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EITF 96-6:

Accounting for the Film and Software Costs Associated with Developing
Entertainment and Educational Software Products

EITF 96 -6 Dates Discussed

March 21, 1996; May 23, 1996

EITF 96 -6 References

FASB Statement No. 2 , Accounting for Research and Development Costs

FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films
FASB Statement No. 86 , Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed
AICPA Statement of Position 93 -7, Reporting on Advertising Costs

EITF 96-6 ISSUE

Both motion picture companies and software companies engage in the development and marketing of
entertainment and educational software (EE) products such as computer games, interactive videos, and other
multimedia products. EE products may include film content taken directly from an existing film or filming that
occurred solely for inclusion in the software product.

Motion picture companies generally capitalize the film production and software costs associated with the
development of EE applications as film cost inventory under Statement 53. Conversely, software companies
traditionally have expensed film production and software costs incurred in the development of EE applications
until technological feasibility is reached based on the accounting principles of Statement 86. Additionally, some
software companies have begun separating the film content from the computer software content when accounting
for EE applications.

The issue is how companies should account for the film and software costs associated with developing EE
products.

EITF 96-6 DISCUSSION

At the May 23, 1996 meeting, the SEC Observer announced that after considering the information provided to the
EITF on this Issue, the SEC staff believes that it is necessary to express its views on this topic through the
following announcement prior to any further consideration by the Task Force of this Issue.

Through discussions by the EITF of the issues raised in Issue 96 -6, the SEC staff has become aware of
diversity in the application of generally accepted accounting principles to exploitation, film, and other software
development costs associated with EE products. The SEC staff has learned that certain registrants are recording
all costs incurred in the development of EE products pursuant to the provisions of SOP 93 -7 and Statement 86.
Other registrants are separating exploitation and film costs from other software development costs and
accounting for the other software development costs using Statement 86 and capitalizing film and exploitation
costs as film cost inventory as described in Statement 53. Still other registrants, principally film production
companies, are capitalizing all costs relating to the development of EE products as film cost inventory. The views
of the SEC staff are not intended to apply to costs incurred to produce computer -generated special effects and
images used in products that are exhibited in theaters or licensed to television stations because those costs are
addressed by Statement 53.
 Statement 86 establishes standards of financial accounting and reporting for the costs of all computer
software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process,
whether internally developed and produced or purchased. The SEC staff believes that EE products that are sold,
leased, or otherwise marketed are subject to the accounting requirements of Statement 86. The SEC staff does
not believe that other standards of financial accounting and reporting or that industry practice are acceptable
alternatives to those requirements. The SEC staff also believes that film costs incurred in the development of an
EE product should be accounted for under the provisions of Statement 86, not the provisions of Statement 53. In
addition, exploitation costs should be expensed as incurred unless those costs include advertising costs that
qualify for capitalization in accordance with the provisions of SOP 93 -7.

The SEC staff recognizes that some registrants in certain specialized industries may have capitalized
exploitation and film costs for EE products by analogy to the specialized accounting practices in Statement 53.
The SEC staff expects the accounting and reporting for the exploitation and film cost components of EE products
incurred subsequent to May 23, 1996 to be in accordance with the provisions of SOP 93 -7 and Statement 86.

The SEC Observer also noted that when this Issue was first introduced to the EITF at its March 21, 1996
meeting, the information provided by the working group suggested that some registrants, principally film
production companies, may be applying the guidance of Statement 53 to all costs incurred in the development of
EE products. The SEC staff does not believe that it is appropriate to disregard the requirements of Statement 86
when accounting for software development costs, regardless of the nature of the business enterprise undertaking
the development project. If registrants previously capitalized costs, other than the exploitation or film cost
component referred to in the preceding paragraph, and those costs are not accounted for in accordance with the
provisions of Statement 86, restatement of prior -period financial statements would be required if the amounts
involved are material.

Because of the SEC staff's position, the Task Force was not asked to reach a consensus on this Issue.

EITF 96-6 STATUS

No further EITF discussion is planned.

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