VIP Motion Case18111 Nordhoff Street, Northridge, California 91330Phone: (818)111-1111 Fax: (818)222-222Email: [email protected] Website:www.Team3Makesacase.com March 25, 2019 VIP Motion, Inc.Jane Doe CEO867 Showtime LaneHometown, Gould 12431 Dear Mr. Doe Team 3 Consultants group, has the pleasure of presenting our results of the case between you and Plex Media. Provided below is our response to the information and concerns that you have requested. This case will include information to questions that have been proposed. We will discuss the issues of the case in regards to the contract agreement.
We will review the accounting concepts such as budgeting, GAAP, revenues, and cash flows. If you have any additional questions or concerns In regards to our Case Analysis, please don’t hesitate to contact us at [email protected] or by phone at (818)111-1111. Sincerely, Team 3Team 3 consultants Group VIP Motion Case VIP MotionVSPlex MediaCase Analysis ReportInvestigation 2019 Prepared by Team 3: Lindsey Cox,Zama Felix, Anthony Santiago,Twinkle Webber, and Craig ZieglerTeam 3 Consultants Report Distributed: March 25, 2019 Prepared forJane DoeCEOVIP Motion Table of Contents Transmittal Page 1 Cover Page 2 Table of Content 3 Executive Summary 4 Introduction 5 Breach of ContractBudgetingFinancial Analysis ConclusionWork Cited Appendix Executive SummaryThis case is between VIP Motion and PlexMedia.
VIP made an offer to have exclusive rights of showing their five films at PlexMedias theaters. PlexMedia accepted this offer and the contract period of six months began. During that period there were expectations that both parties were to abide by. During this contract period, PlexMedia discovered that VIP had allowed a movie chain in Canada to show the films that they had exclusive rights too. Upon discovery, they felt VIP breached the contract agreement and demanded their money back. However, there was no disclaimer in regards to geographical limitations. Canada is a different market compared to the United States; therefore, it should not affect PlexMedias market. From our financial analysis, we discovered that PlexMedia also was in violation of meeting their obligations disclaimed in the contract. PlexMedia were not on track to meeting the contract limitations. Therefore, Both parties arguably breached the contract. In addition to discovering a contract breach, we analyzed the financial matter of the case. We do this by looking into GAAP, budgeting, revenue, and cash flows that relate to both parties. From our findings, we discovered that the total expected budget that PlexMedia should have is $32,075,000. After four months, PlexMedia shows on the end of the year audit statement they earned $5,462,500. According to the minimum contract limitations, PlexMedia would need to earn at least $17,100,000 in six months. Based on the audited amount, it would most likely not be possible to meet the expectations of the contract limitations.IntroductionThis case is between VIP Motion and Plex Media. VIP Motion is a movie production company, and Plex Media is a United States base theater chain. VIP made an offer to have exclusive rights of showing their five films at Plex Medias theaters. The contract period was said to be six months long. As part of the contract agreement, VIP set limitations on the maximum and minimum film showings at each of Plex Medias theaters. Under these terms, Plex Media accepted the offer made by VIP Motion.Under the contract period, there were expectations that both parties had to abide too. For VIP, they were too allow Plex Media exclusive rights of the five films Super fighter and SF II-V for six months. For Plex Media, they were to pay a $5,000,000 contract fee. In addition, they were to show the film Super Fighter no more than 42 times and SF II-V at least 18 times at each theater. For each Film Plex Media shows, they are required to pay $500. It was said that during the contract period that the films were also being shown at a movie chain in Canada. In this report, we will discuss a few things regarding whether or not a breach of contract occurred between both parties. We will also provide some financial analysis in terms of GAAP, cash flow and revenue. Breach In ContractIn this situation between VIP Motion and PlexMedia, the idea of whether VIP Motion breached their contract is difficult to determine because of both parties. When this contract was established, both parties should have discussed the extent to the region of where the shows could be played. Instead, PlexMedia signed the contract assuming that VIP Motion would not allow any other theaters to show the movies but VIP Motion also assumed that Plex Media would know that since they only operate in the United States, that those would be the terms of the agreement. Both parties have valid arguments as to how VIP Motion did breach but also did not breach the contract.Plex Media PerspectiveFrom the perspective of PlexMedia, when they signed the contract, they would told that they were granted exclusive screening rights for the period of the contract, which was six months. In their eyes, being told that they had exclusive screening rights means that no other theater would be allowed to screen the movies, bringing in all of the customers to their theater. There was no geographical limitations discussed in the contract, so VIP Motion breached their contract by allowing a theater from Canada to screen and advertise the