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December 18, 2012

It’s about time

The fortunes of two recent movies set me thinking about how we consider the passage of time when reporting an entity’s financial position and performance. John Carter opened in March 2012, a century after the initial publication of the original Edgar Rice Burroughs’ novels on which the film is based. After a poor opening weekend, headlines reported that Disney had spent its $250million budget on a flop and losses in excess of $100m were already being discussed.

My initial reaction was one of surprise, as it was surely too soon to reach this conclusion. In his excellent book, The Good, the Bad and the Multiplex, Mark Kermode explores the idea that all movies, even bad ones, make money but it just depends on how long you give them to turn a profit.

To illustrate his point, he cites Cleopatra, made in 1963, which has long been considered the most expensive movie flop in history. Uplifted for inflation, the budget for this historical epic was around $318m: to give you some perspective in today’s money, this was even more expensive than the estimated budgets for films such as Titanic ($278m), Avatar ($247m) and another recent Disney feature Tangled (a whopping $268m). All these films delivered profits – what about Cleopatra though, which paid Elizabeth Taylor the equivalent of $50m to star?

Despite conventional wisdom stating that no film could ever claw back such massive sums (even without the legendary production issues suffered by Twentieth Century Fox during filming) the US gross alone for Cleopatra had made back the film’s budget as soon as January 1970, so break even occurred after only seven years. What about John Carter then? After only seven months, the worldwide gross is nearing $300m. So, to paraphrase another classic author of the time Mark Twain, reports of Disney’s demise at the hands of this movie alone would appear to be greatly exaggerated.

Not every investment can be given seven years to pay back but year on year, accounting for a company in the movie business with assets and liabilities like any other must demand a very creative approach. This leads me to my second example, Looper, a time-travel thriller from 2012 which was made for a more modest budget of $30m and which, at the time of writing, has already taken double that amount. Early indications suggested that this movie was benefiting from a more global appeal due to elements of the story being set in China, as the highest grossing market was…China, where it reported opening weekend box office figures of $25m compared with only $20m domestically in the US.

China has recently overtaken Japan as the second biggest cinema audience behind the US, prompting many film producers to invest in this developing market, but success over there is still going to require some patience – a simple accounting error by Chinese officials led to US$ and CYN being mixed up (yes – really) and so Looper actually posted Chinese box office figures of around $6m.

Such a basic accounting error takes the term "creative" to a familiar, if unwelcome, extreme: however, although this would undoubtedly be picked up somewhere along the line, it does reinforce the point that immediate reporting can still be misleading.

What about the passage of time in other industries? Does the seven year rule work anywhere else? Two further stories seemed relevant to me here: the first was news of a further tranche of money being repaid to UK local authorities by the failed Icelandic bank Landsbanki, and the second reported the start of funds being repaid to unsecured creditors of Lehman Brothers by their administrators PwC.

In the ensuing four years since the financial crisis reached dizzying heights (or should that be lows?) the ongoing financial reporting for entities owed money by such failed institutions has been a difficult task – at what point does an asset start to become contingent if all we have to rely on is a degree of hope and judgement? That sounds like the murky world of creative accounting from the movie industry, where the number seven seems to hold the key – but is that in years, months or days?

Only time will tell.

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