A producer's cut: CPAs can play critical role in resolving royalty disputes.

• Author: Franco-Valdez, Frances
• Position: PROFESSIONALISSUES - Certified public accountants

It's common to hear of the disappointments and disputes of authors, writers and producers in the motion picture industry who receive very little in royalty or salary compensation for their contributions to a film.

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During these disputes, a CPA is often hired to perform a forensic analysis of the books to resolve the matter by determining economic damages. In some cases, the outcome may be surprising because compensation structures can vary significantly in the entertainment industry.

FACTORS TO CONSIDER

There are many factors that can impact the amount of royalties paid to various contributors to a film. One is whether the royalties are based on net profits or first-dollar-gross.

Net profits typically are comprised of the studio's share of revenue, less distribution fees and costs associated with production, prints, promotion and advertising. Salaries and royalties from the film's stars also are deducted to arrive at net profit.

First-dollar-gross represents the gross box-office revenues before the deduction of any expenses.

Net profit participants are often a film's writer, "B-level" talent, the composer and in some cases, the cinematographer. First-dollar-gross participants are typically directors and stars such as Tom Hanks, Cameron Diaz, Brad Pitt and the like.

The Motion Picture Association of America reports that Hollywood spent an average of $96 million in 2005 to make and market a film. As a result of such high production and marketing costs, net-profit participants carry a much higher risk than first-dollar-gross participants because they may have contributed to a box office hit and may not see a return for many years, if at all. This is because such high marketing and production costs significantly reduce the net profit, which is the basis used to compute royalties paid to net profit participants

The distribution method, which is typically selected by the studio, also can impact a film's profitability and royalties. Often, disputes will arise on films that did not make widescreen distribution and, as a result, were distributed to a very limited number of screens or went straight to DVD.

A widescreen distribution is critical to a film's profitability because it launches "word-of-mouth" marketing. It is common for studios to see a film experience a loss in the initial domestic theatrical release. The expectation, though, is that a good film will receive a significant amount of momentum through word-of-mouth...