THE BIG PICTURE MV-Link Productions (MV-Link) is a producer and distributor of motion picture films. It specializes in action adventure films popular with males, mostly in the teen and young adult market. While it has only been in business for 7 years, it has produced several moneymaking hits as well as many more minor "B" films that are shown on cable networks and through video rental stores. MV-Link has recently completed the production of five new films. This set of five films contains one film (“Kombat Rex”) that marketing research indicates will be a top box office hit. The other four (KR II, KR III, KR IV, KR V) are "filler" films that will be bundled with the hit and licensed to theatres for exhibition. To receive access to the hit, theatres must agree to show all films a minimum number of times. In July 2006, MV-Link entered into an exclusive contract with PACE Theatres, Inc. (PACE), a large theatre chain with approximately 475 theatres across the United States. This contract provided in part as follows: Agreement: PACE is granted the right, license, and permission to display the five films listed herein during the contract period. In consideration of this contract, MV-Link will receive: 1. $5,000,000, payable $2,500,000 upon contract signature and $2,500,000 on September 1, 2006. 2. $500 for each film showing in each location. Contract period: The contract period shall be the six months commencing on September 1, 2006. Limitation on screenings: PACE agrees to show Kombat Rex no more than 42 times per theater and the four accompanying films (KR II, KR III, KR IV and KR V) no fewer than 18 times each per theater. Exclusivity: PACE shall have exclusive screening rights during the contract period. MV-Link acknowledges that an integral inducement in consideration of the contract is PACE’s interest in being the sole source, without competition from other theaters in the market, during the contract period. At the signing of the contract, PACE paid $2,500,000 of the $5,000,000. PACE sent checks to MV-Link for $2,500,000 on September 1,2006, and $5,462,500 on January 20, 2007, along with an audited statement detailing the number of showings as of December 31, 2006. The following is a summary of that information: Film Number of Showings Amount Due Kombat Rex 8,550 $4,275,000 KR II-V 2,375 1,187,500 10,925 $5,462,500 In March 2007, MV-Link received a demand notice from PACE that all monies previously paid were to be returned or they would file a lawsuit. In their letter, they enclosed a newspaper clipping from a movie theatre in Toronto, Canada that was advertising the set of five films for showing the second week of February 2007.  Copyright 2009, Dr. Janice Bell and Dr. Melanie Williams Required Write a report using the report writing guide from the co ...

1. MV-Link Productions (MV-Link) is a producer and distributor
of motion picture films. It specializes in action
adventure films popular with males, mostly in the teen and
young adult market. While it has only been in
business for 7 years, it has produced several moneymaking hits
as well as many more minor "B" films
that are shown on cable networks and through video rental
stores.
MV-Link has recently completed the production of five new
films. This set of five films contains one film
(“Kombat Rex”) that marketing research indicates will be a top
box office hit. The other four (KR II, KR III,
KR IV, KR V) are "filler" films that will be bundled with the hit
and licensed to theatres for exhibition. To
receive access to the hit, theatres must agree to show all films a
minimum number of times.
In July 2006, MV-Link entered into an exclusive contract with
PACE Theatres, Inc. (PACE), a large
theatre chain with approximately 475 theatres across the United
States. This contract provided in part as
follows:
Agreement: PACE is granted the right, license, and permission
to display the five films listed herein during
the contract period. In consideration of this contract, MV-Link
will receive:

2. 1. $5,000,000, payable $2,500,000 upon contract signature and
$2,500,000 on September 1,
2006.
2. $500 for each film showing in each location.
Contract period: The contract period shall be the six months
commencing on September 1, 2006.
Limitation on screenings: PACE agrees to show Kombat Rex no
more than 42 times per theater and the four
accompanying films (KR II, KR III, KR IV and KR V) no fewer
than 18 times each per theater.
Exclusivity: PACE shall have exclusive screening rights during
the contract period. MV-Link acknowledges
that an integral inducement in consideration of the contract is
PACE’s interest in being the sole source,
without competition from other theaters in the market, during
the contract period.
At the signing of the contract, PACE paid $2,500,000 of the
$5,000,000.
PACE sent checks to MV-Link for $2,500,000 on September
1,2006, and $5,462,500 on January 20,
2007, along with an audited statement detailing the number of
showings as of December 31, 2006. The

