The film industry is famous for something called “Hollywood accounting.” Simply put, this involves studios using accounting methods to hide the budgets and profits of successful films. For decades, it was suggested that this was the driving force behind Tinsel Town, but recent revelations have shown that in some cases it was actually just a Hollywood legend.

Perhaps the best proof of this is Disney’s Marvel Studios film. Ant-Man and the Wasp: Quantumania. The superhero film debuted in February last year to mixed reception and only grossed $476.07 million according to industry analyst Box Office Mojo. Studios typically receive about 50% of the revenue, meaning Disney received about $238.05 million, or $92.05 million less than its net spending on making the film, as we recently reported reported. revealed.

The cost of the film is not a speculation or estimate but a fact, which comes directly from Disney’s filings. This isn’t the kind of disclosure a studio would make if it was trying to hide or disguise its spending.

Film budgets are generally not disclosed by studios, as they tend to absorb the costs of all their productions into their overall expenses and do not detail how much they spent on each.

Like most studios, Disney does not discuss the costs of individual productions and did not respond to an opportunity for comment. This is not necessary because Quantumania was made in the United Kingdom and the production companies behind the films made there must file financial statements that reveal everything from their total costs to the number of employees they employ, the salaries they been paid and the amount of social security contributions they received. . If the production company has more than 250 employees, it must even disclose the salary difference between men and women as well as the percentage of women in its workforce.

Ironically, studios filming in the UK need to be transparent to increase profits, not opaque. Studios don’t just film in the UK due to the picturesque landscapes, lavish facilities and availability of highly skilled talent. They are filming there to benefit from the UK government’s Audiovisual Expenditure Credit (AVEC), which allows them to repay in cash up to 25.5% of the money they spend in the country.

To qualify for reimbursement, at least 10% of production costs must be linked to activities in the UK. To demonstrate this to the government, studios have set up a separate Film Production Company (FPC) in the UK for each film they make there.

The terms of the reimbursement process State that each FPC must be “responsible for the pre-production, principal photography and post-production of the film; as well as the delivery of the finished film. Studios are not allowed to hide their costs from other companies, as the terms also state “there can only be one FPC per film.”

These companies then have to file financial statements and voilà, the cost of the film is no longer a secret. Not only does this come straight from the horse’s mouth, since the companies are owned by the studios, but the data contained in the filings cannot be questioned because UK law states that it must be true and accurate. However, it’s not that simple.

First, the companies usually have code names so as not to attract fans’ attention when requesting permission to film on location. The Disney subsidiary behind Quantumania is called Pym Productions III UK in a nod to the fictional particles that allow Ant-Man to shrink.

Second, the financial statements are far from simple and while some may see this as evidence of Hollywood accounting, there is actually a very logical reason for it. This all comes down to the financing mechanism which differs slightly from film to film but generally follows a similar pattern. This starts from the start of production.

A Hollywood studio buys a script from a screenwriter and greenlights a film on that subject. If the studio decides to make the film in the United Kingdom, it then creates a subsidiary there which acquires the script from its parent company based in the United States.

Acquiring the script gives the British company the rights to make a film on the subject and the Hollywood studio pays it a small fee for production services. Under the rules, the UK company must be responsible for everything from pre-production and principal photography through to post-production, delivery of the finished film and payment for related goods and services. Next comes a little financial magic.

If the UK company makes a profit, the financial benefit to the UK government comes in the form of a reduction in its tax bill. However, if he suffers a loss, he receives a cash refund in the form of a tax credit, so the studios fund the companies in a way that makes this possible.

As shown in the diagram below, the studio buys the rights to the film from the British company but only gives it about 74.5% of the projected production cost. The remaining 25.5% is provided by the studio in the form of a loan. The loan and proceeds from the rights sale give the British company 100% of the film’s production budget, setting the stage for cash repayment.

Loans are not counted as income because they must be repaid. The British company therefore recorded a loss equivalent to approximately 25.5% of the film’s budget. It was then that the British government intervened by reimbursing this loss. Since the repayment amount is equivalent to the loan the company owes to its parent company, the money can be returned to the Hollywood studio as repayment. Thanks to these twists, the British government covers 25.5% of a film’s costs, reducing the studio’s net expenses.

This reimbursement amounted to $58.3 million (£44.5 million) for Quantumania bringing the film’s costs down from $388.4 million (£301.5 million) to a net of $330.1 million.

Importantly, marketing costs are not shown in the financial statements, as they tend to be covered directly by the studio. Likewise, revenue from theater ticket sales, merchandise and home entertainment, including streaming subscriptions, also goes directly to the studio. Data on theater ticket sales is published by Box Office Mojo, but there is no equivalent source for merchandise and home entertainment revenue. The same goes for marketing costs which are also not public since the studios do not disclose them.

If merchandise and home entertainment revenues are high enough, not only could they exceed marketing costs, but they could also cover a box office loss, meaning a film could lose money when of its theatrical release while making a profit. However, it is not possible to confirm this as the data is not public. On the other hand, there is no doubt that Quantumania made a profit even though it lost money at the box office. There is a good reason for this.

The money the studio pays for the film rights is shown as revenue in the production company’s financial statements and its expenses represent the total cost of the film. The largest component of production costs is typically reported in financial statements under the cost of sales category, while administrative expenses largely represent auditors’ fees as well as a loss or gain from currency conversions.

These maneuvers leave the British company with a very small net profit, equivalent to the fees for the studio’s production services. It is not a profit in the conventional sense because it is not generated by external income. The British company is entirely owned by the studio, so the profit is simply money that stays in its right hand rather than the left.

It is nevertheless a profit on paper for the production company behind a film which recorded losses in theaters. Likewise, other films that generated considerable profits during their theatrical release may still only show a small profit on paper. Ultimately, that’s because movie ticket revenue goes directly to the studio, leaving the British company with sole responsibility for making the film. This is not due to Hollywood’s accounting but to reimbursement terms that require it to be a film production company only. If anyone is responsible for how this appears, it’s the British government, not the studios.