Media & Entertainment

Hollywood Accounting

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Creative endeavors don’t always work out as planned. The late actor David Prowse was often reminded of this when he’d occasionally receive letters informing him that a film he was a part of had yet to make a profit. The film in question is “Return of the Jedi”, the (debatably) sixth installment of a little franchise you may know as Star Wars. How did this happen? The answer: Hollywood accounting.

Life in Tinsel Town

You get to Hollywood, the big leagues, and get offered a contract that will give you a small percentage of the net profit of what you think will be a phenomenal blockbuster. Think Lord of the Rings or Harry Potter type of film success. Sounds great, right?

Your film comes out, and the box office numbers are better than predicted. You hit the jackpot. Or did you?

Welcome to Tinsel Town, where the films are almost as creative as the accountants behind them.

Soon, you find yourself in the same position as Prowse. The film was a financial disaster, and so the appealing net profit percentage of your contract essentially becomes meaningless. And although that was not what you expected, it all went according to the studio’s plan. Welcome to Tinsel Town, where the films are almost as creative as the accountants behind them.

Creative Accounting

Hollywood is not a stranger to taking creative liberties with the behind-the-scenes of their finances. This common practice is so popular that it is known as Hollywood accounting. But how does it work?

The basic goal of Hollywood accounting is to ensure that no matter what, films always make a loss on paper. The way to achieve this can vary but one of the common strategies is so simple that it seems odd that it even is legal.

In every film, there are basic production, distribution, and marketing expenses. The key thing here is who you pay these to. Studios can create separate companies, essentially shell companies, that can charge outrageous fees. This inflates the costs, which isn’t problematic since the studios are simply paying themselves.

If this still is not enough, an easy way to increase the price of film is to shift real expenses from a truly unsuccessful film or to deduct anything that can somehow be associated with the film. Parking? Expensive breakfast meeting? A gift for an actor? You name it. It is valid.

The question now is probably, why? A benefit of this cinematic accounting is using net profit as a bargaining chip, a way to appeal to certain creative workers a studio wants for a project. To add to this is the classic benefit of saving money on taxes.

The magic of Hollywood truly extends to even their financial practices.

The most fantastic thing about Hollywood accounting is that it is all legal. Contracts are not broken and the expenses are real. The magic of Hollywood truly extends to even their financial practices.

Notable cases

David Prowse is not alone when it comes to falling victim to the system of Hollywood accounting.

A notorious example is the case of Winston Groom’s deal with Paramount Pictures. Groom’s deal with the studio for the adaptation of his novel “Forrest Gump” included a share of the net profits…which as you can probably guess did not end well. Despite the success of “Forrest Gump”, Groom was assured that the film was a loss for the studio, at least on paper.

A similar example even took place in Middle-earth, as actors from “The Lord of the Rings” – another disappointment on paper – sued the studio after not receiving any money from the percentage of merchandise revenue they were promised.

The list of Hollywood accounting casualties is extensive. It appears that ensuring you are not a victim of Hollywood accounting comes down to two things: Deeply understanding the industry and terms of contracts or have the means to sue.

Welcome to Hollywood.

 

Cover: Tima Miroshnichenko

Edited by: Yili Char

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Rita Alves
Rita Alves was born in Portugal but is currently living in the Netherlands, where she studies Communication Science.

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