3. following is a summary of that information:
Film Number of Showings Amount Due
Kombat Rex 8,550 $4,275,000
KR II-V 2,375 1,187,500
10,925 $5,462,500
In March 2007, MV-Link received a demand notice from PACE
that all monies previously paid were to be
returned or they would file a lawsuit. In their letter, they
enclosed a newspaper clipping from a movie
theatre in Toronto, Canada that was advertising the set of five
films for showing the second week of
February 2007.
Required
Write a report using the report writing guide from the course
website.
In preparing your report remember to review LDC financial
accounting concept 5 (cash flow vs. GAAP
income), financial accounting concept 8 (understanding the
timing of revenue recognition), management

4. accounting concept 5 (understanding how to budget revenue),
and business law concept 1 (offer and
acceptance of contracts; enforcement of contracts: interpreting
the parties’ intent).
Note: To the extent that you may recognize any antitrust issues
(which we would not expect) please
ignore them for purposes of this analysis.

5. THE BIG PICTURE LIBRARY
Statement of Financial Accounting Concepts
Statement 5. Recognition and Measurement in Financial
Statements of Business Enterprises
Financial Accounting Standards Board
GUIDANCE IN APPLYING CRITERIA TO COMPONENTS OF
EARNINGS
CON5, Par. 78
78. This section discusses the need for and provides further
guidance in applying the fundamental
criteria in recognizing components of earnings. Changes in net

6. assets are recognized as components of
earnings if they qualify under the guidance in paragraphs 83-87.
Certain changes in net assets
(discussed in paragraphs 42-44 and 49-51) that meet the four
fundamental recognition criteria just
described may qualify for recognition in comprehensive income
even though they do not qualify for
recognition as components of earnings based on that guidance.
CON5, Par. 79
79. Further guidance in applying the recognition criteria to
components of earnings is necessary
because of the widely acknowledged importance of information
about earnings and its components as a
primary measure of performance for a period. The performance
measured is that of the entity, not
necessarily that of its management, and includes the recognized
effects upon the entity of events and
circumstances both within and beyond the control of the entity
and its management.48 The widely
acknowledged importance of earnings information leads to
guidance intended in part to provide more
stringent requirements for recognizing components of earnings
than for recognizing other changes in
assets or liabilities.
CON5, Par. 80
80. As noted in paragraph 36, earnings measures the extent to
which asset inflows (revenues and
gains) associated with substantially completed cash-to-cash
cycles exceed asset outflows (expenses and
losses) associated, directly or indirectly, with the same cycles.
Guidance for recognizing components of
earnings is concerned with identifying which cycles are

7. substantially complete and with associating
particular revenues, gains, expenses, and losses with those
cycles.
CON5, Par. 81
81. In assessing the prospect that as yet uncompleted
transactions will be concluded successfully, a
degree of skepticism is often warranted. Moreover, as a reaction
to uncertainty, more stringent
requirements historically have been imposed for recognizing
revenues and gains than for recognizing
expenses and losses, and those conservative reactions influence
the guidance for applying the
recognition criteria to components of earnings.
CON5, Par. 82
82. The guidance stated here is intended to summarize key
considerations in a form useful for
guidance for future standard setting—guidance which also is
consistent with the vast bulk of current
practice. The following paragraphs provide guidance separately
for recognition of revenues and gains
and for expenses and losses as components of earnings.
Revenues and Gains
CON5, Par. 83

8. 83. Further guidance for recognition of revenues and gains is
intended to provide an acceptable level
of assurance of the existence and amounts of revenues and gains
before they are recognized. Revenues
and gains of an enterprise during a period are generally
measured by the exchange values of the assets
(goods or services) or liabilities involved, and recognition
involves consideration of two factors (a) being
realized or realizable and (b) being earned, with sometimes one
and sometimes the other being the more
important consideration.
a. Realized or realizable. Revenues and gains generally are
not recognized until realized or
realizable. Revenues and gains are realized when products
(goods or services), merchandise, or other
assets are exchanged for cash or claims to cash. Revenues and
gains are realizable when related
assets received or held are readily convertible to known
amounts of cash or claims to cash. Readily
convertible assets have (i) interchangeable (fungible) units and
(ii) quoted prices available in an active
market that can rapidly absorb the quantity held by the entity
without significantly affecting the price.
b. Earned. Revenues are not recognized until earned. An
entity's revenue-earning activities involve
delivering or producing goods, rendering services, or other
activities that constitute its ongoing major or
central operations and revenues are considered to have been
earned when the entity has substantially
accomplished what it must do to be entitled to the benefits
represented by the revenues. Gains
commonly result from transactions and other events that involve
no "earning process," and for
recognizing gains, being earned is generally less significant

