; this method is exclusively applicable to purchase price allocation. It therefore has little or no practical relevance for determining the fair value of media and publication rights. The cost method determines fair value on the basis of the hypothetical costs that would arise from duplicating or reprocuring the right in question. Regardless of which method is used, the overall results of the measurement must be analyzed in addition to a critical analysis of the carrying amounts of individual intangible assets. If the total of the calculated fair value adjustments for the intangible assets (and the other assets and liabilities) exceeds the purchase price difference, the carrying amounts must be critically examined overall and reviewed for appropriateness.
Chapter B: Order Processes in the Media and Publishing Industries 37
Chapter B: Order Processes in the Media and Publishing Industries

1 Launch Costs and the Development of Content
Launching newly published titles can lead to significant costs (launch costs) for publishers. These include, for example, editorial, promotional, and marketing costs, as well as internal staff costs. Publishers also incur costs when developing content for new or existing publications. However, this content is not related to the launch of a title, but forms the basis for the future content of a variety of new and existing publications. It may be one-time content (e.g., articles for a magazine) or basic content that is exploited in various media. The situation is similar for television broadcasters in terms of their productions and the associated content. The following issues relating to the accounting treatment of such content are addressed using the example of a publishing company. However, they could also be applied in a similar manner to producers and television broadcasters.
1.1
How are the launch costs of a newly published title accounted for?
Launch costs for newly published titles relate to the provision of the new title or format (e.g., magazine title, layout, design, etc.) and are therefore similar by nature to start-up costs. Internally generated brands, mastheads, publishing titles, and start-up costs, as well as items similar in substance may not be recognized as intangible assets because they do not meet the recognition criteria (IAS 38.63 and IAS 38 BCZ 45/46). Although launch costs are associated with measurable future economic benefits for the publishing company that are generated by the success of the newly published title and are required for recognition as an intangible asset (IAS 38.21[a]), they lack the necessary separability from the publishing companys general economic potential for success that is reflected in its primary (i.e., internally generated) goodwill (IAS 38.12 [a]). In addition, expenditure on marketing and promotional activities may not be capitalized (IAS 38.69). Launch costs for a newly published title must therefore be recognized as an expense when they are incurred. See chapter A.5 for information on the ability to separate earlier launch costs incurred by an acquiree from goodwill and to capitalize them during a business combination.
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1.2
What is the required accounting treatment for content that has already been developed for an individual publication before the end of the reporting period?
Content developed before the end of the reporting period, such as articles written for a magazine whose publication date is after the reporting period, represents work in progress from the publishing companys perspective. It must be recognized in inventories in the amount of its attributable costs incurred to date (IAS 2). Attributable costs relate mainly to the relevant editorial costs, such as staff and typesetting costs, proportionate occupancy expenses, office supplies, etc. Any selling costs already incurred may not be included in the measurement of the work in progress. They represent expenses at the time they are incurred. Borrowing costs: See Point A.3.2 The inclusion of borrowing costs in the measurement of work in progress may be considered if the preparation of the publication in the period up to its release takes a substantial period of time. This may be the case when developing comprehensive reference works, for example. The separation of content development and market launch is particularly critical with regard to content developed for newly published titles. Launch costs, such as the development of advertising flyers, may not be capitalized (see B.1.1).
1.3
What is the required accounting treatment for costs incurred in developing basic content for publications?
The outcome of content development can often be exploited over more than one accounting period for a publication series or various media (e.g., book series or online offerings). Definition and recognition criteria: See Point A.1.1 Impairment of intangible assets: See Point A.1.3 It therefore relates to the development of intellectual property that the publisher controls by virtue of its legal right. The developed content is typically used over several accounting periods. Content developed in this way meets the criteria for an intangible asset in accordance with IAS 38 if it is identifiable, its costs can be measured reliably, and it represents future economic benefits for the entity. It is available for use in various publication series, but is not itself sold: Only the publications or online offerings based on the content are sold. Attributable costs that relate to the development of the intellectual property and that are exploited in various publications by the publisher must therefore be recognized as an intangible asset in accordance with IAS 38. These assets must subsequently be amortized and tested for impairment in accordance with IAS 36 if there are indications of impairment.
2 Customer Acquisition Costs

