How do you evaluate your royalty accounting operations? Listed below are the questions we ask when looking at royalty operations;

1. Is all royalty basis revenue accounted for?
2. Are statements and payments owed from licensed rights chased down?
3. Are the signed contract’s royalty rules reflected in the royalty software?
4. Have the calculations for a sample set of contracts been verified?
5. Are copies of royalty contracts stored as PDF files?
6. Are the royalty data files backed up to two different physical locations?
7. Who reviews new royalty contracts entered into your royalty software?
8. Have royalty contracts been created for all products?
9. Do you have a tax identification number for all royalty recipients?
10. How many royalty recipients lack a valid mailing address?

1. Is all royalty basis revenue accounted for?

Publishers receive income from many sources in addition to book sales. This may include translations rights, permission fees, special sales and co-publication agreements.  All of this income must be allocated to the corresponding title.

2. Are statements and payments owed from licensed rights chased down?

In 2008 an arbitrator awarded an author $209,000. During the course of the arbitration it was revealed;

“In a stunning e-mail dated October 18, 2006, an ……. employee admits, “We have no system in place for tracking inbound Royalty Statements from translation rights deals. We do not go looking for missing statements from our Translation rights customers. No one is responsible for the collections on either open contracts nor balances indicated on Royalty statements.” Another employee adds, “in many cases, we have not received statements from the foreign publishers per the contracts.” (Source: The Authors Guild Blog & Publishers Weekly).

Note: The Easy Royalties software has an optional rights marketing module that tracks inbound royalty statements and amounts due.

3. Are the contract’s royalty rules reflected in the royalty software?

Every clause in the written contract should be reflected in your royalty software’s contract. If you don’t pay royalties on sales made at below cost, don’t withhold a reserve on digital book sales, or pay a bonus for having a title make the Times best seller list those clauses should be reflected in the your royalty software.

If you don’t follow this rule your company may be overpaying or underpaying royalties.

4. Have the calculations for a sample set of royalty statements been verified?

Manually checking the calculations for a selected sample of contracts will tell you if the contracts were setup properly in your royalty software.

5. Are copies of royalty contracts stored as PDF files?

Storing scanned copies of contacts as PDF files makes them easily assessable. You don’t have to worry about them lying on an editor’s disk, being misplaced or damaged.

6. Are the royalty data files and PDF contract files backed up to two different locations?

Critical data should be backed up to two different physical locations.

7. Who reviews new contracts entered into your royalty software?

Newly created contracts in your royalty software should be checked for errors. Are the royalty rules, royalty rates and royalty recipients correct? Do they make sense?

Note: The Easy Royalties software has a contract summary report that shows the relevant information for each royalty contract – payees, shares, royalty rules, escalators and linked titles.

8. Are royalty contracts entered for all products that accrue royalties?

Before royalty statements are generated the organization should confirm that every royalty earning product published/created after the last royalty period ended is linked to a royalty contract.

9. Do you have a tax identification number for all royalty recipients?

In the United States royalty payees are required to report royalty recipients that receive $10 or more in royalty income to the Internal Revenue Service.

10. How many royalty recipients lack a valid mailing address?

In America many states have an unclaimed property fund. If a royalty recipient cannot be located within a specific period of time; in New York its three years, you may be required by law to forward those funds to the state.

Royalty and licensing expenses are usually tracked with four royalty expense accounts;

 1. Royalty Expenses (consolidated). Many organizations use a roll-up account to summarize the balances of their royalty sub-accounts.

 2. Royalty Expense. This account tracks the royalty expenses incurred during the period.

 3. Royalty Advance Write-off. This account is used to expense royalty advances (payments issued against future earnings) that are written down to their net realizable value. This can occur if a project is canceled or if the expected royalties from sales will not cover the outstanding balance of the royalty advance AND the recipient of the advance is not expected to return the unearned balance of the advance.

 4. Unearned Royalties (or Royalty Write-off). This account is used to write-down the value of the unearned royalties balance sheet account. Unearned royalties occur when a company has overpaid royalties to the royalty recipient. This can happen when returns for a period exceeds sales – thus resulting in a negative royalty expense. If the company does not expect future royalty earnings to cover the royalty recipient’s negative balance (i.e. the unearned royalties) the balance is written down to its net realizable value.

 Analysis

 The use of four expense accounts allows a publisher to present royalty expenses as a single line item and track the value of royalty expenses, advances written off, and excess royalties paid.

 Example 1:

 Royalty Expenses (consolidated) $100,000

 Unconsolidated:

•  Royalty Expense……………………..$95,000
• Royalty Advance Write-Offs…………$1,000
• Unearned Royalties………………….$4,000

The royalty expense amount for a period should match the total royalty earnings reported by your royalty software for that same period.

 A high royalty advance write-off could indicate that sales estimates are too high, as most publishers aim for an advance that is less than or equal to expected royalties on the first year’s sales.

 A high unearned royalties expense may indicate that the publisher’s (or licensee’s) reserve for returns is too low. A reserve for returns clause in a royalty contract allows the payee to withhold; usually for one period, a percentage of royalties earned to cover returns expected during the following royalty period.