September 5, 2006 International Finance Directors Conference Rome, Italy

1. Sony Pictures EntertainmentUS GAAP, Sony CAP and SPE Accounting Policies and Procedures - Training Course September 5, 2006 International Finance Directors Conference Rome, Italy

2. Agenda • Welcome and Agenda • US GAAP,Sony Corporate Accounting Policies (CAP) and SPE accounting policies and procedures • Q&A and Closing

3. Welcome and Agenda Objective • Re-fresh current US GAAP topics and gain understanding of Sony CAP and SPE accounting policies and procedures • Introduce SPE Technical Support and Compliance Group resources and links

4. AGENDA • Cash and Cash Equivalents • Accounts Receivable • Inventory • Film Costs • Broadcast Rights • Fixed Assets • Software and Website Development Costs • Investments • Investments in Unconsolidated Subsidiaries • Goodwill and Intangibles • Other Assets

5. AGENDA • Accounts Payable • Accrued Expenses and Other Liabilities • Contractual Obligations • Deferred Revenue • Debt • Equity and Retained Earnings • Revenue Recognition • Barter Revenue • Expenses • Income Taxes • Pensions • Consolidation and Financial Reporting

6. CASH AND CASH EQUIVALENTS

7. Cash and cash equivalents

8. Cash and cash equivalents Cash equivalents are investments that: • have an original maturity date of three months or less from the date of purchase • are readily convertible into a known cash amount and • are so near maturity that there is very little risk that the cash value will change If the above criteria is not met, investments should be classified as short-term or long- term investments depending on maturity Questions: • Does a three-month Treasury Bill purchased three months from maturity date qualify as cash equivalent? • Does a three-year Treasury note purchased three months from maturity date qualify as cash equivalent? • Does a three-year Treasury note purchased three years ago qualify as cash equivalent?

9. Cash and cash equivalents Answers: • Yes, because original maturity is three months from the date of purchase • Yes, because original maturity is three months from the date of purchase • No, because original maturity is three years from the date of purchase

10. Restricted Cash • Compensating balances with legal restriction as to withdrawal • Current vs. non-current classification of restricted cash: • Relate to current liabilities – Restricted cash in current assets • Relate to non-current liabilities – Restricted cash in non-current assets

11. Overdrafts • Bank overdrafts: • total of checks honored by the bank without sufficient funds in the account to cover them • should be classified as a current liability • more common outside of the the United States • overdrafts on ZBA accounts are evaluated at the “parent” account level for possible reclassification due to legal right of offset • Book overdrafts: • represent outstanding checks in excess of funds on deposit • should be classified as a current liability except for ZBA accounts which are evaluated at the “parent” account level for possible reclassification due to legal right of offset • Checks written but not Released: • Checks drawn but not released (e.g., not mailed) by the end of accounting period should not be deducted from the cash balance but should be included with accounts payable or other appropriate liability accounts

12. Questions: Should Cr balance in a/c 100230 be re-classified to current liability? Should Cr balance in a/c 100170 be re-classified to current liability? Should Cr balance in a/c 100219 be re-classified to current liability? Overdrafts

13. Overdrafts Answers: • No, because this account is ZBA but should be evaluated at the parent account level • No, because this account is ZBA but should be evaluated at the parent company account level • Depends. If there are no cash accounts at Wells Fargo which this a/c has legal rights to be offset with, then it should be re-classed to current liability.

14. Minimum Internal Controls • Responsibilities for receiving, disbursing and reconciling cash should be segregated • Bank accounts can only be opened or closed with the approval of the SPE Treasurer or Assistant Treasurer • Bank and investment statements should be reconciled to the G/L on a timely basis (before the end of the next calendar month) each month for all accounts (except for impressed accounts that should be reconciled on a quarterly basis), and reviewed by at least a Manager in the Finance Department. Any exceptions to timing of reconciliations should be pre-approved by Treasury and Technical Compliance and Support Department • All suspense accounts should be analyzed and cleared on a monthly basis and reviewed by at least a Manager in the Finance Department • Any restrictions on the availability of cash balances should be disclosed to Corporate Reporting