Media companies typically incur certain expenditures when entering into new subscriber agreements, such as commissions paid to internal sales staff or external sales agents. Such costs for entering into agreements are referred to as customer acquisition costs (or subscriber acquisition costs). In most cases, the agreements signed have fixed durations that are based on specific minimum durations. For IFRS accounting purposes, the entity must decide whether it must recognize such expenditures as an intangible asset (IAS 38) or directly as an expense.
2.1
Are customer acquisition costs capitalized?
Expenditures incurred in entering into new subscriber agreements must be recognized as an intangible asset if they: Are directly attributable to the signing of certain agreements and meet the criteria for recognition as an intangible asset Are only incurred when actually entering into the agreement and take the form of marginal costs Can be measured reliably. Agreements that are entered into meet the definition and recognition criteria for an intangible asset if they have fixed durations, because in this case the media company controls the future cash inflows resulting from the rights enforceable under an agreement. This means that the costs of internal sales staff and external sales agents that meet the above criteria must be recognized as intangible assets. Note that, in particular with regard to the costs of internal sales staff, only those costs that are by nature marginal costs may be capitalized. This relates primarily to commissions, which must be included if they represent a performance-related bonus and are paid to staff in addition to their fixed remuneration depending on the number of subscriber agreements signed. The following example illustrates this: The sales staff at media company Customer Plc receive a fixed salary. They are paid additional bonuses if they sell more than 50 subscriber agreements that have a minimum duration of one year. Only the commissions starting with the 51st subscriber agreement are marginal costs (for each agreement) and therefore eligible for capitalization. Proportionate salary costs for the first 50 agreements may not be capitalized on a straight-line basis because the salaries are not only paid for the acquisition of agreements (subscriber agreements), but also for the staffs (possibly unsuccessful) efforts to sell such agreements.
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2.2
What special issues arise in relation to customer acquisition costs for customer agreements with no fixed durations?
Subscriber agreements with no fixed durations entitle customers to terminate their agreements at any time. In this case, the media company does not control the future cash inflows from the subscriber agreement because it cannot force its subscribers to make future subscription payments. This is also the case even if the media company can reliably estimate the average future subscription period on the basis of past experience. Despite its knowledge of the economic relationships based on its experience, it cannot force subscribers to make future payments. As the ability to control future cash flows is one of the requirements for recognizing the costs incurred as an intangible asset, customer acquisition costs resulting from agreements with no fixed durations may not be capitalized. They must be recognized as income when they are incurred. By contrast, subscriber agreements and customer relationships acquired as part of a business combination (IFRS 3) must also be recognized separately from goodwill if they can be terminated at any time. However, this only applies if their fair value can be measured reliably.
Measurement of fair value: See Point A.5.2 and A.5.3
2.3
How does the entity calculate the amortization period of customer acquisition costs that are eligible for capitalization if the contractual duration is short and the average subscription period is longer?
Subscriber agreements typically comprise a short contractual minimum duration (one to two years) with subsequent extension or termination options. This means that the actual average subscription period is usually much longer. As intangible assets, customer acquisition costs must be amortized over their useful life in accordance with IFRS. Based on the general definition, useful life is the period over which customer acquisition costs are expected to be available for use by the media company (IAS 38.8). It is usually appropriate to base useful life on the fixed duration of the agreement (IAS 38.94).
3 Acquisition and Operation of Printing Machines

3.1 What factors must be considered when accounting for acquired printing machines with regular maintenance intervals?
The following example serves to illustrate this issue: A new printing machine acquired on January 1, 2007 must be overhauled every four years regardless of the actual condition of the machine (i.e., in addition to general maintenance work). The cost of the printing machine is 250,000 monetary units (MU). The current cost of overhauling a comparable machine at the acquisition date is 40,000 MU. However, such an overhaul is expected to cost 44,000 MU in four years due to inflation. The printing machine has a useful life of 15 years, after which it is deemed not to have any residual value. After four years (on January 1, 2011), the first overhaul is performed at an actual cost of 44,000 MU. Regular overhauls are a key component of the printing machine due to their significant cost. The regular overhaul intervals represent a separate useful life of the overhaul component. This component must therefore be amortized separately from the actual printing machine starting on the acquisition date because it has a different useful life. This method is known as the component approach. The printing machine is recognized as an asset at a cost of 250,000 MU as of January 1, 2007. Measurement after initial recognition reflects the following: Depreciation of 210,000 MU of the machine component over 15 years (i.e., 14,000 MU per year) Amortization of 40,000 MU of the overhaul component over four years (i.e., 10,000 MU per year). The annual depreciation and amortization expense in the reporting periods from 2007 to 2011 therefore amounts to 24,000 MU. After four years, the first overhaul is performed on January 1, 2011. At this date, the cost of 44,000 MU must be recognized for the printing machine and then amortized over the four years. This results in a depreciation and amortization expense of 25,000 MU (11,000 MU + 14,000 MU) for the following four years. Component approach: The component approach is based on the rules under IAS 16.43.
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3.2
How is the residual value of printing machines calculated and accounted for?
The depreciable amount of a printing machine is calculated by deducting its residual value from its cost (IAS 16.6). The expected residual value of the printing machine at the end of its useful life therefore affects the amount of depreciation charged. The estimated residual value corresponds to the recoverable amount for the printing machine at the end of the reporting period, assuming that the machine is already at the end of its useful life in terms of its age and value. No future inflationary effects may be included in this figure. Indicators for calculating prices are: Estimates of value changes by management Comparable printing machines on the current used market Experience from past sales of comparable used machines. Estimated residual value must be reviewed at least at the end of each reporting period (IAS 16.51). A change in residual value also leads to a corresponding change in the depreciable amount of the printing machine. Assuming that the useful life remains unchanged, the depreciation rates must therefore be changed as well. As the adjustment of the residual value represents a change in an estimate, the depreciation rates must be adjusted prospectively (IAS 8.36). The effects of the change in the estimate must be disclosed in the notes (IAS 8.39).
3.3
To what extent are expected losses from long-term printing contracts accounted for?
Publishing companies typically operate printers that print not only their own publications, but also those of third-party publishing companies, for example to improve capacity utilization. Long contract durations and the agreement of fixed fees for the provision of services are typical when fulfilling third-party contracts. If it transpires after the conclusion of such a contract that the unavoidable costs incurred in the future by meeting the obligations under the contract exceed the expected revenue (e.g., in the form of cost increases for undelivered paper), a provision for expected losses must be recognized for the onerous contract (IAS 37.68). However, a provision may not be recognized for such contracts if the printer can terminate them without any additional costs.
4 Cable and Transponder Capacity

