1.3       Query             

Revenue recognition on sale of sub-distribution rights of a film

1. Company ‘A’ has the main object of promoting film industry in India. In furtherance of this object, the said company arranges export of Indian films in overseas markets and imports foreign films for distribution in India.

2. For exports in Indian films, the company enters into a contract with film’s right-holders and acquires overseas distribution rights of the film, generally, for 5 to 7 years. The rights of exploitation in foreign market of the film are then sold to overseas buyers for the same number of years. The proceeds from exports are either shared with the Indian right-holders after recovering expenses or the company gets service charges at a fixed rate of realisation from exports. In either case Lumpsum consideration is received by the company.

3. The rights of distribution in India of foreign films are obtained generally for 5 to 7 years. The rightholder of the said film is paid either a fixed sum or share in net proceeds from exploitation of film in India. Such films are either exhibited by company ‘A’ on its own or rights of sub-distribution for certain territories are sold to parties for a fixed price covering period of 5 to 7 years.

4. Up to the accounting year 1985, the company was carrying on the activities mentioned in preceding two paras-except sale of sub-distribution rights of foreign films in India. The income accruing to the company from these activities was being accounted as income in the year of accrual irrespective of the period of contract under which it accrued.

5. During the accounting year 1986, it sold, for a fixed consideration, sub-distribution rights in foreign films for certain territories in India. These rights were sold for 5 to 7 years under separate contracts and the consideration for a sale was also realised. Though the income from sale of sub-distribution rights accrued to company ‘A’ on completion of sale, it decided to account the said income over the period of three years in the following manner.

However, the practice of accounting entire income from export of Indian films in the year in which sale was completed was not changed accordingly.

6. The querists have sought the opinion of the Expert Advisory Committee, as to whether the practice followed by the company of spreading the receipts from sale of sub-distribution rights over three years in the above manner is correct when—

(i) the earnings of the same nature arising out of the export of Indian films are treated as income of the year in which these accrue;

(ii) the proceeds accruing to the company are under sale of sub-distribution rights which are current assets of the company.

7. The querist has further informed that the bases of revenue recognition adopted for sale of sub-distribution rights of foreign films in India are: (a) The rights are sold for a specified period of five to seven years, and (b) the maximum realisation for exploitation of film normally accrues in the first three years.

8. The querist has also supplied copies of some typical ‘sub-distribution agreements’ between the company and the sub-distributor regarding sale of sub-distribution rights of foreign films in India. The relevant notable features of the agreements are as below:

(i) The sub-distributor agrees and undertakes to pay a fixed sum by way of royalty amount excluding the cost of release prints and publicity materials and other materials.

(ii) The said fixed sum, in its entirety, is received on or before signing of the agreement.

(iii) According to clause 7 of the agreement, “The sub-distributor confirms that in the event of his not recovering the amount of investment as mentioned above during the period of this agreement, the sub-distributor shall not claim any amount from the Corporation.”

                                                                                   Opinion                                                December 3, 1987

1. The Committee notes that para 13 of Accounting Standard-9 (AS-9) on ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, deals with the revenue recognition in respect of transactions of the nature pertaining to the query. The relevant extracts of the said para are given below:

(i) “Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should also be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:

(ii) Royalties: On an accrual basis in accordance with the terms of the relevant agreement…”

2. The Committee is of the view, from the facts of the query, that there is no significant uncertainty as to measurability or collectability of the consideration of sale of sub-distribution rights of foreign films in India since the entire amount is accrued and received on or before signing the agreement and the company is not required to compensate the sub-distributor in the event the latter does not recover the amount of his investment. The Committee is also of the view that the fact that the maximum realisation from a film normally arises during the first three years is not relevant since the royalty amount is not dependent on the proceeds from exploitation of the film by the sub-distributor. The Committee is further of the view that the fact of the period of agreement being 5-7 years is not relevant since the royalty amount does not accrue periodically.

3. On the basis of the above considerations, the Committee is of the opinion that in the circumstances and facts stated in the query, revenue from sale of sub-distribution rights of foreign films in India should be recognised in the year of accrual.[1]. In view of this, the policy followed by the company to spread the revenue during first three years is not correct.

[1] Though the query does not specifically refer to treatment of cost of acquiring distribution rights, it is obvious that such costs should be properly matched with the revenues.