15. ACCOUNTSRECEIVABLE

16. Accounts Receivable

17. Recording and Classification • To be recorded when they are both measurable and earned • SOP 00-02 receivables (refer to Revenue section) • Non-SOP 00-02 receivables (refer to Revenue section) • Percentage-of-Completion Receivables should be recorded based on the ratio of current direct costs to total estimated direct costs • Long-Term Receivables – any receivable within a maturity date or expected collection date greater than one year. Should be classified as long term and discounted

18. Doubtful Accounts Specific Reserve: • Determined based upon a specific account-by-account review • Should include both billed and unbilled receivables General Reserve: • Made for the remaining pool of receivables (after deducting receivables covered by specific allowance) • Requires aging of current period customer accounts. Historical data plus current trends can be used for determination of allowance percentage for each of the categories (i.e. 1-30, 31-60, etc.) • Approval from Corporate of allowance percentage from Corporate. Needs to be revised every three years or covered as part of Balance sheet review process • Should be documented and retained

19. Sales Discounts and Reserves Questions: • How is sales returns allowance calculated and when it should be recorded? • Should the bad debt expense be recorded in operating expenses or contra-revenue? • When should sales discounts be recorded? When should an allowance for sales discounts be recorded? • Can one allowance cover both sales returns and doubtful accounts?

20. Sales Discounts and Reserves Answers: • The amount of the allowance should be a percentage of sales based on the division’s past experience and current market conditions. The allowance should be recorded at the time the associated accounts receivable are recorded • Bad debt expense should be classified as contra-revenue. It should be passed to the “producing” entity similar to distribution related expenses in order to match revenue and expenses and the producing entity/product • Sales discounts offered to customers in exchange for early payment should be recorded at the time the discount is taken. The allowance for sales discounts should be established at the time of billing to reflect the amount of potential discounts • No, two separate allowances should be established

21. Minimum Internal Controls • Accounts Receivable sub-systems, as applicable, should be reconciled to the G/L at least quarterly • Aging reports should be updated and reviewed on a monthly basis and any significant changes in the aging, past due accounts and credit balances should be investigated • The allowance for doubtful accounts, returns and other allowances should be assessed for adequacy at least quarterly and adjustments approved by the Controller or higher • All receivables should be reviewed on at least quarterly to ensure that they have been properly classified between current and noncurrent • Any employee loans are generally prohibited. Exceptions must be approved by SPE General Counsel

22. INVENTORY

23. Inventory

24. Definition and Acquisition Costs • Purchased or manufactured items for the purpose of resale including but not limited to video cassettes, DVD’s, blue-ray disks, packaged software/games, etc • Acquisition costs = invoiced cost + total of all incidental costs (e.g., freight-in, insurance, duty, etc.) – purchase returns and allowances • Receiving, inspection, storage, handling and interest costs are not included in acquisition costs • Incidental costs that are less than 3% of total purchased inventory or manufacturing costs may be excluded from acquisition costs

25. Valuation • Inventory shall be valued at standard full absorption cost (full costing). Includes direct materials, direct labor, both variable and fixed manufacturing overheads • Cost variances (the differences between standard costs and actual costs, or previous standard costs and current standard costs) shall be allocated between inventory and costs of sales. Total net variances less than 1% of total manufacturing cost or total purchasing cost may be charged or credited against cost of sales. This is a Sony Corporation policy based on materiality

26. Valuation • Inventory shall be valued at the lower of cost or market. “Market” refers to either net realizable value (NRV) or repurchasing cost, defined as follows: • Net realizable value = (Net selling price) – (Direct sales expenses) • Repurchasing cost is the “actual purchasing unit price” or “contract unit price” at the time of valuation • The following limits are placed on “market”: • Ceiling – selling price minus estimated cost of completion and sale • Floor – selling price minus estimated cost of completion and sale, and a normal gross profit

27. Valuation Example of applying the “ceiling” and “floor” tests:

28. Valuation • Establish inventory reserve for slow-moving items: • Reserve is established based on past returns experience and current and expected market conditions • Once an inventory item has been written down, this lower value is considered cost for future comparisons with “market” • Any purchases or sales of inventory from/to SPE entities (intercompany) and Sony affiliates should be identified and reported to the Home Office for elimination

29. Minimum Internal Controls • Physical inventories each half-year or cycle counts on a rotational basis should be performed and reconciled to the inventory system and G/L • Inventory held by third parties should be reported or confirmed by the third party and reconciled to the inventory system and G/L at least annually • NRV test should be performed at least quarterly • Obsolescence reserves or write-offs should be reviewed and approved by management in accordance with COFA