Media companies often use specific line or transmission capacity provided by telecommunications companies, such as underground cable bandwidth or satellite transponder capacity. This is due to various economic factors, such as the high cost of setting up their own network, large geographical coverage, and the use of modern technologies, such as HDTV. While the infrastructure provider retains legal ownership of the cable network or the technical facilities itself, the rights to use are assigned to the purchaser of the capacity for a specific period in the form of agreements. Certain agreements grant the purchaser the right to use identifiable physical assets or corresponding components of a larger infrastructure (e.g., a particular satellite transponder). Others entitle the purchaser to use specific partial capacity, regardless of the specification of individual network components.
4.1
Do agreements on renting cable and transponder capacity constitute a lease in accordance with IFRS?
When renting cable and transponder capacity, the provider usually grants the customer a right to use such capacity. Agreements that assign a right to use may give rise to a lease depending on the contractual arrangements. Classification as a lease entails applying the IFRS accounting principles for leases (IAS 17). To establish whether such arrangements are or contain a lease, see the decision tree under point A.4.2. According to the decision tree, a lease can only exist if specific, identifiable assets are used. This is the case, for example, if the agreements provide for the use of specific optical fibers in certain cables, or the use of a particular transponder or constant capacity provided by a defined satellite is agreed upon. In terms of the criterion of assigning a right to use, the first two scenarios presented in the chart under point A.4.2 (operation of the asset in accordance with IFRIC 4.9 [a] or control of physical access to the asset in accordance with IFRIC 4.9 [b]) never apply to cable and transponder capacity because they relate to the purchasers ability to exercise physical control. As the cables or transponders are without doubt located outside the purchasers premises, the purchaser cannot control access to the asset. IFRIC 4 criteria: See the overview under Point A.4.2
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However, in practice, the most decisive factors are whether the user pays a contractually fixed price or a market price for using the cable or transponder capacity, and whether other potential users only use this transmission capacity to a minor extent (IFRIC 4.9 [c]). Determining whether a lease exists ultimately depends on the contractual arrangements governing the renting of cable and transponder capacity. As contractual arrangements differ substantially in practice, they must be examined on a case-by-case basis using the relevant criteria. If the entity concludes that the agreement in question is a lease as defined by IFRS, this leads to other special accounting issues (see point B.4.2).
4.2
How are agreements on renting cable and transponder capacity accounted for if they constitute a lease?
Accounting for leases: See Point A.4.3
If an agreement on renting cable and transponder capacity contains a lease in accordance with IAS 17, the entity must decide whether the lease must be recognized as a finance lease or an operating lease. Classification in the balance sheet follows the same principles as for rented online platforms described earlier.
Chapter C: Revenue Recognition in the Media and Publishing Industries 45
Chapter C: Revenue Recognition in the Media and Publishing Industries

