Accounting In Action Business Insight
Suppose you are a filmmaker like George Lucas and spend $11 million to produce a film such as Star Wars. Over what period should the cost be expensed? It should be expensed over the economic life of the film. But what is its economic life? The filmmaker must estimate how much revenue will be earned from box office sales, video sales, television, and games and toys—a period that could be less than a year or more than twenty years, as is the case for Twentieth Century Fox’s Star Wars. Originally released in 1977 and rereleased in 1997, domestic revenues total nearly $500 million for Star Wars and continue to grow. This situation demonstrates the difficulty of properly matching expenses to revenues. What accounting principle does this example illustrate? How will financial results be affected if the expenses are recognized over a period that is less than that used for revenues? What if the expenses are recognized over a period that is longer than that used for revenues?