9. than being realized or realizable.
Business Law concepts
Interpretation of contracts
General rules of construction
Courts look to contracts to determine the parties’ obligations.
Most of this is based on the language of the
agreement, however sometimes there are issues not mentioned
or ambiguously addressed in a contract.
What to do if there is a dispute about a topic not addressed (or
ambiguously addressed) in the contract?
Courts follow general rules in construing contracts called “rules
of construction.” Some of these rules are
articulated in cases, some are intuitive but few are codified in
statute. It makes it difficult, sometimes, for
business people to make business decisions. The more you
understand how courts tend to approach
contractual disputes, the more effective you will be at managing
resources. Here are a few rules of
construction that may apply to Adventure Films. Think about
how they affect your analysis of the case.
Use them (cite to specific sources) in your analysis of the case.
Courts seek to preserve, not invalidate agreements

10. Courts in general try to preserve contracts, even if there is a
flaw in the agreement. There are important
reasons for this: courts want parties to a contract to rely on the
contract. Business would be harmed if
everyone who entered a contract thought that with a sharp
enough lawyer they could find some defect
that would get the contract invalidated. Commerce relies on the
premise that parties will do what they
have agreed to do, and that if not, there will be some remedy at
law. If you need an illustration of this
point, think of any country in which political power, wealth or
corruption mean that getting legal rights
enforced depends on your political clout rather than on the law.
Look at how much foreign investment
gets made in such countries. Look at the overall wealth of the
citizens of such countries. It is not hard to
conclude that the American legal system, despite its flaws,
helps the economy by ensuring that the
judicial system enforces legal rights.
This brings up an important point with students studying
business law: there is a tendency to seize on any
contractual defect and conclude that entire agreements are not
binding. This is a serious error. For one
thing, it’s sloppy; sometimes students are concluding that
contracts are not binding in order to avoid
completing their analysis ( e.g. “They didn’t mention xxx!
That’s wrong! There’s no contract!”). Some of it
is naïve: there are few contracts that do not have some
ambiguities; invalidating all of them would mean
that there were virtually no legally binding agreements. Some of
it is well-intentioned but overzealous:
when you first learn about business law even good students
often want to apply it literally. Avoid this
tendency and recognize that only in cases where courts conclude

11. that the parties never, truly, agreed will
they invalidate a contract based on missing or ambiguous
contractual terms. Courts are not “contract
police” rather “contract enforcers.”
Here are some references that should aid your analysis:
In DeSantis v. Wackenhut Corp., 793 S.W.2d at p. 677, the
court observed that "the most basic policy of
contract law . . . is the protection of the justified expectations
of the parties. The parties' understanding of
their respective contractual rights and obligations depends in
part upon the certainty with which they may
predict how the law will interpret and enforce their agreement.”
“The law does not favor but leans against destruction of
contracts because of uncertainty; it will, if feasible, so
construe agreements as to carry into effect (the) reasonable
intention of parties if that can be ascertained.” Bohman v
Berg (1960) 54 Cal 2d 787.
Courts construe a contract’s meaning to be consistent with the
parties’ intention
The central rule of contractual analysis is to interpret based
upon the parties’ intent on entering the
agreement. It is central to legal analysis to recognize that courts

12. do not enforce agreements based upon
what the judge thinks is fairest, “right” or best. The judge was
not a party to the agreement and his or her
opinion is irrelevant on this issue. Instead, interpret contracts to
most consistently enforce the parties’
reasonable expectations. The judge’s job (and your job in this
assignment) is to figure out what the
parties intended and to interpret the contract consistent with
that intent.
Here is some authority for this proposition:
The contractual meaning “is determined by objective
manifestations of the parties' intent, including the
words used in the agreement, as well as extrinsic evidence of
such objective matters as the surrounding
circumstances under which the parties negotiated or entered into
the contract, the object, nature and
subject matter of the contract, and the subsequent conduct of the
parties." Morey v. Vannucci (1998) 64
Cal.App.4th 904, 912.)
“The fundamental goal of contractual interpretation is to give
effect to the mutual intention of the parties.
The mutual intention to which the courts give effect is
determined by objective manifestations of the
parties' intent, including the words used in the agreement, as
well as extrinsic evidence of such objective
matters as the surrounding circumstances under which the
parties negotiated or entered into the contract;
the object, nature and subject matter of the contract; and the
subsequent acts and conduct of the parties.”
1 Witkin Summary of Cal. Law, Contracts (9th ed. 1987) § 684,
pp. 617-618.