1 Multiple-element Arrangements in the Media and Publishing Industries
A multiple-element arrangement is an arrangement with a customer under which different deliverables are required to be provided to and/or performed for that customer. In the media industry, this may involve: The sale of a cable subscription agreement combined with the provision of the necessary decoder at a discounted price Activation and setup fees associated with a channel subscription Triple-play agreements (arrangements where the deliverables are television, [IP] telephony, and internet). The focus of the assessment is on whether, based on the contractual provisions, both a primary service (provision of the cable channel) and incidental services (provision of a decoder) are required to be performed. The other approach would be to divide the arrangement into two transactions (provision of the cable channel and sale of a decoder). In the publishing industry, publishers often sell comprehensive information solutions that combine print and online products. While the print product has a fixed edition status at the time of sale, the online product includes regular updates to the information contained in the print product, which are provided over the Internet for a certain period of time in the form of a time-limited subscription. The questions that arise here are whether an arrangement involving different deliverables results in revenue being recognized separately for individual elements, and how the total purchase price is allocated among the individual elements under IFRS.
1.1
How is revenue recognized when a subscription agreement is sold and a decoder provided (at a discounted price) at the same time?
This issue is explained by way of the following example. On taking out a 24-month subscription, a customer of cable television provider Cable-for-You Inc. is provided with the decoder required to receive the channels free of charge. In addition to a monthly fee of 20 MU, the customer is also required to pay a one-time activation fee of 50 MU on taking out the subscription. These fees are charged regardless of whether the decoder is provided free of charge. Cable-for-You purchases the decoder from a third party for 100 MU. The decoder is offered for sale at a regular price of 150 MU regardless of whether customers enter into a subscription agreement.
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Furthermore, Cable-for-You is not obliged to return any portion of the fee. After 24 months, the subscription may be extended at the same monthly fee. IAS 18.13: However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single individual transaction in order to reflect the substance of the transaction. As IFRS does not contain detailed provisions on the breakdown of multiple-element arrangements (IAS 18.13), it is common practice to follow U.S. GAAP (EITF 00-21), which requires an arrangement to be accounted for as a multiple-element arrangement if: The arrangement includes multiple deliverables The delivered items have value to the customer separately and on a standalone basis (this is assumed to be the case if the customer is able to purchase the items from an alternative vendor or resell them to a third party) There is objective and reliable evidence of the fair value of the items (If the arrangement includes a general right of return) delivery of the undelivered items is considered probable and substantially in the control of the vendor. If these criteria are applied, the provision of the cable channel and that of the decoder can be viewed as two separate elements of the subscription agreement, as they each have value to the customer on a standalone basis and that value can be measured separately. The activation fee, on the other hand, does not have separate value to the customer and is therefore merely an additional arrangement consideration. The total consideration in respect of this sale of a subscription agreement combined with the provision of a decoder (at a discounted price) is 530 MU (24 months 20 MU + 50 MU). Each identified element must now be allocated its share of the revenue. For this, the consideration is allocated ratably among the elements based on their fair values as follows:
Element Consideration received Fair value Share of the total Allocation of the selling price
Subscription Decoder (Activation fee) Total

480 MU 50 MU 530 MU
480 MU 150 MU 630 MU
76.2% 23.8% 100%
404 MU 126 MU 530 MU
Revenue is recognized for each identified element separately. In this case, however, it is important to bear in mind that the total consideration depends to a considerable extent on the subscription fee that will only be received over a two-year period, as the subscriber is only required to pay the monthly fee if the cable channel is actually broadcast. The consideration of 480 MU is therefore contingent on the future provision of the service. Such contingent consideration may not be recognized at the outset. It must be deducted from the elements that are required to be delivered first (in the example, the decoder).
Based on the calculation above, Cable-for-You therefore only recognizes a revenue of 50 MU when the decoder is delivered, as this consideration has already been received. The remaining consideration of 480 MU for the subscription and decoder is recognized ratably over the expected total term of the subscription. The cost of the decoder is also expensed ratably, with 50 MU recognized as an expense when the decoder is delivered and the remaining expense, also in the amount of 50 MU, deferred and recognized ratably over the minimum 24-month term of the agreement.
1.2
When are combined print and online products divided into their individual elements in order to determine the recognition of revenue?
This issue is explained by way of the following example. A publisher sells books containing collections of legal texts. Customers can also purchase an online solution from the publisher, which provides regular online updates to the relevant laws. The products are sold at the following prices: Bound print edition as a single purchase Two-year online subscription as a single purchase Bound print edition incl. two-year online subscription 100 MU 80 MU 140 MU
A customer now purchases the bound print edition including the two-year online subscription and therefore pays 140 MU. The bound print edition and the online subscription are two separately identifiable transactions, as they each have separately measurable value to the customer (see chapter C.1.1). The revenue from the sale of the print edition (IAS 18.14) and the provision of the online subscription (IAS 18.20) must therefore be recognized separately. The share of the revenue from the sale of the bound print edition is recognized at the time of delivery to the customer. The share of the revenue from the sale of the online subscription, on the other hand, is deferred and recognized ratably over the two years during which the service is provided to the customer. The purchase price is allocated as follows, based on the unit price of the elements that constitute the fair value:
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Element
Selling price
Fair value
Relative fair value
Allocation of the selling price
Bound print edition Two-year online subscription Total

140 MU
100 MU 80 MU 180 MU
55.5% 44.5% 100%
78 MU 62 MU 140 MU
Based on the calculation above, the publisher therefore recognizes a revenue of 78 MU for the bound print edition at the time of sale. As the customer pays the total amount at the outset, there is no consideration contingent on the future provision of a service when the bound print edition is sold together with the twoyear online subscription (in contrast to section C.1.1). The share of the revenue allocable to the print element is therefore recognized in full at the time of delivery to the customer. The revenue of 62 MU allocable to the online element is recognized over the term of the two-year online subscription, and therefore in the amount of 2.60 MU a month.
2 Advertising Revenue in TV and Print Media

