A movie that had begun production with a budget of about $7.5 million was released by United Artists in the spring of 1980. Depending on the accounting ledger you looked at, the expenses had increased to between $40 million and $44 million by the time Heaven’s Gate hit theaters. After a week in New York, the movie was removed, recut, and then rereleased to a similar lack of interest. Due of the significant financial loss from a single project funded by a single studio, United Artists was sold to MGM the next year. The American auteur film movement, which gave rise to Apocalypse Now, Raging Bull, and Taxi Driver, virtually came to an end as a studio-funded endeavor. Hollywood’s operations underwent a structural shift for the next ten years as a result of one movie’s cost overruns and the accounting errors that permitted them to build up without enough escalation.
Although it is an extreme example, the pattern it illustrates—costs building up in ways that aren’t apparent until they’ve escalated into a crisis—has been prevalent in film production accounting since Hollywood’s inception. The particular mechanism is altered. The difference between the final liability and what a production’s financial model predicts remains constant.
FASB ASC 926, the industry’s accounting standard, mandates that production costs be capitalized (represented as assets on the balance sheet instead of immediate expenses) and subsequently amortized against revenue over time using a technique known as the individual film forecast computation. The actual income collected is compared to the total predicted lifetime revenue to determine the amortization rate in each given quarter. A movie’s asset value must be recorded if it does poorly. These liabilities come as a surprise if residual responsibilities were underestimated when the movie was first funded. Deferred expenses associated with a single movie may remain on a balance sheet for years, categorized in ways that make them less apparent than they ought to be, until an audit or a change in ownership sheds new light on the figures.
In 1995, Carolco Pictures used Cutthroat Island as an example of this. The company had created successful films like Total Recall, Terminator 2, and Basic Instinct, but it had been capitalizing expenses and postponing commitments in a way that necessitated ongoing production and income. The financial situation collapsed when Cutthroat Island spent $98 million and made about $10 million globally. In November of that year, Carolco declared bankruptcy. A studio that had been making profitable movies for years was brought to an end by a single production failure and underlying structural debt that the accounting had partially covered up.
This story’s most recent iteration focuses on streaming and the particular accounting difficulties it brought about. Disney and Warner Bros. Discovery both made significant investments in developing streaming libraries between 2020 and 2022, capitalizing on content costs against optimistically projected subscriber revenue during a time when streaming’s competitive dynamics were still developing and subscriber growth was still robust. Both businesses found themselves with content assets on their financial sheets that were significantly less valuable than the models had predicted when subscriber growth stalled and the streaming economics became more apparent. In 2023 alone, Disney received $2.4 billion in content impairments. The overall write-downs for Warner Bros. Discovery in 2022 and 2023 came to $5.3 billion, including the full write-off of Batgirl, a completed $90 million movie that was never released, completely deleted from HBO Max, and written down for tax purposes.
Because it highlights a particular aspect of how accounting decisions interact with artistic and strategic ones in ways that aren’t always separate, the Batgirl instance is worth considering. The movie was finished. There had been test screenings. There was a plan for release. After resolving the debt from the Discovery merger, Warner Bros. Discovery’s new management concluded that the tax benefit of writing the movie down as a loss outweighed the anticipated revenue from its release. The accounting reasoning made sense in the given situation. Most observers felt that the industry had not yet fully considered the artistic logic that a $90 million completed movie with a cast and crew was simply deleted from existence for commercial reasons.
These mistakes follow identifiable patterns, which makes them informative rather than just warning. When base compensation is incorrectly classified, residuals are computed incorrectly. Deferred expenses from a first movie are carried over in methods that fail to sufficiently identify the risk they provide to the budget of a sequel. Revenue forecasts that do not take market fluctuations into consideration are used to capitalize content assets. In each of these situations, the accounting principles are the same. The assumptions that underpin the models and the inspection mechanisms that are meant to identify these assumptions before they worsen are the sources of the inaccuracies. For eight decades, Hollywood has been making the same kinds of financial mistakes on varying degrees and in many specialized ways. The movies are different. The weaknesses in the balance sheet remain relatively stable.
