Hollywood Accounting

"Darling! This is the Industry! The really creative people are the accountants. A big studio got over half the profit, after setting breakeven at about three times the cost, taking twenty-five percent of income as an overhead charge, and taking thirty percent of income as a distribution charge, plus rental fees, and prime interest on what they advanced."

—John D. MacDonald, Free Fall in Crimson

"Well, it's like stupid points. Stupid to take the points. "Won't be any net profits?" You sit there with your points going, 'Eeeh, eeh, eeh, eeh, eeh.'"

—Eddie Murphy explaining why he called net points "monkey points"

Hollywood Accounting is how a production studio weasels out of paying royalties or anything else based on a percentage of profit: just over-estimate your expenses, and bingo, there is no profit, or at least a lot less of it - at least on paper, even if the gross reaches into the billions. The "expenses" are charged to a separate entity or aspect of the filmmaking process, such as marketing, even though both entities involved are owned by the same film studio. So the studio basically "charges" itself "$100 million" in expenses, pays itself, and avoids having to claim that it made any gross profits. Some really outrageous cases have led to lawsuits.

For this reason, the smart actors in Hollywood will insist on getting a percentage of "gross points" in their contract, i.e. the money directly made before the studio profits are calculated.

That Other Wiki has a more in-depth article on the subject found here.

See also Box Office Bomb where the movie makes low gross revenue for real, not just on paper.

Examples of Hollywood Accounting include:

Film

• Warner Bros' Batman, despite earning $253 million at the box office, posted a $36 million loss when the accounting was done. According to WB's formula, the studio would have had to take in an additional $150 million before the movie could begin turning a profit. Many criticized the production company for using a "rolling break-even point" to justify the film's losses. According to the Los Angeles Times (who did their own investigation), the film still should have made close to $90 million in profit by the time all expenses were paid.
• Battlefield Earth was the last film produced by Franchise Studios, as it turned out they made a living out of "overbudgeting" bad movies and keeping the excess as profit. After this stinker the FBI closed in and reclaimed the 100 million...er, 75 million...er, 40 million spent.
• Paramount Pictures once tried to argue that it didn't have to pay royalties to screenwriter Art Buchwald for a script idea that he claimed was stolen from him. Buchwald wrote a treatment for a story idea in 1982, and pitched it to Paramount brass as a possible comedy vehicle for Eddie Murphy. Paramount shelved the treatment after several failed attempts at making a script out of it, but pulled it out again in 1987, and ended up developing the comedy Coming to America based on said treatment (with Murphy, who was starring in the film, given sole story credit). Buchwald sued Paramount, and a jury agreed that Paramount breached their contract and the two stories were remarkably similar. Paramount subsequently argued that it spent so much money on marketing and development that they made no net profit. The courts then said Paramount's formula for calculating profit was "unconscionable", and the production company (fearing a loss on appeal and a wave of lawsuits by other authors) ended up settling with Buchwald out of court.
• In 2007, Paul Haggis sued the producers of the 2004 film Crash for not giving him $4.7 million in unpaid royalties. Studio executives argued that the movie (which was made for $7.5 million, and grossed ten times that amount at the box office) wasn't profitable when the accounting was done. The co-writer (Bobby Moresco) and co-producer (Cathy Schulman) also sued for royalties.
  • The film's producer, Bob Yari, later went bankrupt over the suit (along with a number of money-losing projects he self-distributed). He was later sued in 2012 for the same thing over the same movie.
• Novelist Winston Groom got nothing from the Forrest Gump film, and thus refused to sell the screenplay rights for the sequel. Even if they fixed it, it's probably too late now - Eric Roth was working on it anyway, but handed it in one day before 9/11, at which point they just gave the hell up.
• Sigourney Weaver was told that the studio lost money on the original Ghostbusters, despite it being one of the most successful films ever made, and thus she wasn't going to get any royalties from it. Supposedly she showed up with an army of lawyers and accountants to check the books, and the studio offered her an exorbitant amount of money to appear in the sequel to keep her from looking at them.
• Harry Potter and the Order of the Phoenix came under fire mid-2010 after an accounting report was leaked.
• New Line Cinema was sued over The Lord of the Rings by Peter Jackson (leaving The Hobbit in Development Hell for several years), the Tolkien estate, and over a dozen actors.
• The cast and producers of the film My Big Fat Greek Wedding (with the exception of lead actress Nia Vardalos) ended up going to court to sue Playtone Pictures, HBO and Gold Circle Films for unpaid profits. The studios claimed the film lost $20 million, despite being one of the highest-grossing independent films of all time (and a record-holder for highest-grossing independent for several years).
• Ben Affleck agreed to take his salary for Pearl Harbor from the net profits. Oops.
• Gary Oldman has yet to be paid for Léon: The Professional.
  • Nice irony, that.
• According to David Prowse (the man in Darth Vader's suit), Lucasfilm still hasn't paid him residuals for his work in Return of the Jedi, despite the film earning over $570 million at the box office (not counting home media releases), against a $32.5 million budget. As one commentator put it:

