SOUND RECORDING INVESTOR TAX CREDIT REQUEST FOR FINAL CERTIFICATION

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1 SOUND RECORDING INVESTOR TAX CREDIT REQUEST FOR FINAL CERTIFICATION 1) Applicant Entity must request final certification of expenditures as follows: a. If the base investment is in excess of $15,000 but less than $50,000, Applicant Entity must submit a cost report, verifying production expense details. See Appendix A. b. If the base investment is greater than or equal to $50,000, Applicant Entity must submit an audit in compliance with LED s audit guidelines. See Appendix A. c. The cost report or audit shall be prepared by an independent CPA licenses in the state of Louisiana. 2) Applicants to the sound recording production program must provide detailed accounting and verification of expenditures relating to All-In Producer Deals. See Appendix C. APPENDIX A: COST REPORT AND AUDIT GUIDELINES CPA-prepared Cost Reports for Sound Recording Projects less than $50,000 and Auditing Instructions for Projects $50,000 or more Purpose/Requirements In an effort to ensure compliance with La. R.S. 47:6023, the Louisiana Department of Economic Development is requiring the independent certification of production paid by sound recording production companies/investors during the creation of state-certified productions. If expenditures are fifty thousand dollars ($50,000.00) or more, an audit of the production expenditures must be performed by an independent Louisiana certified public accountant. This CPA, selected and paid for by the applicant prior to the granting of any certification by the Office of Entertainment Industry Development, must prepare a report to document findings. The applicant will not be precluded from engaging its regular independent certified public accountant, if applicable, to perform these engagements. If expenditures are less than fifty thousand dollars ($50,000.00), no audit is required; however, an independent Louisiana certified public accountant, selected and paid for prior to the granting of any certification by the Office of Entertainment Industry Development, must prepare a cost report. It is the applicant s responsibility to ensure that all of the required information is provided. Audited schedules that, minimally, do not conform to the guidelines outlined herein will not be accepted. The results of the audit engagement of the specified element may affect the validity of tax credits granted under this program. Regulation Please reference La. R.S. 47:6023 for more information regarding the regulation and the detailed definitions of state-certified expenditures.

2 General The following procedures set forth minimum standards for acceptability of the audit to be performed. The auditor is to make its certification on the basis of having performed, at a minimum, these procedures. The auditor must be a Certified Public Accountant licensed in the State of Louisiana and must be an independent third party not related to the applicant. The auditor s opinion must be addressed to the party which has engaged the auditor The auditor s name, address, and telephone number must be evident on the report. The auditor s opinion must be dated as at the completion of the audit fieldwork. The audit must be performed in accordance with auditing standards generally accepted in the United States of America, and the auditor must have sufficient knowledge of accounting principles and practices generally recognized in the sound recording industry. Identification of the Production Project The Production Title of the production, when applicable, must be disclosed. The period during which the costs were incurred must be noted. Production Expenditures Only expenditures which are directly related to the production can be recorded as production costs. These costs must be charged to the proper budgetary item. Refunds and credit notes received for discounts, rebates, invoicing errors, and purchase returns must be credited to the production costs; similarly, proceeds from the sale of production assets must be deducted from the costs presented in the cost report at fair market value. Travel must be booked through a Louisiana travel agent or must be paid directly in the state of Louisiana and subject to state sales or use tax. State and local taxes should be excluded. Alcohol purchases should be excluded. Notes to the Cost Report of Production Sources of funds. All sources of funds that were used to finance the production must be disclosed. Non-Louisiana costs. Only those expenditures that were incurred in the State of Louisiana can be included on the cost report. Related party transactions. The notes must provide a breakdown of all related party transactions (as defined by the accounting standards), and include the following: o The name of the related party o The nature of the relationship between the related party and the applicant o The nature of the transaction, and o The amount of the transaction If there are no related party transactions, the cost report must include a note to that effect. For more information on related party transactions, see Appendix B.