In addition to revenue generated by providing media and publishing content, advertising revenue is another important source of income for media and publishing companies. In this context, the question is when (section C.2.1) and in what amount (section C.2.2) to recognize revenue from the provision of advertising in the relevant media and publications. Barter transactions (sections C.2.3 and C.2.4), where the consideration from the advertising partner consists not of cash payments, but of other, nonmonetary consideration, raise further issues. The accounting treatment of advertising fees that depend on the audience ratings or sales figures achieved also requires closer analysis (section C.2.5).
2.1
When is revenue recognized from the provision of advertising space in newspapers/magazines and revenue from TV advertising?
This issue is explained by way of the following example. On December 16, 2007, Publisher A sells advertising space in a magazine to Customer C. The magazine containing the advertising space sold to C appears on January 8, 2008. Under IFRS, revenue from the provision of advertising services is recognized by reference to the stage of completion of the advertising service at the end of the reporting period if the outcome of the advertising service can be estimated reliably (IAS 18.20). The outcome of the advertising service can be estimated reliably if all the following conditions are satisfied: The amount of revenue can be measured reliably. It is probable that the economic benefits associated with the advertising service in the form of the agreed fee will flow to the publisher. The stage of completion of the advertising service (for example, in the case of multiple advertising services) at the end of the reporting period can be measured reliably. The costs incurred for the advertising service can be measured reliably. Once the advertisement has been published in the magazine, it is probable that economic benefits in the form of a payment will flow to Publisher A from this transaction. The revenue is therefore recognized on January 8, 2008. The same principles also apply to TV advertising. The decisive factor is generally the date on which the advertisement in question is published and the service is therefore rendered.
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2.2
How are bonus agreements with advertising customers accounted for?
This issue is explained by way of the following example. Publisher A offers Advertising Customer B bonuses on the advertising published in As magazine based on the annual advertising revenue generated with B. The following bonus rates are contractually fixed as Bs rebate based on the annual advertising revenue generated with B.
Annual revenue with B up to Bonus
1 million MU 3 million MU 5 million MU

3% 5% 10%
A estimates that it will generate annual advertising revenue of 3 million MU with B in calendar year 2007. The bonuses payable to Advertising Customer B are deducted from the revenue, as this must be measured at the fair value of the consideration received, less any trade discounts and volume rebates granted by the entity (IAS 18.10). To do this, the publisher estimates the expected annual revenue and calculates the amount of the bonuses payable in the individual reporting periods. Whenever it posts a related revenue entry, it directly deducts the expected bonus rate based on a reliable estimate. If it is not able to estimate the bonus rate at that time, the revenue is recognized as soon as it is able to estimate the bonus rate. In the example above, Publisher A therefore reduces the current revenue by 5 percent and recognizes a provision of 0.15 million MU in 2007.
2.3
How are barter transactions involving advertising services accounted for?
A barter transaction involving advertising services occurs when two unrelated business partners enter into a barter transaction under which one party provides advertising services and in return receives advertising services from the other party. These advertising services may consist of publishing advertisements in newspapers or magazines, broadcasting commercials on television or radio, activating advertisements on Web sites, or advertising through other media. In most cases, no payment is made between the two parties exchanging services. Revenue from such a barter transaction is only recognized by the service provider if: Dissimilar services are exchanged. The amount of revenue can be measured reliably (IAS 18.12, 18.20 [a], and SIC-31.3).
By contrast, the exchange of advertising services in similar media would not result in revenue being recognized. In this context, media are considered to be similar if they share some of the following characteristics: Target group Format or position (size of the advertisement, position on the page, etc.) Frequency with which the advertisement is broadcast/placed Timing (season, time of day).
Revenue from the exchange of advertising services may only be measured reliably by the advertising service provider at the fair value of its own advertising service. It may not be measured at the fair value of the advertising service received. As a benchmark for measuring fair value, the advertising service provider may only use other advertising transactions that: Are nonbarter transactions Involve advertising services similar to those in the barter transaction in question Occur frequently Involve payment of consideration Do not involve the same counterparty as the barter transaction in question.
However, it is also important to bear in mind that, in practice, large rebates that serve to fill the remaining gaps in the relevant publication or broadcast are often granted on advertising services provided as part of a barter transaction. If these rebates are price adjustments in line with the market, they are also included in measuring the fair value of a partys own advertising service. This is explained by way of the following example. Publisher A provides Television Broadcaster B with advertising space in its magazine. In return, B broadcasts As television commercials on its channel. No payments are made between the two counterparties. The fair value of the advertising service provided by A to B is 100,000 MU. As the magazine and the television channel are two different advertising media, the advertising services exchanged are dissimilar. A therefore recognizes revenue of 100,000 MU for the advertising service it has provided. This amount is the fair value of the advertising service provided by A as part of the barter transaction, based on other similar advertising services provided by A.
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2.4
When is revenue from barter transactions recognized?
This issue is explained by way of the following example. Radio Broadcaster A enters into an agreement with Television Broadcaster B. A will broadcast three commercials on its radio channel for B, for which a third party would have paid 15,000 MU. In return, B agrees to broadcast two commercials on its television channel for A. At the end of the reporting period, it is assumed that B has already broadcast both commercials on its television channel, while A has only broadcast two of Bs commercials. The radio and TV advertising services that have been exchanged are considered dissimilar and therefore recognized as revenue by the respective service provider. However, as A has only performed part of its service at the end of the reporting period, it can only recognize the revenue ratably. Assuming that the outstanding radio commercial has a fair value of 5,000 MU, it recognizes revenue of only 10,000 MU and expenses of 15,000 MU at the end of the reporting period. It therefore records: Dr Advertising expenses of 15,000 MU Cr Liabilities from advertising services Dr Receivables from advertising services of Cr Advertising revenue from barter transactions Cr Deferred income
15,000 MU 15,000 MU 10,000 MU 5,000 MU
The remaining revenue of 5,000 MU is only recognized when the third radio commercial is broadcast. As invoices are generated for value added tax reasons, the relevant receivable and liability are also recorded in the balance sheet. These are then offset when the services are provided.
2.5
How is advertising revenue recognized when it is dependent on audience ratings or sales figures?
Television broadcasters sometimes guarantee their advertising customers certain minimum audience ratings in their target group. If the audience ratings are not achieved, the television broadcaster will often grant the advertising customer reductions on future advertising prices or free advertising time. If the guaranteed audience ratings are not achieved, the television broadcaster has a constructive obligation to compensate the advertising customer (IAS 37.14). This obligation is recognized at fair value. The revenue is therefore deferred in the amount of the obligation and only recognized when the compensation is provided.
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3 Newspaper and Book Publication Revenue with Wholesalers