Imagine that George Lucas decided to go to New York tomorrow to talk about Return of the Jedi in 3D. And he stayed at the Ritz Carlton, ordered sushi at 3 a.m. from room service and used the hotel phone to call Bahrain to make prank calls. 26 years after the release of the film, the accountants at Lucasfilm are going to charge $86,000 to the costs of (Jedi)...if Lucas utters the words Star Wars and he's spending money, they're putting it on the red line for one of those films.

• This was the origin of the Stan Lee vs Marvel Enterprises lawsuit: Stan's contract said he was entitled to 10% of Marvel's profits from their movies ... and Marvel's share of the net from Blade turned out to be zero. When Marvel got wise and started asking for a percentage of the gross, they tried to claim that Stan's contract didn't cover that. A court of law disagreed.
• Paramount has never paid any of the Star Trek actors for the use of their image in any of the merchandising that has been sold for the series, claiming that it has lost money in all of them. It is fairly impressive that they keep producing all this merchandise that does nothing but lose money, isn't it?

Live Action TV

• Non-film example: J. Michael Straczynski got screwed out of his cut of the profits from Babylon 5. Fortunately, he was Doing It for the Art anyway.

JMS: The show, all in, cost about $110 million to make. Each year of its original run, we know it showed a profit because they TOLD us so. And in one case, they actually showed us the figures. It's now been on the air worldwide for ten years. There's been merchandise, syndication, cable, books, you name it. The DVDs grossed roughly half a BILLION dollars (and that was just after they put out S5, without all of the S5 sales in). So what does my last profit statement say? We're $80 million in the red. Basically, by the terms of my contract, if a set on a WB movie burns down in Botswana, they can charge it against B5's profits.

• • Harlan Ellison, in a clip from his film "Dreams With Sharp Teeth", also discusses his involvement with Babylon 5, notably when Warner Brothers asked him to provide clearance rights for an interview he did during the show's production for inclusion on the DVD set. When he asked what he would be paid, the studio told him that they didn't have enough money in the budget to pay him royalties (in addition to telling him that he'd have to go buy a copy of the DVD set in a store because they couldn't justify sending him a set).
• In 2010, Rysher Entertainment, who produced Nash Bridges, claimed it didn't have to pay royalties to lead actor Don Johnson because they never made a profit from the show and didn't have to share anything with the actor. Johnson, whose contract stipulated he owned half the show's copyrights, sued the company and won $23 million.

Other

• "Hollywood accounting" is what led to the Writer's Guild of America strike in 2007. The WGA (representing hundreds of film and television writers), in a nutshell, decided to strike because the Alliance of Motion Picture and Television Producers were deadset against increasing DVD royalties for said writers. At the end of the strike, the WGA accepted a minor increase in royalties, far below what they had originally set out to achieve.
• The Stop Online Piracy Act/Protect-IP Bill backlash in 2012 resulted in the legal sector criticizing the Motion Picture Association of America for creative accounting that claimed Hollywood lost $58 billion in profits due to online piracy. One legal report showed that the actual amount of money lost to piracy was less than 1% of the original claim, that the only real thing piracy affected was redistribution of disposable income for other purposes, and that the notion that money not spent on movies disappears from Hollywood wasn't true.