movies, which were supposed to be exclusive to PlexMedia only. VIP Motion was also the one who created the contract, so if they intended to allow theaters outside of the United States to show the films, they should have addressed that in the contract. PlexMedia paid their part of the signed contract and followed all of the rules so in their perspective, VIP Motion was in the wrong.VIP Motion’s Perspective From the perspective of VIP Motion, when this contract was put into place, they did not think they needed to add the aspect of geographical locations into the contract because PlexMedia only has theaters in the United States. If PlexMedia had theaters located outside of the United States, then VIP Motion would have not allowed any other theaters to screen the films. VIP Motion states that the geographical limitation is in fact applied because PlexMedia’s exclusivity is extended only to their market, i.e. the U.S. (Coaching Slides) Since PlexMedia is only located in the United States and VIP Motion did not grant any other theaters the right to show the films inside the United States, they believe they did not breach the contract with PlexMedia.At the time of entering the contract with each other, both parties’ reasonable expectations were for PlexMedia to have the right to exclusively film all of the movies at their theaters only, and none other. Although both parties were not clear as to the geographic limitations of the contract, PlexMedia was still given exclusive rights to show the films, which they did. Exclusive rights is the right or privilege that can only be used by the person who it is granted to. (The Law Dictionary) VIP Motion did in fact breach the contract with PlexMedia because they gave PlexMedia exclusive rights to show the film. If they had wanted to only give exclusive rights in the United States, they should have included that in the contract. Contracts are interpreted as they were apparently intended by the parties at the time the contract was created. (VIP Motion Library) VIP Motion can argue that since PlexMedia is only located in the U.S. that the contract only was meant for the U.S. as the geographical location, but VIP Motion did not mention that in the contract. The contract is interpreted as that PlexMedia has full exclusive rights, with no geographical limitations, since that was not covered in the contract. Budgeted of Minimum and Maximum Revenues Super Fighter Showings (Max)$9,975,000 Super Fighters II-V Showings (Min)$17,100,000Total Showing Price$27,075,000Contract Fee$5,000,000Total Budget Expense$32,075,000 Price BreakdownThe audited statement given in the case was of the first 4 months of the contract. Therefore, for Super Fighter 8,550 shows were shown between September 1, 2006 to December 31, 2006. To find the minimum expected revenue under the contract, we need to compute the entire 6 months. To do so, we can try and determine the average of the number of shows shown per month. Take 8,550 divided by 4 which equals 2,137.5 (2,137.5 is the average number of tickets sold a month) multiply that by two and you get 4,275 tickets sold for the remaining two months ( January and February). The minimum expected revenue for Super Fighter is 4,275,000 (the first 4 months) plus 2,137,500 (the EXP Value of entire contract period equals $6,412,500. (Another way to check and verify is to divide Amount Due: 4,275,000/4=1,068,750*2 =$2,137,500.) If they showed Super Fighter 42 times at all locations they would have a total of 19,950 showings. Times that by 500 = 9,975,000. For the other four movies, the contract states that each of the four movies must be shown 18 times per theater. 18*4=72, 72*475= 34,200 showing. Of the 4 films (SF II-V), In the first four months 2,375 shows were shown. To determine the expected revenue, we subtract the contracted movies that are to be shown from the movies shown (34,200- 2,375=31, 825). From the equation, we can say that 31,825 showings have yet to be shown. To determine the expected revenue we multiply 31,825 by 500 which equals $15,912,500.Financial AnalysisGAAPThere are five general revenue recognition criterias that are established under the General Accepted Accounting Principles (GAAP). According to Investopedia an article written by Will Kenton, the five revenue recognition criteria under GAAP are:1. Identify the contract 2. Identify the contractual performance obligations3. Determine the amount of consideration/price for the transaction4. Allocate the determined amount of consideration/price to the contractual obligations5. Recognize revenue when or as the performing party satisfies performance obligationsSource: Investopedia (Kenton) Identify the ContractWe can conclude that a contract was made between Plex media and VIP Motion. VIP made an offer, which Plex media accepted. Therefore, there was a contract between the two. The offer was to have exclusive rights to showing the five movies that VIP Produced (Super Fight and SF II-V). Identify the Contractual Performance ObligationThe contract performance obligations consisted of $5,000,000 payable, $500 dollars for each film, the expected blockbuster hit Super Fighter to be shown no more than 42 times per theater, and the other four movies (SF II-V) to be shown at least 18 times each at all of Plex medias Theaters. While agreeing to these obligations of the contract Plex Media will gain exclusive rights to showing the five films. Determine the Transaction