Publishers generate publication revenue by selling their publications via retailers. The products are sold to end customers at the gross price, which is the price printed on the title. They are sold to retailers via wholesalers, which form the link in the commercial chain between the publisher and the retailer. The question now is when and in what amount the publisher recognizes revenue.
3.1
In what amount does the publisher recognize revenue from transactions via wholesalers and retailers?
The publishers revenue with the wholesaler and retailer is measured on the basis of the gross inflow of economic benefits (IAS 18.7). Allocation of the revenue therefore depends on who is the principal and who is the agent in the transaction in question. The revenue earned is calculated separately for each sale and for each link in the commercial chain (publisher - wholesaler - retailer). While the agent recognizes only its commission as revenue, the principal is allocated the gross inflow. The agents commissions represent sales costs for the principal. The following criteria are used to assess the sales transactions at each link in the commercial chain (EITF 99-19 in conjunction with IAS 18.11): Who is the primary obligor in the arrangement? Who has general inventory risk? Who has latitude in establishing price? Who is able to change the product or itself performs part of the service ordered by the customer? Does the company have discretion in supplier selection? Is the company involved in the determination of product or service specifications? Who has physical loss inventory risk? Who has credit risk?
A decision is reached by carrying out a comprehensive assessment of the individual criteria. For example, if there are restrictions on the return rights of the wholesale or retailer (e.g., depending on the condition of the magazine), the latter has certain inventory risk and risk of loss. If further risks and rewards arising from the sale of the products are assumed, this may be an indicator of the role of the wholesaler or retailer as principal.
The accounting consequences for the parties, depending on whether they are deemed to be the principal or the agent, are illustrated by way of the following example. It is assumed that a magazine is sold on the street for 3.00 MU. The selling price is allocated among the individual parties as follows: Publisher Wholesaler Retailer 1.50 MU 0.50 MU 1.00 MU
It is important to bear in mind that, under most legal systems, the legal position of the wholesaler and retailer vis--vis the publisher is such that it does not usually act as principal. Therefore, the publisher usually recognizes revenue of 3.00 MU. The wholesaler only recognizes commission revenue of 0.50 MU.
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4 Revenue Recognition in the Publishing Industry When Return Rights Exist

