ARCHIVED -  Public Notice CRTC 1993-93

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Public Notice

Ottawa, 22 June 1993
Public Notice CRTC 1993-93
This Public Notice is to clarify the Commission's position with respect to a number of issues relating to the reporting of Canadian program expenditures, thereby to ensure that all licensees have a full understanding of the Commission's definition of eligible Canadian programming expenditures and of its determination as to the appropriateness of certain accounting practices.
As the Commission announced in Public Notice CRTC 1989-27 dated 6 April 1989, beginning with the 1989/90 broadcast year, most of the English-language private television stations earning more than $10 million per year in advertising revenues and network payments, where applicable, have been required by condition of licence to spend a minimum amount on Canadian programming. This condition of licence is based on an averaging provision linked to the station's financial performance in previous years. Other private English-language television stations whose advertising revenues and network payments are less than $10 million are expected to meet the same Canadian program expenditure requirements.
The formula, whose purpose is to ensure an appropriate level of expenditures on Canadian programs, is designed to minimize any year-to-year fluctuation in Canadian program expenditures resulting from a sharp increase or decrease in advertising revenues by averaging the rate of change of the licensee's revenues over a period of up to three years.
The Commission subsequently introduced a number of modifications intended to increase the flexibility of the formula. Provisions respecting over and under expenditures during the licence term, and changes to the three-year averaging mechanism, were introduced in Public Notices CRTC 1992-28 and CRTC 1992-89 dated 8 April and 23 December 1992, respectively.
Last fall, in order to ensure that the formula is being applied in a consistent and equitable manner, the Commission asked those licensees subject to the condition of licence to provide detailed information about their actual Canadian programming expenditures in 1989/90 and 1990/91 and their accounting practices with regard to Canadian programming. In reviewing this information the Commission discovered a number of inconsistencies and interpretation difficulties.
Reporting Practices
The Commission, in making its determination in this matter, has taken into account the many different types of ownership structure in the Canadian television industry, ranging from networks to corporate groups to individual stations. It has also recognized that broadcasters contribute to quality Canadian programming in a variety of ways: in addition to acquiring Canadian programs from the independent production sector, some produce programming either on their own or with independent producers; others pool resources with other broadcasters to produce co-operative programs. The Commission is concerned that the accounting practices of some licensees result in an overstating of the funds actually being expended on Canadian programming. These accounting practices are discussed below.
Double Counting
Double counting can occur when the cost of a program is counted by more than one licensee for the purpose of fulfilling Canadian programming expenditure requirements. For example, a licensee may acquire the national broadcast rights for Canadian programs and credit the entire cost against its expenditure requirements. The same licensee can then recover a portion of the cost of the rights purchase by selling the unexploited broadcast rights to other licensees, who then credit the amount they have paid against their expenditure requirements. Double counting also occurs when a licensee produces or acquires ownership of a program, claims the entire cost of the production against the formula requirement, and then sells the program or broadcast rights to another licensee who claims its cost for the program as a Canadian programming expenditure.
This practice results in a lower level of real expenditure on Canadian programming than is reported by licensees as their expenditures on Canadian programming. The Commission believes that it is important to ensure a level of expenditure on quality Canadian programming in the broadcasting system. At the same time, it does not want to negatively impact on the distribution and exposure of Canadian productions. Nor does it wish to introduce a disincentive to the production of quality Canadian programming which could result if the Commission were to require a licensee to re-invest in Canadian programming all revenues it derives from selling Canadian programming.
Accordingly, given its concerns with respect to double counting, but consistent with the objective of maintaining an incentive to produce and acquire quality programming, the Commission will require that the cost of a production or rights purchase be allocated between two assets: a local station use or broadcast component, which will qualify as an expenditure within the formula; and a non-broadcast resale component, which will not qualify as an expenditure within the formula. This methodology is to be followed regardless of the method used to acquire a program. The Commission notes in this regard that, for the purposes of the allocation, there is no difference between rights purchases, acquired ownership or station produced/co-produced programming.
The Commission expects licensees to make their own business decisions concerning program cost allocations, taking into account the anticipated future revenues to be derived from each component and the licensee's historic successes in sub-licensing rights purchases and selling similar in-house productions. The reasonableness of the allocations made by the licensee will be reviewed periodically by the Commission.
Revenues earned from the syndication or resale of any particular program in amounts greater than the allocation to the non-broadcast or resale component may be treated as syndication income by the licensee. However, the Commission expects licensees to consider the success of earlier programs when determining future allocations between the local component and the resale component.
Where, on the other hand, a production does not garner sufficient syndication revenues to recover the allocation to the resale component, the licensee may count the losses towards fulfilling its expenditure requirement.
In order to recognize the production undertaken by licensees, particularly those operating in smaller markets, and to encourage the distribution of such productions in other markets, the Commission has determined that licensees will not be required to undertake the foregoing allocations for produced or acquired (copyright) programming where the total cost of production of the programming falls below $100,000 for a single production, or $50,000 per episode for a series production (two or more programs produced by the same production company or licensee, having a common theme, situation, or set of characters). Financial recoveries from sales of such productions to related parties, however, are to be deducted from the amounts claimed as expenditures within the formula for station-produced or acquired programs costing less than these amounts. The Commission recognizes that this mechanism may still permit more than one party to claim expenses related to a program, but is satisfied that this approach will reduce any disincentive to produce Canadian programs of high quality.