13. “A contract must be so interpreted as to give effect to the
mutual intention of the parties as it existed at
the time of contracting, so far as the same is ascertainable and
lawful.” Cal. Civ. Code § 1636.
Missing or ambiguous terms
Contracts are interpreted as they were apparently intended by
the parties at the time the contract was
created. If the parties’ intent can be determined, courts will
supply missing terms or clarify ambiguities.
They will not, however, insert terms to create an agreement
where none, really, exists.
Here are some relevant references:
“A contract extends only to those things concerning which it
appears the parties intended to contract. Our
function is to determine what, in terms and substance, is
contained in the contract, not to insert what has
been omitted. We do not have the power to create for the parties
a contract which they did not make and
cannot insert language which one party now wishes were there.”
Levi Strauss & Co. v. Aetna Casualty &
Surety Co. (1986) 184 Cal. App. 3d 1479, 1485-1486.
“However broad may be the terms of a contract, it extends only
to those things concerning which it
appears that the parties intended to contract.” Cal. Civ. Code §
1648.
“If parties had concluded (a) transaction in which it appears
they intend to make contract, (the) court
should not frustrate their intention, if it is possible to reach fair

14. and just result, though this requires choice
among conflicting meanings and filling of some gaps left by
parties.” Rivers v Beadle (1960) 183 Cal App
2d 691.
Plain meaning
This is not a trick. It is just common sense. Interpret
contractual language consistent with commonly-
understood definitions and interpretations of its language.
Here is a source for this statement:
"The paramount consideration is the intention of the contracting
parties'. . . as it existed at the time of
contracting, so far as the same is ascertainable and lawful.' This
intention must be ascertained from the
words used, after taking into consideration the entire contract
and the circumstances under which it was
made. The words used in a contract must be given their ordinary
meaning, unless there is evidence that
the parties intended to use them in a unique sense or to give the
words some different meaning." Moss
Development, 41 Cal.App.3d at p. 9.
THE BIG PICTURE
GROUP 6
MARCH 4, 2017

15. THE BIG PICTURE – QUESTIONS
The CEO of MV-Link Productions has hired your consulting
firm to produce a report on this possible breach of contract
case, including recommendations. Use the report writing guide
from the course website. In your analysis of this case include
answers to the following questions:
Q. 1. Did MV-Link breach the contract? Specifically discuss
whether the showing by a competitor movie chain in Toronto
constituted a violation of the MV-Link/PACE agreement.
Q. 2. Assuming the contract is valid, prepare the following
financial analyses:
1. Prepare a budget of expected minimum revenues under the
contract. Show the sources of revenues from the set of five
films and the fee.
1. What are the general revenue recognition criteria established
under Generally Accepted Accounting Principles (GAAP)
c. How would you apply the GAAP criteria for revenue
recognition to account for the revenues under this contract?
Explain your logic for both realizable and earned.
d. Using the logic you developed in part c, calculate the
revenue that MV-Link Productions should report for the set of
five films for the year ended 12/31/2006.
e. For the year ended 12/31/2006, prepare a schedule that
shows the cash flows received from PACE from the contract.
f. Why do cash flows and revenues recognized differ, if they
differ under your calculations?

16. Note: To the extent that you may recognize any antitrust issues
(which we would not expect) please ignore them for purposes of
this analysis.
In preparing your report remember to review LDC financial
accounting concept 5 (cash flow vs. GAAP income), financial
accounting concept 8 (understanding the timing of revenue
recognition), management accounting concept 5 (understanding
how to budget revenue), and business law concept 1 (offer and
acceptance of contracts; enforcement of contracts: interpreting
the parties’ intent)
DATE: March 2007
TO: MV-Link Productions
FROM: The Business Associates Consulting Firm
RE: Analysis of liability for breach of contract
As you requested, we have prepared an analysis of MV-Links
liability for breach of contract as alleged by PACE theaters, a
large theatre chain with approximately 475 theatres across the
United States. In the analysis we examine the financial and
legal aspects of the information provided. Please contact us if
you need any more information.

