Film costs are the direct costs associated with physically producing a film, as well as allocations of production overhead and capitalized interest. Examples of these direct costs are cast compensation, postproduction, set construction, sound synchronization, story costs, and wardrobe.
Film costs are amortized to expense using the individual-film-forecast-computation method. The amortization calculation is to divide current period actual revenue by the estimated remaining unrecognized ultimate revenue as of the beginning of the current fiscal year. Thus, the formula is:
Current period actual revenue / Estimated remaining unrecognized ultimate revenue
Amortizing film costs in this manner results in a constant rate of profit over the revenue-generating period, unless there is a change in estimate. Amortization begins when a film is released and begins to generate revenue.
This amortization method is based on estimates, which may eventually prove to be incorrect. The estimate of ultimate revenue being used for the calculation should be reviewed and revised as necessary as of each reporting date, to incorporate the most recent information. These changes in estimate will alter the denominator in the amortization calculation. When there is a change in estimate, the accountant applies the revised fraction to the net carrying amount of unamortized film costs as of the beginning of the fiscal year; the difference between the expenses calculated with the new estimates and the aggregate amount charged to expense in that fiscal year is recognized as an income statement adjustment in the current period.