30. FILM COSTS

31. Film Costs

32. Definitions • Statement of Position 00-2 (SOP 00-2), Accounting by Producers or Distributors of Films • Film - feature films, television series, television specials, on any medium (e.g. film, videotape, digital) • The costs of producing a film and bringing that film to market consists of film costs, participation costs, exploitation costs, and manufacturing costs

33. Definitions • Film costs – Direct negative costs, allocated production overhead, and capitalized interest (if applicable) of physical production of film or television properties • Participation costs – parties involved in the production of a film may be compensated in part by contingent payments based on the financial results of a film pursuant to contractual formulas (participations) and by contingent amounts due under provisions of collective bargaining agreements (residuals). Such parties are collectively referred to as participants, and such costs are referred to collectively as participation costs. Participations may be given to creative talent, such as actors and writers, or to entities from whom distribution rights are licensed

34. Definitions • Exploitation costs – all direct costs (including marketing, advertising, publicity, promotion, and other distribution expenses) incurred in connection with the distribution of a film • Manufacturing costs - costs of manufacturing or duplicating products, including film prints, videocassettes and digital video discs. Not included in film costs • Film prints – those materials, produced on behalf of a film distributor for delivery to a theatre or other similar venue, that contain the completed audio and video elements of a film. Such materials are used by the theatre or other similar venue to exhibit the film to its customers

35. Definitions • Ultimates represent the estimated lifetime revenues of the exhibition or sale of a film or television product in all markets and territories, including revenues from the sale of title-related products • Ultimates are used to determine the amount by which film costs should be amortized each accounting period

36. Capitalization of Film Costs • Should be recorded as a non-current asset • Film costs consist of 1) the production or “negative” costs of a film or television product, including direct production costs such as ATL and BTL payroll, set construction, wardrobe, sound, postproduction costs, etc. 2) development costs that are directly related to a title, and 3) allocated production overhead • Production overhead includes allocable costs of individuals or departments with exclusive or significant responsibility for production of films. Production overhead should not include G&A costs, the costs of certain overall deals • Overall deals (e.g. the exclusive right to a writer’s creating product) should not be included in film costs unless costs can be directly associated with the acquisition, adaptation or development of specific projects • Interest related to production of a film can be capitalized. SPE’s practice – not to capitalize the interest

37. Capitalization of Film Costs • If a project is not expected to be ultimately used in the production of a film or television property, a loss should be recorded immediately • Any project that has not been “set for production” within three years from its capitalization should be expensed • A property is set for production when (a) management has implicitly or explicitly committed to fund the production, i.e. greenlight (b) the property has entered active pre-production and c) principal photography is set to start within six months

38. Capitalization of Film Costs • Episodic television series costs can be capitalized only to the extent of revenue contracted for the respective episode until its future secondary market revenues can be estimated. An entity should expense as incurred film costs in excess of this limitation on an episode-by-episode basis, and an entity should not restore such amounts as film cost assets in subsequent periods.  An entity should expense all capitalized costs (including set costs) for each episode as it recognizes the related revenue for each episode. Once secondary market revenues can be estimated, costs may be capitalized to the extent supported by the ultimates • In cases of an episodic television series over multiple seasons, where secondary market revenue can be estimated, the series can be counted as a single film in calculating amortization

39. Capitalization of Film Costs Example – Accounting for costs of episodic television production prior to the establishment of secondary market revenue estimates Assumptions: • An episodic TV series is in first year of production • Secondary market revenue estimate – none • Cost of production, per episode after the first episode - $500,000 (assume that the most of the set costs were accounted for as part of the first episode) • Exploitation costs, per episode - $5,000 • Estimated ultimate revenue per episode: contracted $200,000

40. Amortization of Film Costs • Individual-film-forecast-computation method • Individual-film-forecast-computation method is calculated as: • Change in amortization due to change in ultimates – charge or credit to income statement Actual revenue for current period x Unamortized film costs Future ultimate revenue starting from Beginning of current fiscal year

41. Amortization of Film Costs Example - Illustration of the Individual-Film-Forecast Method of Amortization, for a Film in Its Initial Year of Release Assumptions: • Film cost - $50,000 • Estimated ultimate revenue - $100,000 • Actual revenue earned in Year 1 - $60,000 • Estimated ultimate participation costs - $10,000 Question 1 – What is film cost amortization in Year 1? Question 2 – What amount of participation costs is accrued in Year 1?