3 Reporting The audit of the cost report of production expenditures must be conducted in accordance with auditing standards generally accepted in the United States of America. Once the audit engagement is completed, please submit one copy to the Office of Entertainment Industry Development. The auditor s opinion should be accompanied by the cost report of production expenditures, the notes to the cost report, and a completed CPA Certification Form (see Exhibit IV). Report Deadline The CPA s final opinion must be received by the Office of Entertainment Industry Development prior to any certification of expenditures or granting of tax credits. APPENDIX B: RELATED PARTY TRANSACTIONS Related Party Transactions disclosure and identification The notes must provide a breakdown of all related party transactions (as defined by the accounting standards), and include the following: a. The name of the related party b. The nature of the relationship between the related party and the applicant c. The nature of the transaction, and d. The amount of the transaction. For further guidance on defining related parties and applicable procedures that should be considered by the auditor, see SAS No. 45 and AU Sec. 334 on related parties. If there are no related party transactions, the cost report must include a note to that effect. Related Party Transactions verification of economic substance over form GAAS and GAAP require the reporting of the economic substance of transactions regardless of their legal form. The auditor must satisfy himself or herself that any related party relationships and material transactions are properly accounted for and adequately disclosed in the notes. Mere disclosure of RPT s without further analysis and explanation will be considered insufficient by LED. Related Party Transactions project cost accounting and reporting and possible limitations on qualifying expenditures Sound Recording Production Companies that enter into transactions with related parties shall report project costs as detailed below, unless LED approves in writing an exception for reporting at market rates. The Sound Recording Incentive Program is project based, therefore, to the extent that related party sound recording production companies are seeking tax credits for qualifying expenditures, they must capture and report project costs and revenues, not just functional expense classifications. Full project costing requires the creation and reporting of Labor and Facility/Equipment charge rates to properly account for Production company personnel and facility/equipment resources used to create the state certified production, ie the project. Labor charge rate the actual pay amounts to each personnel per hour, plus a labor burden percentage add-on. The resulting fully burdened labor rate is then charged to certified production costs, ie the project, based upon the hours actually worked on the project by each personnel assigned. Facility/Equipment for related party sound recording production companies using their own equipment, LED will recognize either of the following value calculation methods: o 65% of the documented current market rental value, or

4 o Internal Cost Recovery Rate (ICRR). For each facility or equipment item that a production company establishes a specific market rate charge to apply to their outside customers, there should be a corresponding ICRR, consisting of actual acquisition costs, ongoing maintenance and upgrades, divided by anticipated utilization over real useful life. Related Party Transactions verification of economic substance over form CPA notes on methods used, documents reviewed, etc. Related Party Transactions project cost accounting and reporting and possible limitations on qualifying expenditures CPA notes on methods used, documents reviewed, calculations made, if any. For further guidance on related party transaction questions, refer to our accounting FAQs document at which includes example CPA notes, ICRR calculations, and answers to common questions. APPENDIX C: PRODUCER FEES POLICY Disclosure and Benchmark for Qualifying Producer Fees 1. For projects initially certified after 02/01/2011, applicants to the sound recording production program must provide detailed accounting and verification of expenditures relating to All-In Producer Deals. For example, audits must reflect payments made to all vendors, and Producer Agreements should reflect the scope of services to be provided in Louisiana and include a clause allowing the State to audit the Producer s accounting records directly related to any expenses claimed for tax credits. 2. LED further establishes an industry benchmark of up to 20% of total qualifying Louisiana production expenditures for Producers Fees (for the calculation, Louisiana production expenditures exclude any producer fees), which shall be considered Fair Market Value. While applicants may enter into producer agreements with fees in excess of LED s approved benchmark, producer fee payments exceeding 20% may not be eligible to earn tax credits. 3. Additionally, LED establishes a benchmark of up to 12% of total qualifying Louisiana production expenditures (for the calculation, Louisiana production expenditures exclude any producer fees), for related-party producer fee expenditures, which must be supported by a cost report or audit, when applicable, and documentation of services provided. Fair market value for related-party services rendered must also be established by submission of third-party contracts for similarly-sized projects and scope of work or other documents as approved by LED. While productions may enter into agreements with fees in excess of LED s approved benchmark, payments exceeding 12% will not be eligible to earn tax credits unless the benchmark is exceeded through expenditures (supported by a cost report or audit, when applicable, and documentation of services provided) under third-party contracts only with no related-party expenditures. Illustrative Example ABC Sound Recording Production Company (ABC) and Producer enter into a written agreement to produce Project 1 by Big Name Artist, comprised of 10 tracks and a total all in budget of $150,000. If Project 1 is determined to be a qualifying state certified production, ABC would have to verify more than just one lump sum payment of $150,000 from ABC to Producer in order to earn tax credits. Instead, ABC s audit must also show detailed breakdowns of all expenditures made by Producer to vendors on behalf of Project 1, such as:

