THE BRIEF CAREER OF CARLY HENNESSEY: A LOOK AT THE ECONOMICS OF POP MUSIC.(INSTRUCTOR’S NOTE)

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THE BRIEF CAREER OF CARLY HENNESSEY: A LOOK AT THE ECONOMICS OF POP MUSIC.(INSTRUCTOR’S NOTE)

The two primary topics in this case study are the matching concept which underlies accrual accounting and types of cost behavior patterns for management decision making. The case is appropriate for upper-level accounting majors. With two sets of discussion questions, it could be used in either the first intermediate accounting course or the upper-level managerial course. Either the financial or managerial approaches to the case can be taught in two class hours. Both approaches will require about three to four hours of outside preparation by students. CASE SYNOPSIS In this case, students examine financial and managerial accounting concepts in an identifiable setting, the pop music industry. As background to the accounting issues, students get an introduction to the pop music industry through a brief look at two years in the recording life of a sixteen-year old newcomer artist. The industry is revealed through a look at the terms of recording contracts, production and promotion costs and pressures, and the music distribution system. Students can listen to several songs and see the artist’s promotional video on the Web as part of the background material. The primary financial accounting issue is how recording studios account for production and promotion costs for albums of new and untested recording artists. Students decide whether such costs should be treated as revenue expenditures and expensed as incurred or capital expenditures to be deferred to future periods. Students will discover that most new releases never approach even a break-even volume of sales which makes the likelihood of future revenues extremely unlikely. Ultimately, a recommendation is required as to when advances to the artist and the sizeable recording and promotional costs for her album should be recognized. Student activities include accessing the corporate Web site, locating corporate accounting policies regarding music promotion and production costs, researching some GAAP rules for the music industry and discovering a practical application of some basic financial accounting theory. The managerial accounting issues revolve around cost behavior patterns and break-even analysis. The issues of fixed, variable, mixed, and discretionary fixed costs are introduced. Using the industry’s average break-even level of sales, students are asked to approximate the variable costs for CDs and project what happens to variable costs and record company revenues as sales exceed the break-even level. INSTRUCTORS’ NOTES FINANCIAL ACCOUNTING ISSUES Financial Accounting Question 1 Question: In light of trends in popular music industry over the past few years, briefly discuss the likelihood of any new artist generating at least a break even level of sales for a debut album. Students should conclude from the background material in the case that it is extremely unlikely that any one new artist will be a “success”. In fact, based on the sales figures for new titles in 2001, it is considerably unlikely that new releases would even make a profit. Less than 2 percent (112 / 6455) even reached break-even. The focus here is to get students to think about the concept of materiality (as a prelude to Question 4) as it relates to expected future recoverability of deferred costs. It really isn’t necessary that students assign an exact probability to this question as long as they realize that in this industry, profitability only comes to a very few big-name artists. Most albums never even recover the upfront promotion and production costs or cash advances to the artists. Financial Accounting Question 2 Question: In your opinion, at what point during the three-year period of her contract (1999-2002) could MCA executives reliably predict the success or failure of Ms. Hennessy’s recording career? Justify your answer. This question is intended to get students to concentrate on the timing of events and when, perhaps, the future viability of a project becomes doubtful.

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