Iness insight disneys revenue recognition walt disney

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~INESS INSIGHT Disney's Revenue Recognition Walt Disney Company uses a method similar to percentage-of-completion to determine ~ amount of production cost to match against film and television revenues. Following is an t from its 10-K. Film and television costs include capitalizable production costs, production overhead, interest, development costs, and acquired production costs and are stated at the lower of cost, less accu- mulated amortization, or fair value. Film and television .... costs are expensed based on the ratio of the current period's revenues to estimated remaining total revenues (Ultimate Revenues). Ultimate Revenues include revenues that will be earned within ten years from the date of the initial theatrical release or .._the delivery of the first episode. - Disney pays production costs, it records those costs on the balance sheet as inventory. Then, film and television revenues are recognized, the company matches a portion of production costs inventory) against revenues in computing income. Each period, the costs recognized are al to the proportion of total revenues recognized in the period to the total revenues expected _ er the life of the film or television show. Thus, estimates of both costs and income depend on the ity of Disney's revenue estimates, which are, likely, imprecise. COGS 3M Cash 3M COGS 3M I Cash I 3M AR 4M Rev 4M AR 4M I Aev 4M Cash 7M AA 7M Cash 7M I AA I 7M
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5-11 Module 5 I Revenue Recognition and Operating Income The percentage-of-comp1etion method of revenue recognition requires an estimate of total costs. This estimate is made at the beginning of the contract and is typically the one used to initially bid the contract. However, estimates are inherently inaccurate. If the estimate change during the construction period, the percentage-of-completion is computed as the total costs incurred to date divided by the current estimate of total anticipated costs (costs incurred to date plus total estimated costs to complete). If total construction costs are underestimated, the percentage-of-completion is overesti- mated (the denominator is too low) and revenue and gross profit to date are overstated. The estimation process inherent in this method has the potential for inaccurate or, even, improper revenue recognition. In addition, estimates of remaining costs to complete projects are difficult for the auditors to verify. This uncertainty adds additional risk to financial statement analysis. r Recognition of Unearned Revenue In some industries it is common to receive cash before recording revenue. Customers might pay in advance for special orders, make deposits for future services, or buy concert tickets, sub- scriptions, or gift cards. In those cases, companies must record unearned revenues, a liability.
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