5 Studio time, Fantastic Studio 10 $300 per day - $3,000 Musicians fees - $2,000 o John Smith drummer, 10 $50 per day $500 o Sarah Jones vocals, 10 $100 per day, $1,000 o Sally Franklin vocals, 5 $100 per day, $500 Lodging for musicians 3 rms for 10 $100 each - $3,000 Production engineer, Fantastic Studio 10 $100 per day - $1,000 Lodging for Big Name Artist 1 suite for 10 $250 per nt - $2,500 Catering services 5ppl lunch for 10 $50 per day - $2,500 License fees - $1,000 Composer fees - $1,000 Legal fees - $5,000 Accounting fees - $4,000 Big Name Artist- $100,000 Total: $125,000 Producer fee up to a maximum of $25,000 or 20% of other qualifying project expenditures. EXHIBIT I: INDEPENDENT CPA S AUDITING REPORT (Submit in letter format on the independent certified public accountant s letterhead. Exclude Exhibit I if project is under $50,000.) Investor Name Address City, State, and Zip We have audited the accompanying cost report of production expenditures of Investor Name for the period from inception through completion of the State Certified Production (Unique ID#). The cost report of production expenditures is the responsibility of the Investor Name. Our responsibility is to express an opinion on this cost report of production expenditures based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the cost report of production expenditures is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the cost report of production expenditures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall cost report of production expenditures presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the cost report referred to above presents fairly, in all material aspects, the results of operation in Louisiana of Investor Name for the period from inception through completion of the State Certified Production (Unique ID#), in conformity with the accounting and reporting requirements of Louisiana Revised Statue 47:6023 as described in the accompanying Foot Note 1. Firm s signature / City, State Report Date

6 EXHIBIT II: SUPPORTING INFORMATION FOR INDEPENDENT CPA S REPORT Cost Report of Production Expenditures: Attach the Cost Report of Production Expenditures detailing the investor name, State Certified Production (Unique ID#), and the period reviewed. Notes to the Cost Report of Production Expenditures: 1. General This cost report of production expenditures represents the production costs attributable to the production entitled "XYZ" produced by the Sound Recording Production Investor Name during the period to. 2. Sources of funds As of (insert the ending date of the cost report) the production entitled "XYZ" was financed from the following sources: The following non-monetary transactions were included in the cost of the production: Please disclose the nature of the services provided and the consideration given in exchange for the services for each non-monetary transaction. 3. Louisiana Yearly Expenditures & Employee Payroll The production costs presented in this cost report include the following yearly Louisiana expenditures. YEAR 1 Spend: $ YEAR 2 Spend: $ 4. Non-Louisiana Costs The production costs presented in this cost report include the following non-louisiana costs: Budget item: $ Budget item: $ 5. Related Party Transactions The production costs presented in this cost report include the following related party transactions (as defined by the accounting standards): Disclose the following for each transaction: The name of the related party The nature of the relationship between the related party and the motion picture production company The nature of the transaction The amount of the transaction

7 EXHIBIT III: CPA CERTIFICATION FORM Applicant Name: Proposed Tax Credit Total: Application Number and Name: CPA Name: Firm: Street Address: City, State, and Zip: Phone: Fax: I,, have verified that all amounts listed in the prepared cost report or in the audited cost report submitted to the Office of Entertainment Industry Development, have been paid by the Sound Recording Investor Tax Credit applicant named above and received by the proper vendor for the production or infrastructure project being applied for. I have read and understand the Louisiana Sound Recording Investor Tax Credit and believe that all of the expenses listed on the cost report will qualify as state-certified as defined by La. R.S. 47:6023. Louisiana CPA Signature Date Applicant Signature Date This form to accompany all cost report submissions for the Sound Recording Investor Tax Credit Program (R.S. 47:6023).