Equity Investment
In reviewing the accounting practices of television licensees, the Commission has noted that there are substantial differences among licensees in their treatment of equity investments under the formula. The Commission considers that, as a general rule, the regulated operations of a broadcast licensee should encompass neither the profits nor the losses that may result from its equity investments in programs. Accordingly, equity investments by television licensees are not to be counted as a Canadian program expenditure for the purposes of the formula.
The Commission however, is aware of the importance of equity investments in the production of Canadian programs, particularly for the independent sector. Therefore, as an incentive for broadcasters to enter into equity arrangements with independent producers, losses on equity investments in productions of Canadian programs with arm's length companies are eligible to be counted towards a licensee's expenditure obligations.
Telecast vs Not-Telecast
The issue of whether or not a Canadian program should be telecast on a licensee's facilities in order for the cost of the program to be claimed against the licensee's expenditure requirements was another matter examined by the Commission in its review of the various reporting practices.
It is the Commission's view that, in order for the costs of a program to qualify as an eligible expenditure under the formula, the licensee must have purchased a broadcast right or production with the intention of airing the program on the licensee's facilities. If, subsequent to its purchase or production, the program is not broadcast for any reason, a licensee may write-off the program within the formula net of any recoupment such as from completion bonds and/or insurance. For example, a right entitling a broadcaster to multiple airings might also be applicable only for a specific period of time. When this period expires the right lapses and has no further value. Any asset value still attached to the right at that time may be written off as an expenditure within the formula.
Production Services Sold
Expenses related to contract work undertaken by a licensee to produce a program or commercial for a third party, or to provide assistance to a third party in its production of a program are not eligible Canadian program expenditures under the formula.
This approach is consistent with the Commission's longstanding policy that productions undertaken by a station for a network are not recognized as the station's productions. These productions are completed under contract by the affiliates and the costs of the contract may be counted only by the network as a Canadian program expenditure.
Loans by broadcasters to assist in the financing of Canadian productions are not eligible expenses for purposes of the formula.
Negative Revenues of a Network
In cases where a network incurs losses in any broadcast year and requires its affiliates to cover the losses, affiliates have treated such payments as a deduction in revenues (negative revenues) when calculating the year-to-year percentage increase in revenues for the purpose of the formula. The Commission confirms that the foregoing treatment of negative network payments is an acceptable practice when calculating the percentage change in revenues under the formula.
This practice, however, will only be accepted in cases where a licensee has actually paid the network for its share of the network's losses, or has recorded the amount as payable to the network in its books of account.
Definition of a Canadian Program Expenditure
In order to eliminate any confusion concerning eligible expenses for English-language conventional television licensees, the Commission has appended to this public notice a definition of "expend on Canadian programming", which is to be followed by licensees when reporting their annual Canadian programming expenditures and which will be used by the Commission in determining compliance by licensees with their conditions of licence or with Commission expectations. The Commission recognizes that the directives outlined in this public notice will have a significant impact on some licensees, particularly on the larger corporate groups. It considers, however, that clarity in this area is of paramount importance, and that these findings will result in the consistent application of reporting and accounting procedures among all licensees subject to the Canadian programming expenditures formula, whether by condition of licence or as an expectation.
Allan J. Darling
Secretary General
For purposes of the conditions of licence or expectations applied by the Commission with respect to expenditures on Canadian programming by the licensees of English-language private television undertakings, "expend on Canadian programming" means:
a) The amortization charged against an expenditure by the licensee for exhibition rights to a Canadian program when the amortization results from exhibition of the program on the undertaking.
 Where an expenditure results in an acquisition of rights for an area greater than that served by the undertaking, the licensee must make a reasonable allocation of the expenditure into an amount in respect of the broadcast area served by the undertaking and an amount in respect of all other areas on the basis of estimated revenues to be derived from all sources.
b) Where an expenditure by the licensee to produce or acquire a Canadian program whose total cost of production exceeds $100,000 for a single program or $50,000 per episode for a series program, the amortization or expense charged against the expenditure as a result of exhibition of the program by the undertaking.
 Where the licensee can reasonably expect to derive revenues from the programming beyond that to be derived from exhibition of the programming on the undertaking, the licensee must make a reasonable allocation of the expenditure into an amount in respect of the broadcast rights for the area served by the undertaking and an amount in respect of the rest of the property on the basis of estimated revenues to be derived from all sources.
c) In situations requiring an allocation of an expenditure for Canadian programming as previously outlined in (a) and (b), the losses incurred, if any, on the sale, syndication, resale, etc. of the Canadian programming, with related party transactions being effected at no more than cost.
d) Where an expenditure by the licensee to produce or acquire a Canadian program, whose total cost of production does not exceed $100,000 for a single program or $50,000 per episode for a series program, the amortization or expensing of the net expenditure, net of recoveries from sales to related parties, as a result of the exhibition of the program by the undertaking.
e) Losses on equity investments in productions of Canadian programs with arm's-length companies.
f) Expenditures on script and concept development, excluding overhead costs.
g) Write-downs of Canadian program inventory after recognition of recoupments such as from insurance or completion bonds to bring the inventory to estimated realizable value.

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