Disney sued over accounting by film financiers
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Accounting
Disney used ânearly everyâ Hollywood accounting trick to deprive a financial partner out of millions, according to a recent lawsuit.
Francis Scialabba
By
Natasha Pinon
¡ 5 min read
Maybe youâve already heard, but Disneyâs in hot waterâand not just because of the actors and writers strikes happening right now.
Disney is being accused by one of its major financial partners of using ânearly every trick in the Hollywood accounting playbook to depriveâ TSG Entertainment, a film financing firm, âout of hundreds of millions of dollars,â according to a lawsuit filed on August 15 in Los Angeles County Superior Court.
In the suit, TSG took aim at both Disney and its subsidiary, 20th Century Studios, formerly 20th Century Fox, which joined Disney in 2019 as part of a multibillion-dollar acquisition.
Since 2012, TSG has been in a revenue participation agreement with 20th Century Studios under its former name, and this agreement was amended nine times throughout its duration, per the lawsuit.
The RPA outlined how TSG would profit from selected filmsâ revenue in exchange for its financing commitments, including production and marketing costs.
The financier said it has invested âin good faithâ over $3.3 billion into âsome of Foxâs most successful, beloved, and award-winning films,â including blockbusters like Avatar: The Way of Water, Bohemian Rhapsody, and the Deadpool and X-Men franchises.
Over time, though, the financier noticed that the return on its investments was decreasing âdramatically,â leading the firm to hire an independent auditing firm to conduct an audit âof Foxâs books and recordsâ to see whether or not the terms of the RPA were being upheld.
The independent audit found that Fox underpaid TSG by at least $40 million using âa number of underhanded Hollywood accounting tricks,â according to the lawsuit. It also throws a number of other allegations at the defendants, including the claim that Disney negotiated âsweetheartâ deals in which TSG-backed films boosted Disneyâs subscriber numbers, while minimizing âthe profit payments to stakeholders like TSG.â
As of this writing, Disney has not commented on the lawsuit.
Revenue recognition. At the core, though, is the central allegation that there was around $40 million âthat should have been accounted for that wasnât there,â according to Jason Cherubini , co-founder and CFO of Dawnâs Light Media and chair of the accounting department at Stevenson University. âIf thatâs actually off, and there were gross receipts that existed that were not paid to investors, thatâs a straight breach of contract,â he explained.
Cherubini takes issue âwhen people throw out âHollywood accountingâ as if itâs this massive gray area, and itâs exclusive to Hollywood,â he said. âIt really has a lot to do with revenue recognition and where you match expenses to.â
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Ripple effect. But, ironically, the bigger implications of the lawsuit will likely stem from some of the additional allegations against 20th Century Studios and Disney, not the underpayment, Cherubini explained.
âWhen you get into some of the self-dealing stuff, I think thatâs more where this could change things in the industry,â he explained, adding that it aligns with some of the demands regarding streaming brought forth in the WGA and SAG strikes.
âMost of the profit sharesâthis is profit shares for SAG, for WGA, for investorsâoften have been lifted off of, âWell, what is the film going to earn?ââ Cherubuni pointed out. In the past, studios could âdirectly measure that, through box office ticket sales, through transactional video on demand, and through streaming licenses,â he added.
But now, as media heavyweights become âpart of the production companyâŚtheyâre going to license it to themselves, [to] their streaming service. It benefits them to license it at the minimum amount.â
âThis disrupture of payout is going to have to be addressed in this new way of consuming media,â he continued. âBecause if youâre investing in a film, andâŚall of your profit from that film [is] tied to box office dollars and license deal dollars, and thereâs a way to skirt that with that self-dealing, you want a way around that.â
Wider repercussions? These issues, though uniquely linked to the intense period of labor upheaval and unrest in entertainment, arenât siloed to the film and TV industries, Cherubini said, and finance leaders across industries can learn from the Disney lawsuit and the strikes.
âWhen we look to other [non-media] industries, it really is looking at, âHow do you structure performance bonuses? And do you go to other KPIs beyond just financial metrics?ââ he said. In the film industry, most of these benefits have been purely aligned with financial metrics, and thatâs causing conflict in the streaming era. Financial leaders should consider it a lesson.
âNow that weâreâŚseeing these other benefits, you may have to move more to a balanced, scorecard-type approach, where youâre going to list the benefits or youâre going to measure the profit sharing, or however you make those performance payments, on other things as well,â Cherubini said.