17. EXECUTIVE SUMMARY-Karine
Case brief: MV-Link completed the production of five movies.
This set of movies contains “Kombat Rex” film which
marketing researcher indicates that will be a hit. The other four
movies KR II, KR III, KR IV, and KR V will just be a
continuation of the original story. In order to get the hit,
theaters should agree to show all movies a minimum number of
times. MV-link Production gets chance to sign an exclusive
contract with PACE. PACE theater has about 475 theaters
within the United States. However, the contract has made
without mention the exact requirement of limitations and
screenings. Also, MV-Link Production accepts that PACE
interest to be as a sole source among theaters during the
contract period. PACE is demanding to reimburse the paid funds
due to MV-Link Production did not comply with all the
agreements showing in the contract.
Purpose:Determine and understand contract’s key points using
financial, managerial accounting, and business law analysis.
Legal Analysis:In order to prove MV-Link production actions
are legal there are two concepts to determine: MV-Link is in
compliance with standard regulations and complies with
contract agreement.
Financial Analysis: GAAP criteria for revenue recognition, cash
flow, and revenue recognition differences, calculation of

18. revenue for the year end 12/31/2006 and cash flow received
from PACE from the contract. Preparation of the budget of
expected revenue under the contract. The emphasis of the
sources of revenue from five movies and the fee.
Results: After completing all necessary analysis of the case the
result is PACE does not have any rights to demand money back
from MV-Link Production. PACE cannot open lawsuit against
MV-Link production due to their actions are within compliance
with the contract agreement .
Recommendation: Analyzing the case based on provided facts
our recommendation would be to not reimburse funds to PACE
due to advertising took place in Canada and Canada has
different market.
Introduction-Nehal
Legal Analysis-Tarfa
The MV-Link production did not violate the contract agreement
by issuing the rights to show to a competitor movie chain in
Toronto. The agreement clearly stated that the permission to
show the proposed films was released to PACE Theatres for the
indicated number of months that started on September 1, 2006.
The content, under ‘Exclusivity’ section, states that MV-Link
acknowledges a showed interest in giving PACE theatres the
rights of being the sole source, without any interference from

19. theaters with similar interests, in the period of the duration of
the contract. The length of the contract was supposed to end
March 1, 2007. Therefore, by airing the proposed films in of
February 2007, the rival theater in Toronto, Canada could not
have sabotaged the market for PACE shows.
According to business law concept, the contract had
undergone the offer and acceptance, up to the signage stage and
was, therefore, enforceable by law. PACE Theatres had played
its part of paying for the movies as indicated by the contract ($
2,500,000 during the officiating of the agreement and
$2,500,000 in September.) PACE was also expected to pay a fee
of $500 per film showing at each location amounting to
$5,462,000. This amount according to PACE was paid on
January 20, 2007. This constituted to the components of earning
according to financial accounting concept 5 paragraph 80,
which refers to paragraph 36, revenue quantifies the length of
asset inflows linked with vaguely finished cash-to-cash rotation
overreaches asset outflows related, directly or indirectly, to the
similar sequences, The conclusion is that PACE Theatres had
completed their payments and their section of the contract.
In the introduction, statement of paragraph if the revenues
and gains are not yet recognized the issuing party has to provide
some sort of assurance in which the Toronto theatre had not
been issued with. It was merely an invitation to treat as
discussed by business law concept 1. This did not guarantee the
gaining of revenue due to showing the five films.
Since the courts draw intent from the parties involved, and the
wordings used in the agreement while attaching or using the
agreement as evidence (as it is stated in business law concept 1
under ‘courts construe a contract’s meaning to be consistent
with the parties’ intention), the MV Links’ intentions are
believed to be pure since they followed the agreement to the
latter and had no bad intentions in issuing the contract to
Toronto theatres.
The plain meaning with no hidden intent would be used to
define the case and a conclusion drawn from the given

20. agreement. It left no space for loopholes thus the definitions
were clear. The only ambiguous part would have been the end
time of the contract since a date was not issued. A proper
calculation of months between MV Link and PACE Theatre
would have been appropriate.
In conclusion, MV-Link had not violated any of the terms of the
agreement and was, therefore, was not liable to a lawsuit.