Produced and Acquired/Licensed Content Costs and Advances

9 Months Ended

Jun. 27, 2020

Produced and Acquired/Licensed Content Costs and Advances Disclosure

Produced and Acquired/Licensed Content Costs and Advances

At the beginning of fiscal 2020, the Company adopted, on a prospective basis, new Financial Accounting Standards Board (FASB) guidance that updates the accounting for film and television content costs. Therefore, reporting periods beginning after September 29, 2019 are presented under the new guidance, while prior periods continue to be reported in accordance with our historical accounting. The new guidance does the following:

•Allows for the classification of acquired/licensed television content rights as long-term assets. Previously, we reported a portion of these rights in current assets. The Company has classified approximately $3 billion of these rights as long-term in the Q1 2020 balance sheet. Advances for live programming rights made prior to the live event continue to be reported in current assets.

•Aligns the capitalization of production costs for episodic television content with the capitalization of production costs for theatrical content. Previously, theatrical content production costs could be fully capitalized while episodic television production costs were generally limited to the amount of contracted revenues. We do not expect this change to have a material impact on the Company’s financial statements for fiscal year 2020.

•Introduces the concept of “predominant monetization strategy” to classify capitalized content costs for purposes of amortization and impairment as follows:

•Individual - lifetime value is predominantly derived from third-party revenues that are directly attributable to the specific film or television title (e.g. theatrical revenues or sales to third-party television programmers).

•Group - lifetime value is predominantly derived from third-party revenues that are attributable only to a bundle of titles (e.g. subscription revenue for a DTC service or affiliate fees for a cable television network).

The determination of the predominant monetization strategy is made at commencement of production on a consolidated basis and is based on the means by which we derive third-party revenues from use of the content. Imputed title by title intersegment license fees that may be necessary for other purposes are established as required by those purposes.

For these accounting purposes, we generally classify content that is initially intended for use on our DTC services or on our linear television networks as group assets. Content initially intended for theatrical release or for sale to third-party licensees, we generally classify as individual assets. Because the new accounting guidance is applied prospectively, the predominant monetization strategy for content released prior to the beginning of fiscal 2020 is determined based on the expected means of monetization over the remaining life of the content. Thus for example, film titles that were released theatrically and in home entertainment prior to fiscal year 2020 and are now distributed on Disney+ are generally considered group content.

The classification of content as individual or group only changes if there is a significant change to the title’s monetization strategy relative to its initial assessment (e.g. content that was initially intended for license to a third-party is instead used on an owned DTC service).

Production costs for content predominantly individually monetized will continue to be amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues). For film productions, Ultimate Revenues include revenues from all sources, which may include intersegment license fees, that will be earned within ten years from the date of the initial release for theatrical films. For episodic television series, Ultimate Revenues include revenues that will be earned within ten years from delivery of the first episode, or if still in production, five years from delivery of the most recent episode, if later.

Production costs predominantly monetized as a group are amortized based on projected usage (which may be, for example, derived from historical viewership patterns), typically resulting in an accelerated or straight-line amortization pattern.

Licensed rights to film and television content and other programs for broadcast on our linear networks or distribution on our DTC services are expensed on an accelerated or straight-line basis over their useful life or over the number of times the program is expected to be aired, as appropriate. We amortize rights costs for multi-year sports programming arrangements

during the applicable seasons based on the estimated relative value of each year in the arrangement. If annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season.

The costs of produced and licensed film and television content are subject to regular recoverability assessments. For content that is predominantly monetized individually, the unamortized costs are compared to the estimated fair value. The fair value is determined based on a discounted cash flow analysis of the cash flows directly attributable to the title. To the extent the unamortized costs exceed the fair value, an impairment charge is recorded for the excess. For content that is predominantly monetized as a group, the aggregate unamortized costs of the group are compared to the present value of the discounted cash flows using the lowest level for which identifiable cash flows are independent of other produced and licensed content. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group. If there are no plans to continue to use an individual film or television program that is part of a group, the unamortized cost of the individual title is written-off immediately. Licensed content is included as part of the group within which it is monetized for purposes of assessing recoverability.

Total capitalized produced and licensed content by predominant monetization strategy is as follows:


	As of June 27, 2020
	Predominantly Monetized Individually		Predominantly Monetized as a Group		Total
Produced content
Theatrical film costs
Released, less amortization	$	3,107	$	2,631	$	5,738
Completed, not released	431		124		555
In-process	3,456		283		3,739
In development or pre-production	425		4		429
	$	7,419	$	3,042	10,461
Television costs
Released, less amortization	$	2,614	$	6,168	$	8,782
Completed, not released	—		254		254
In-process	131		1,752		1,883
In development or pre-production	6		50		56
	$	2,751	$	8,224	10,975
Licensed content - Television programming rights and advances					7,259
Total produced and licensed content					$	28,695

Current portion					$	3,135
Non-current portion					$	25,560

Amortization of produced and licensed content is as follows:


	Quarter Ended June 27, 2020
	Predominantly Monetized Individually		Predominantly Monetized as a Group		Total
Theatrical film costs	$	333	$	195	$	528
Television costs	637		1,049		1,686
Total produced content costs	$	970	$	1,244	2,214
Television programming rights and advances					1,263
Total produced and licensed content costs⁽¹⁾					$	3,477

	Nine Months Ended June 27, 2020⁽¹⁾
	Predominantly Monetized Individually		Predominantly Monetized as a Group		Total
Theatrical film costs	$	1,358	$	738	$	2,096
Television costs	2,117		2,916		5,033
Total produced content costs	$	3,475	$	3,654	7,129
Television programming rights and advances					7,703
Total produced and licensed content costs⁽¹⁾					$	14,832

⁽¹⁾Amortization for the nine months ended June 27, 2020 reflects a reclassification of amounts for the quarter ended March 28, 2020 between monetized individually and monetized as a group.

⁽²⁾Primarily included in “Costs of services” in the Condensed Consolidated Statement of Income.

Amortization of produced and licensed content for the quarter and nine months ended June 29, 2019 was $5.8 billion and $13.2 billion, respectively.