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Accounting. Disney used ânearly everyâ Hollywood accounting trick to deprive a financial partner out of millions, according to a recent lawsuit. . Francis Scialabba. By. Natasha Pinon. ¡ 5 min read. Maybe youâve already heard, but Disneyâs in hot waterâand not just because of the actors and writers strikes happening right now. Disney is being accused by one of its major financial partners of using ânearly every trick in the Hollywood accounting playbook to depriveâ TSG Entertainment, a film financing firm, âout of hundreds of millions of dollars,â according to a lawsuit filed on August 15 in Los Angeles County Superior Court. In the suit, TSG took aim at both Disney and its subsidiary, 20th Century Studios, formerly 20th Century Fox, which joined Disney in 2019 as part of a multibillion-dollar acquisition. Since 2012, TSG has been in a revenue participation agreement with 20th Century Studios under its former name, and this agreement was amended nine times throughout its duration, per the lawsuit. The RPA outlined how TSG would profit from selected filmsâ revenue in exchange for its financing commitments, including production and marketing costs. The financier said it has invested âin good faithâ over $3.3 billion into âsome of Foxâs most successful, beloved, and award-winning films,â including blockbusters like Avatar: The Way of Water, Bohemian Rhapsody, and the Deadpool and X-Men franchises. Over time, though, the financier noticed that the return on its investments was decreasing âdramatically,â leading the firm to hire an independent auditing firm to conduct an audit âof Foxâs books and recordsâ to see whether or not the terms of the RPA were being upheld. The independent audit found that Fox underpaid TSG by at least $40 million using âa number of underhanded Hollywood accounting tricks,â according to the lawsuit. It also throws a number of other allegations at the defendants, including the claim that Disney negotiated âsweetheartâ deals in which TSG-backed films boosted Disneyâs subscriber numbers, while minimizing âthe profit payments to stakeholders like TSG.â As of this writing, Disney has not commented on the lawsuit. Revenue recognition. At the core, though, is the central allegation that there was around $40 million âthat should have been accounted for that wasnât there,â according to Jason Cherubini , co-founder and CFO of Dawnâs Light Media and chair of the accounting department at Stevenson University. âIf thatâs actually off, and there were gross receipts that existed that were not paid to investors, thatâs a straight breach of contract,â he explained. Cherubini takes issue âwhen people throw out âHollywood accountingâ as if itâs this massive gray area, and itâs exclusive to Hollywood,â he said. âIt really has a lot to do with revenue recognition and where you match expenses to.â News built for finance pros. CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides. Ripple effect. But, ironically, the bigger implications of the lawsuit will likely stem from some of the additional allegations against 20th Century Studios and Disney, not the underpayment, Cherubini explained. âWhen you get into some of the self-dealing stuff, I think thatâs more where this could change things in the industry,â he explained, adding that it aligns with some of the demands regarding streaming brought forth in the WGA and SAG strikes. âMost of the profit sharesâthis is profit shares for SAG, for WGA, for investorsâoften have been lifted off of, âWell, what is the film going to earn?ââ Cherubuni pointed out. In the past, studios could âdirectly measure that, through box office ticket sales, through transactional video on demand, and through streaming licenses,â he added. But now, as media heavyweights become âpart of the production companyâŚtheyâre going to license it to themselves, [to] their streaming service. It benefits them to license it at the minimum amount.â âThis disrupture of payout is going to have to be addressed in this new way of consuming media,â he continued. âBecause if youâre investing in a film, andâŚall of your profit from that film [is] tied to box office dollars and license deal dollars, and thereâs a way to skirt that with that self-dealing, you want a way around that.â Wider repercussions? These issues, though uniquely linked to the intense period of labor upheaval and unrest in entertainment, arenât siloed to the film and TV industries, Cherubini said, and finance leaders across industries can learn from the Disney lawsuit and the strikes. âWhen we look to other [non-media] industries, it really is looking at, âHow do you structure performance bonuses? And do you go to other KPIs beyond just financial metrics?ââ he said. In the film industry, most of these benefits have been purely aligned with financial metrics, and thatâs causing conflict in the streaming era. Financial leaders should consider it a lesson. âNow that weâreâŚseeing these other benefits, you may have to move more to a balanced, scorecard-type approach, where youâre going to list the benefits or youâre going to measure the profit sharing, or however you make those performance payments, on other things as well,â Cherubini said. Copy. News built for finance pros. CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.