Wholesalers and retailers often have the contractually agreed right to return unsold products to the publisher for reimbursement of the selling price. This primarily affects music and print products.
4.1
How is revenue recognized when return rights exist?
If the wholesaler or retailer has a right of return and there is uncertainty as to the probability of return, revenue is only recognized when the period in which the wholesaler or retailer may exercise its right of return has passed or the relevant publications have been sold to end customers. IAS 18.14: Sale of goods: he significant risks and rewards of T ownership are transferred to the buyer he seller retains neither continuing T managerial involvement nor effective control he amount of revenue can be T measured reliably t is probable that economic I benefits will flow to the entity he costs can be measured reliably T However, revenue is recognized at the time of delivery if the volume of expected returns can be estimated reliably (e.g., from supportable historical data) and revenue is deferred for the risks based on the expected returns ratio. For new titles, it may be difficult to estimate expected returns reliably due to a lack of historical experience. In the absence of a reliable estimate, revenue is usually recognized for new titles only when the time period for exercising the right of return has elapsed or, if sooner, when the products have been sold to end customers. In practice, however, publishers usually resort to the following measures so as to be able to make a reliable estimate: Using past returns ratios for similar titles as a guide and/or Using actual returns ratios in the period in which the financial statements are prepared (period in which adjusting events after the reporting period are recognized) as a guide.
4.2
How is the amount of returns calculated?
The amount of returns is usually calculated as follows. The returns ratio for a fiscal year (or for a reference quarter) is calculated by multiplying the ratio of revenue affected by returns to total revenue (in each case excluding value added tax) by the revenue for months that are expected to generate returns in the following fiscal year. If deliveries in those months have already resulted in returns in the past fiscal year, an appropriate weighting is applied in each case. The time lag between the products sale and their expected return is also taken into account. In addition, adequate consideration is given to the impact of changes in the product offering (such as new editions) on the returns ratio.
5 Other Issues Related to the Recognition of Revenue by Media and Publishing Companies
The following sections illustrate other issues related to the recognition of revenue by media and publishing companies. They address the timing of contract production revenue recognition by a producer, the conditions under which joint revenue earned by several entities is recognized gross or net, specific issues related to deferred revenue in business combinations, and issues that arise where revenue recognition and lease accounting come into conflict.
5.1
When is contract production revenue recognized?
When series, shows, or single-part/multipart dramas are produced for television broadcasters, for example under a contract production arrangement, the question arises as to what specific issues the production company needs to consider in recognizing the revenue from those services. This is explained by way of the following example. Television Production Company A produces a TV crime series for Television Broadcaster B under a contract production arrangement. The contract with the television broadcaster is for an entire season of 22 episodes. It governs the terms and conditions of production and acceptance for the individual episodes in the season. A is required to produce the 22 episodes for B over a period of 8 months between December 2007 and July 2008. A receives 2.2 million MU from B as payment for the entire season. The compensation is paid ratably by B within 30 days of accepting an episode from A, and therefore in the amount of 100,000 MU per episode. On the date that an episode is delivered to B, B also receives the licensing rights to that episode. A delivers the first episode of the TV crime series to B on December 15, 2007. Bs right to license the episode also begins on that date. In this contract production arrangement, it is assumed that the criteria are met for accounting for the arrangement as a construction contract in accordance with IAS 11 (see section A.3.1). The revenue and the related contract costs are therefore recognized by reference to the stage of completion of the contract activity (IAS 11.22). As a reliable share of the revenue can be allocated to the stage of completion in the form of the relevant episode, A recognizes a revenue of 100,000 MU when the first episode is delivered to B on December 15, 2007. However, if the costs of individual episodes differ significantly, for example because the final episode of the series is more expensive to produce, the total consideration of 2.2 million MU is allocated for revenue recognition purposes based on the relevant production cost weighting.
Contract production: See Point A.3
58
If several episodes are produced simultaneously, for example to avoid changing filming location, revenue is also recognized ratably (PoC method) for those further episodes because revenue and related contract costs are recognized by reference to the stage of completion (IAS 11.22).
5.2
Is revenue from the joint exploitation of TV rights reported gross or net?
The joint exploitation of TV rights involves two parties broadcasting a program together. One party assumes responsibility for providing the platform and the other for providing the content. Examples include: The broadcasting of sports programs produced by A on Bs cable channel The broadcasting of As phone-in quiz program where Bs technical platform is used to handle telephone calls from viewers. One of the two parties assumes responsibility for collection of the proceeds from the joint exploitation of the rights from customers and forwards the contractually agreed-upon share to the other party. The issue of which party reports the revenue gross in the amount of the total proceeds from the exploitation of the rights and which party only reports revenue net in the form of the inflows attributable to the entity is decided on a case-by-case basis, depending on the contractual arrangements. The decisive factors are whether it is in fact a joint undertaking, or whether the two parties are merely acting separately, and who assumes the significant risks and rewards arising from the transaction. EITF 99-19: See Point C.3.1 The criteria in EITF 99-19 outlined earlier are used to analyze whether an entity is acting as principal or merely as agent and therefore reports revenue net. A decision is reached by carrying out a comprehensive assessment of all the facts. This issue is explained by way of the following example. Company A operates a direct telephone marketing program together with Television Broadcaster B, for which A provides the necessary technical infrastructure. A telephone company collects the related fees from callers and forwards a contractually fixed share to Company A. A contractually agreed share of the revenue received by A is forwarded to Television Broadcaster B (revenue sharing). Although Company A is now the primary obligor in the arrangement, the share of the revenue forwarded by A to Television Broadcaster B is not matched by a corresponding service provided by A, as the two parties operate the program together. In this case, the method of payment is not the decisive factor for the recognition of revenue. A can therefore only recognize its share of the fees forwarded to it by the telephone company as revenue.
5.3
How is deferred income accounted for in a business combination?
In certain circumstances, deferred income is recognized, as illustrated in section C.1. This is future revenue that has not yet been earned at the end of the reporting period. A business combination entails a change of approach and therefore a change in the way such items are accounted for. The future revenue has already been acquired in the business combination. Constructively, the liability therefore represents a future obligation for the acquirer that is linked to the revenue, such as an obligation to provide a service. Such an obligation is recognized at fair value (that is, the future cost of fulfilling the obligation) at the acquisition date in the course of purchase price allocation (see IFRS 3 Appendix B.16 in conjunction with EITF 01-3). Prior to the business combination, however, the item was measured in the amount of the deferred revenue, which includes the margin on the contract. This margin may not be included in measuring the obligation during purchase price allocation. The margin is not therefore recognized in future.
5.4
Can the acquisition or sale of licenses via media and publication rights fall within the scope of lease accounting?
A lease within the meaning of IAS 17: A lease involves the right to use an asset for an agreed-upon period of time in return for payment.
Film licenses and exploitation rights, such as for books, are usually assigned to the acquirer for a certain period of time. During that time, the acquirer may exploit the rights conveyed with the license. Such an exploitation right is therefore comparable to a right to use an intangible asset. Since IFRS contains specific provisions on the grant of rights to use assets via leases (in the shape of IAS 17), the question is whether those principles are also applicable to licenses in the media and publishing industries. Due to a specific exclusion in IAS 17, Leases, the answer to this question is no. Although agreements on the use of intangible assets may generally fall within the scope of lease accounting, licensing agreements for films, manuscripts, copyrights, and similar items are specifically excluded from the scope of IAS 17 (IAS 17.2 [b]). Their accounting treatment should not be based on the principles applicable to leases.
kpmg.de
Contacts
Dr. Markus Kreher Partner, Advisory, Media KPMG AG Wirtschaftsprfungsgesellschaft Ganghoferstrasse 29 80339 Munich, Germany T +49 (0)89 9282-4310 markuskreher@kpmg.com Dr. Anne Schurbohm Partner, Audit KPMG AG Wirtschaftsprfungsgesellschaft Nikolaus-Drkopp-Strasse 2a 33602 Bielefeld, Germany T +49 (0)521 9631-1680 aschurbohm@kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any particular entity or individual. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received, or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
2008 KPMG AG Wirtschaftsprfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International. KPMG and the KPMG logo are registered trademarks of KPMG International.