42. Amortization of Film Costs • Film cost amortization in Year 1: $60,000 earned revenue * $50,000 film cost = $30,000$100,000 ultimate revenue • Participation costs accrued in Year 1: $60,000 earned revenue * $10,000 ultimate participation costs = $6,000$100,000 ultimate revenue

43. Amortization of Film Costs Example - Illustration of the Individual-Film-Forecast Method of Amortization, for an Episodic Television Series Question 1 – What is the amount of amortization for season 4 and 5? Question 2 – What is the amount of accrual of participation costs for season 4 and 5? Assumptions: • An entity produces and distributes an episodic television series. Five seasons of the series are ultimately produced. • The entity's fiscal year end corresponds directly with the completion of each production season. • The beginning of Season 4 is when secondary market revenue estimates are initially established. • Costs of production are the following: • Seasons 1 to 3 - $36,000 (fully expensed prior to Season 4) • Season 4 - $16,000 • Season 5 - $18,000

44. Amortization of Film Costs Assumptions (cont’d): • Earned and remaining ultimate revenues are the following: As of Season 4 Earned and reported in Season 4 $  8,000 Earned and reported in Season 5 N/A Remaining ultimate revenue, Seasons 1 to 4 $40,000 Remaining ultimate revenue, Season 5       N/A $48,000 As of Season 5 Earned and reported in Season 4 N/A Earned and reported in Season 5 $11,000 Remaining ultimate revenue, Seasons 1 to 4 $40,000 Remaining ultimate revenue, Season 5 $10,000 $61,000 •   Ultimate participation costs are as follows: As of Seasons 1 to 3 $       0 As of Season 4 $2,000 As of Season 5 $3,000

45. Amortization of Film Costs • Amortization of series costs: Season 4 $8,000/$48,000 x $16,000 = $2,667 Season 5 $11,000 /$61,000 x $31,333 = $5,650 • Accrual of participation costs: Season 4 $8,000/$48,000 x $2,000 = $333 Season 5 $11,000/$61,000 x $2,667 = $481

46. Ultimate Revenues Most Properties • Revenues should be estimated for up to the ten-year period following the initial release for non-catalog and non-episodic television series properties Episodic Television Series • Revenues should include estimates of revenue over a period not to exceed ten years from the date of delivery of the first episode or, if still in production, five years from the date of delivery of the most recent episode, if later. Revenue estimates for secondary markets should be included only if an entity can demonstrate through its experience or industry norms that the number of episodes already produced, plus those for which a firm commitment exists and the entity expects to deliver, can be licensed successfully in the secondary market

47. Ultimate Revenues Catalog Properties • Revenues for films acquired for the film library should be estimated over a period of up to twenty years from acquisition date Film-Related Products • Revenues from licensing deals for the marketing of film-related products should be included only if either a) a contract for a nonrefundable amount exists or b) there is a history of revenues from similar deals. In the case of film-related product sales revenues, revenues should be included only if there is a history of revenues from similar products for similar types of films.

48. Valuation of Film Costs • Film costs must be recorded at the lower of cost or net realizable value (NRV). The fair value of the film should be evaluated using discounted cash flows. In cases where the fair value of a film is expected to be less than its unamortized film costs, the film must be written down to fair value, with the difference recorded as a loss. In no case can a film’s recorded value be written up Subsequent events • Need for a write-down occurred after the date of the balance sheet but before issuance of financial statements – film costs have to be adjusted for the write-down

49. Minimum Internal Controls • NRV testing should be performed at least quarterly for all significant titles • Amortization expense should be reconciled from the sub-system/schedule to the G/L quarterly • “Catalog” balances should be reviewed at least quarterly to determine all exploitation costs have been expensed as incurred • Production overhead costs should be reviewed annually to determine a) that capitalized costs are still appropriate and b) whether any portion of non-capitalized overhead costs should be capitalized • Capitalizable overhead should be allocated on a by-title basis at least quarterly • Ultimates should be prepared/updated for all significant titles at least quarterly in consultation with operating management

50. BROADCASTRIGHTS