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How to account for master copies of films

Good day to all.

We have a client whose business is to make films for the education industry and then sell copies to whichever customer (school) is interested in the short films.

I am currently unsure about how to account for the cost of the master copies. I presume these are fixed assets but I am not sure which category these will go to and how to depreciate these assets.

Any suggestions will be most welcome. 

Thanks in advance.

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25th Oct 2011 15:37

Intangible assets

I think these are intangible, rather than fixed, assets (as the asset is the copyright in the material they have created, rather than the physical medium it is stored on. So if one copy of a film is lost, they can just create another one from the backup at almost no cost).

this means they should only be capitalised if they have a readily ascertainable market value, and then amortised (rather than depreciated) over their estimated UEL.

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Slightly different view

In the film/music industry where the master version of a film or sound recording is purchased, it is generally treated as a tangible fixed asset (in the same way that computer software on a computer is treated as a tangible asset).

I have had HMRC accept that purchased sound masters are plant for capital allowances purposes (although there used to be legislation that allowed the cost to be effectively claimed as a revenue deduction).

Whilst I accept that the physical tape/disk is nothing more than the a medium containing intellectual property (although it is a more than just a backup), I think that (given the approach in UITF 29 for websites - treating them as a tangible asset) they would be recognised as a tangible asset.  Even if recognised as a tangible fixed asset, they would still need to be depreciated over their estimated useful economic lives, which would be short.

Indeed, the principles in UITF 29 may offer further assistance (from a tax perspective), and provide justification for recognising some of the costs of producing the films as a revenue expense.

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By aaron01
25th Oct 2011 15:56

@WhichTyler - I guess what you are saying makes sense. Thank you.

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By aaron01
25th Oct 2011 16:00

Creating their own film v/s purchasing films

@George - this particular client creates their own films (production costs, actors, etc). I am assuming this would more in line to what WhichTyler said. I am not really sure though as this is the first time I am coming across a situation like that. 

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25th Oct 2011 16:14

Don't forget

Whatever the accounting treatment under FRS/UITF/IAS, the revenue may have their own view. There's a lot of that here: http://www.hmrc.gov.uk/manuals/bimmanual/bim56005.htm et seq.

 

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BIM 56005...

... is no longer current. The legislation in question (Chapter 9 of Part 2 of ITTOIA 2005 for non corporates and in various Finance Acts for corporates) was repealed by FA 2006.  The replacement legislation, now in Part 15 of CTA 2009, deals with the issues somewhat differently (and only for corporates).  I note though that this does deem all film production costs to be revenue, regardless.

Looking at the definitions in FRS 10 and FRS 15, I'd say that treatment as a Tangible Asset is correct.  A master version of a film is more than just a back up, it is the means by which the intellectual property on it can be reproduced and distributed for sale.  Without the master, it simply isn't possible to exploit the intellectual property it contains.  That to me, puts it in the category of having a physical substance.

From FRS 10:

"Intangible Assets: Non-financial fixed assets that do not have physical substance but are identified and controlled by the entity through custody or legal rights".

From FRS 12:

"Tangible Assets: Assets that have a physical substance and are held for use in the production, supply of goods or services, for rental to others, or for administrative purposes on a continuing basis in the reporting entity's activities."

 

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25th Oct 2011 20:19

Thanks

For the correction on BIM56005

 

 

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01st Nov 2011 13:03

in the good old days

if you recorded your own album as an artist you wrote off the costs to revenue, i think that that would  still be case as opposed to buying a master recording , is that correct for tax purposes

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