Hollywood accounting

Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or "creative" set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Expenditures can be inflated to reduce or eliminate the reported profit of the project, thereby reducing the amount which the corporation must pay in taxes and royalties or other profit-sharing agreements, as these are based on net profit.

Hollywood accounting gets its name from its prevalence in the entertainment industry—that is, in the movie studios of Hollywood at a time when most studios were located in Hollywood. Those affected can include writers and actors, but also production companies, producers and investors. A number of cases of Hollywood accounting have been successfully pursued in court and have resulted in hundreds of millions of dollars in awarded damages.

Hollywood accounting can take several forms. In one form, a subsidiary is formed to perform a given activity and the parent entity will extract money out of the film's revenue in the form of charges for certain "services". For example, a film studio has a distribution arm as a sub-entity, which will then charge the studio a "distribution fee"—essentially, the studio charging itself a sum it has total control over and hence controlling the profitability report of a project.

Another form of Hollywood accounting is a reverse tobashi scheme, in which the studio unjustly cross-collateralizes the accounting of two projects and shifts losses from a flop onto a profitable project by shifting costs involving internal operations. This way, two unprofitable projects are created out of one on paper alone, primarily for the purpose of eliminating net participation liabilities. The specific schemes can range from the simple and obvious to the extremely complex. Generally, Hollywood accounting uses permanent creative accounting practices (such as charging an arbitrary distribution fee from one sub-entity to another) rather than temporary ones (like the Repo 105 scheme) since the measures are meant to permanently distort the bottom line of a film project.

Three main factors in Hollywood accounting reduce the reported profit of a movie, and all have to do with the calculation of overhead:

All of the above means of calculating overhead are highly controversial, even within the accounting profession. Namely, these percentages are assigned without much regard to how, in reality, these estimates relate to actual overhead costs. In short, this method does not, by any rational standard, attempt to adequately trace overhead costs.

Because of the studio's ability to place arbitrary charges along the value chain, net participation "points" (a percentage of the net income as opposed to a percentage of the gross income of a film) are sometimes referred to as "monkey points". The term is attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in their contract.

Actress Lynda Carter on The Late Show with Joan Rivers commented "Don't ever settle for net profits. It's called 'creative accounting'."