How do content and distribution rights affect balance sheet?
A company I am looking at has a business segment that distributes content that it licenses from other companies (think Pay Per View). The 10-k notes that the costs associated with licensing, editing, and production are capitalized and then amortized over a 5-year useful life. This figure then shows up on the balance sheet as "Content and distribution rights, net."
What I'm confused about is that the financials don't appear to mention anything about a corresponding offsetting liability. I know that with the proposed discussion of capitalizing leases, for example, that there would be both an asset and corresponding liability that would be moved onto the BS.
Does this treatment of accounting for these distribution rights seem correct?
Basically they have to pay for the rights (if I am understanding the business correctly).
They have an asset, they have to pay for that asset. The appropriate journal entry will be to Debit the Assets and Credit the payables (or if they pay in cash credit the bank).
Basically what is happening is intangible assets are going up and payables are going up (i.e assets are increasing, liabilities are increasing).
Im not sure if I am fully understanding the business and I would not be up on US GAAP but that is a simple explanation.
Whoever they are paying for these rights will be just another creditor so wont necessarily be disclosed. Or alternatively, like I said the payment could just come out of the bank account and you wont be able to see that on the financials (unlikely it would be all cash though I would imagine).
Maherj,
Here's where I'm getting hung up. The total value of Content and distribution rights, net is greater than total liabilities.
So in my mind, unless these rights were paid for in previous periods, it would appear that the company is creating assets on its balance sheet simply by entering into these distribution contracts, which doesn't seem right to me.
Thoughts?
I may not be getting it right but, has Maherj said, if they are paying cash, then you would increase "Content and distribution rights net" and decrease cash, it doesn't matter what is the value of liabilities.
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