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CO M M U NI C A T I O N S & ME D I A

IFRS Practical Issues

Chapter A: Media and Publication Rights

Chapter B: Order Processes in the Media and Publishing Industries

Chapter C: Revenue Recognition in the Media and Publishing Industries .

Value chain in the media and publishing industries

Chapter A: Media and Publication Rights 11

Chapter A: Media and Publication Rights

1 Publishing, Title, and Distribution Rights in the Publishing Industry

Chapter A: Media and Publication Rights 13

Carrying amount before amortization

Source: KPMG in Germany

Chapter A: Media and Publication Rights 15

Fair value less costs to sell

Source: KPMG in Germany

How are advances to artists and authors accounted for?

Chapter A: Media and Publication Rights 17

Impairment: See Point A.1.3

2 Program Assets at Television Broadcasters and Rights Traders

Definition and recognition criteria: See point A.1.1

Chapter A: Media and Publication Rights 19

How are program assets separated if program packages are acquired?

How are acquired program assets measured after initial recognition?

Source: KPMG in Germany

Chapter A: Media and Publication Rights 21

Chapter A: Media and Publication Rights 23

3 Film and Television Productions by a Production Company

Cost in accordance with IFRS: See Point A.3.2

Chapter A: Media and Publication Rights 25

How is the cost of a film production calculated?

Cost in accordance with IFRS: See Point A.3.2

Chapter A: Media and Publication Rights 27

4 Online Media and Publishing Offerings

Chapter A: Media and Publication Rights 29

There is no embedded lease.

Chapter A: Media and Publication Rights 31

5 Media and Publication Rights in Business Combinations

Chapter A: Media and Publication Rights 33

Chapter A: Media and Publication Rights 35

Method 2: Present value method

Chapter B: Order Processes in the Media and Publishing Industries 37

Chapter B: Order Processes in the Media and Publishing Industries

Chapter B: Order Processes in the Media and Publishing Industries 39

2 Customer Acquisition Costs

Are customer acquisition costs capitalized?

Measurement of fair value: See Point A.5.2 and A.5.3

Chapter B: Order Processes in the Media and Publishing Industries 41

3 Acquisition and Operation of Printing Machines

Chapter B: Order Processes in the Media and Publishing Industries 43

4 Cable and Transponder Capacity

Accounting for leases: See Point A.4.3

Chapter C: Revenue Recognition in the Media and Publishing Industries 45

Chapter C: Revenue Recognition in the Media and Publishing Industries

Subscription Decoder (Activation fee) Total

480 MU 150 MU 630 MU

76.2% 23.8% 100%

404 MU 126 MU 530 MU

Chapter C: Revenue Recognition in the Media and Publishing Industries 47

Relative fair value

Allocation of the selling price

Bound print edition Two-year online subscription Total

55.5% 44.5% 100%

Chapter C: Revenue Recognition in the Media and Publishing Industries 49