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How Hollywood Accounting Works

Behind the Scenes of Hollywood Accounting
Sandra Bullock avoided the headache of net profit points by negotiating a deal that earned her millions for her role in "Gravity."
Sandra Bullock avoided the headache of net profit points by negotiating a deal that earned her millions for her role in "Gravity."
Brad Barket/Getty Images Entertainment/Getty Images

The big difference between Hollywood accounting and typical corporate accounting is how people are paid. Shares of the film or "points" may be given to producers, directors, actors, writers, or anyone who worked on or helped with the production in a significant way. Most players in Hollywood get net points; in other words, they're supposed to receive some of whatever is left after the studio recoups the costs [source: Snyder].

The thing is, these people don't ever actually see any money from these shares. The reason net points are given so liberally is because they are, by all accounts, essentially meaningless. To ensure that there are no net profits in Hollywood, movies are contractually designed to be unprofitable, no matter how much they make.

It's really a game of paperwork. Each movie is set up like a corporation that's designed to lose money. Within the corporation are shell companies, those existing in name only, that are designed to siphon all of the profits from the movie and funnel them back to the studio. These shell companies handle things like advertising, marketing and distribution. They can even be set up to cover more general expenses for accountants, managers, travel and entertainment for studio heads, and so on.

Some of the fees that studios pay themselves through these shell companies might be legitimate, but they can also be outrageous. A distribution fee of 30 to 35 percent of every penny a movie makes goes directly to the studio [source: Davidson]. The studio charges the film exorbitant amounts for advertising and publicity in addition to financing and interest through shell companies. Every perk that comes with the job of working at a studio, it seems, is paid for by some movie or television show. Executives are said to charge the bulk of their expenses to whichever movie is grossing the most [source: Daniels et al.].

To be sure, shell companies aren't new. Corporations in other industries use them all the time to play accounting tricks. In other types of business, however, shell companies are typically used to hide losses to make a corporation's profits appear greater to shareholders and investors. It's the goal of hiding profits and not losses that makes Hollywood accounting unique.

Because there's no such thing as net profits in Hollywood, a handful of the biggest players in the industry demand a percentage of gross points or, more specifically, first-dollar gross. That means these people are getting a cut of the profits before most other costs are recouped. Sandra Bullock is said to have negotiated this rare type of deal for her role in the movie "Gravity." She received $20 million upfront and 15 percent of first-dollar gross. The actress stands to make at least $70 million from the deal [source:Galloway].