PriceAccording to Warren Averett, The ASC 606 defines the transaction price as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. (Averett) In this case, the customer is PlexMedia. The transaction price that VIP is expected to earn is the $5,000,000 contract fee. In addition, they are expected to earn $500 per each showing of the five films. The number of showings should be in accordance with the contract limitations. Allocate the Determined Amount to the Contractual ObligationsTo determine the allocated price, we must use the information provided above. Due to the contract limitations, this price can vary. However, the maximum expected value that VIP will make from the contract deal is approximately 32,075,000. We determine this from adding the $5,000,000 contract fee with the minimum and maximum contract limitations of showings per theater times $500. Recognize revenue when or as the performing party satisfies performance obligationsAccording to Warren Averett, ASC 606 states that revenue should be recognized when (or as) an entity satisfies a performance obligation by transferring a promised good or service to a customer. (Averett) In this case, revenue is distributed over time because there is a 6-month contract period. Revenue for VIP should be recognized as the cash flow comes in. For example, revenue would have been recognized by VIP when they received the 2.5 million on the date the contract was signed, September 1, 2006, when the additional contract fee of 2.5 million was earned, and January 20, 2007, When Plex Media paid $5,462,500. Realized or RealizableAccording to the CSUN business gateway coaching slides, Realized is cash that has been received and realizable is a claim to cash or a near cash item has been received, e.g., accounts or note receivables. The company giving the claim to cash must have the ability to pay. In this case, the realized revenue is the initial 2,500,000 dollars from the contract fees that VIP received. The realizable revenue from the agreement is all other cash that VIP is expected to acquire from the contract agreement. For example, the additional 2,500,000 is a realizable revenue because it was not initially received; however, VIP expects to receive the revenue in the future. The same rule applies for the revenue that VIP is expected to make from the exhibition fees. EarnedAccording to the CSUN business gateway coaching slides, earned means that you’ve delivered the merchandise or rendered the service to the customer.Should Report (12/31/06) Based on accrual basis accounting, which according to Paul Kimmel is when revenue is recognized when earned (most often when goods or services are provided). (kimmel)VIP motion at the end of the 2006-year would show the $5,000,000 contract fee and they would show the $5,462,500 taken from PlexMedia’s audited statements. Even though VIP had not receive the money shown on the audited statement yet, they would still record the revenue on the December 31, 2006 report because of accrual basis accounting.VIP Motion Cash Flow StatementFor the year ended December 31, 2006Cash Flow for Financial ActivityAccounts Receivable (Contract Fee) 5,000,000Net Cash Flow 5,000,000Cash BalancesCash at beginning of year -Cash at end of year 5,000,000Net Change in Cash for Period 5,000,000 Difference Between Cash Flows and Revenue RecognitionAccording to the coaching slides Cash flow measures the amount of cash received. They represent real increases in your bank balance that you can spend. and Revenue measures the amount that you have earned through providing goods and services to customers, regardless of whether you have received payment in cash. (CSUN Coaching Slides 11)In this case, the recognized revenue would be the contract fee plus the $500 per showing of each of their films at all of PlexMedias theaters. As stated above, over the 6-month contract period, the Max expected revenue VIP could make is $32,075,000. To calculate the minimum expected average taken from the four months given, VIP is most likely going to make around $11,825,125. (USED AVERAGE SHOWINGS PER MONTH BASED ON FOUR MONTHS TO DETERMINE FINAL 2 MONTHS).Cash flow is money that is received. In this case, it is the actual money that VIP has earned and received during the contract. From our analysis, VIP had only received the 5 million contract fee on or before the date of December 31, 2006. VIP did also receive $5,462,500 in January 2007 which is also a cash flow; however, it would not go on the December 31, 2006, statement because it was received in the following year.Recommendations Conclusion In conclusion, we have summarized that both parties (VIP motion and PlexMedia) have valid arguments that they did breach, but they also did not breach the contract. When the PlexMedia signed the contract, they were told that they were going to get a hold of exclusive screening that no theater would get, but due VIP motion to not adding the aspect of geographical limitation the screenings were also shown in Canada. VIP motion did not think it was necessary to add the geographical limitation. There were films that were given to PlexMedia to show in their movie theater that was in contract with VIP motion to screen them. We performed analysis explaining expected and actual revenues, and the flow of cash due to the movie screenings before Plex Media sent a demand to VIP motion. We performed this analysis to recognize the possible breach of the contract case.