Deciphering textbook royalty statements to determine whether royalties being reported are accurate can be frustrating for both first time and veteran textbook authors.
Royalty calculations should be relatively straightforward. That is, the contractually agreed-upon royalty rate for the Work multiplied by the earnings received by the publisher. However, add in escalation clauses, various rates for different sales categories or channels, co-authorship, packaged products, electronic materials, custom editions, abridgements, agreed-upon deductions, returns for reserves, specific definitions of earnings, multiple titles in various editions etc., and the calculation of royalties becomes much more complex.
Deconstructing a royalty statement
In reality, royalty statements range from one to hundreds of pages per reporting period. Many publishers provide a summary in addition to detailed information that alone can be dozens of pages. Below, the simplified example illustrates a royalty statement for one ISBN during one royalty or reporting period:
A reporting period is the contractually agreed-upon time frame for the accumulation and payment of royalties. These periods can range from a monthly to annual basis. Textbooks are most commonly reported on a semiannual basis. A publisher’s payment term also varies, but is often three months after the end of the reporting period. For example, an author receiving royalties on an annual basis and receiving a royalty check three months after the end of the reporting period will receive a royalty statement that contains sales from 15 months ago. It is important to keep these time frames in mind when reviewing statements as the current state of book sales may not be reflective of the past.
The first area to take a look at is Category – this provides information about where a book was sold. These descriptions might also denote certain types of sales like custom publishing or electronic versions of the work. Ideally, there should be separate categories reported for any type of sale that has a specific royalty rate attached to it. Categories on royalty statements can be confusing to authors. The named categories on a particular publisher’s royalty reports are a function of that publisher’s internal reporting structures and systems. These categories will differ based on a particular publisher. For example, one publisher may not distinguish Canadian sales from export sales. Another, as in this example, will report Canadian sales as a separate and distinct category.
The next area of focus is Net Units – this represents the total units of the book sold less any returned copies during the reporting period. Some publishers will also report gross units and returned units. Net Units generally represent royalty-bearing units sold to which a royalty should be applied.
Royalty statements often contain a cumulative or Life to Date amount for Net Units of a particular ISBN. This represents the total copies of a book sold since inception. Adding the Net Units on the current royalty statement to the Life to Date figure contained on the immediately preceding royalty statement should equal Life to Date units on the current royalty statement.
Net Revenue represents the dollars received for sales of Net Units by the publisher. Most royalty agreements apply the royalty rate to Net Revenue; however, this is not always the case as there could be royalties based upon gross revenue (sales dollars before returns) or some amount per unit. Similar to unit reporting, some publishers will provide information related to gross sales dollars and related returns in dollars.
Royalty Rate represents the contractual rates agreed to by the author and the publisher for various types of sales of books and other materials. When reviewing a royalty statement, it is important to check the underlying publishing agreement to ensure that these rates are correct. Errors can easily occur if the correct royalty rates are not applied within the publisher’s accounting systems. For example, a book may have an escalation clause, but there is a lack of a reliable mechanism within the accounting system to trigger a higher rate after a certain sales volume of books has been reached.
The Author’s Share is the amount of royalty attributable to the author when a co-authorship agreement exists. This figure should be straightforward, but again, should be checked as co-authorship agreements often change and mistakes can occur with respect to updates within the publisher’s system.
The Royalty Earned in the Current Period can be computed as: Net Revenue multiplied by Royalty Rate multiplied by Author’s Share.
Yet, the Royalty Earned in the Current Period may not match the amount of the royalty payment. To understand, one must consider the Balance Forward and Deductions.
The Balance Forward is the amount due or owed from the previous reporting period. This can result for a myriad of reasons, such as a remainder of an advance that has not been fully earned, a recalculation of royalties earned during a previous reporting period or a balance due because a payment was not sent to the author in the previous period. To understand what the Balance Forward amount is comprised of, the previous reporting period’s royalty statement must be reviewed.
Deductions reduce payable amount on royalty statements. These deductions are contractually driven and may include charges for items like permissions fees, indexing or research. Some publishers do not include descriptions of these charges on the royalty statements, which can make it difficult for authors to evaluate the appropriateness of deductions.
Despite reviewing the mechanics of royalty statements, the question for many authors remains – “Are the royalty statements accurate?”
The difficulty in addressing this question is that royalty statements do not include all of the information needed to determine the accuracy of royalty payments. In order to test the veracity of royalty statements, authors need more detailed information than can possibly be contained on a royalty statement. Specifically:
- Inventory information related to the printing and ultimate sale or disposal of books,
- Information related to the sale and distribution of electronic content,
- Underlying sales and return records,
- Publisher’s list of all ISBNs associated with an author and indication of royalty vs. non-royalty bearing,
- Subrights agreements and records of monies received for these contracts, and
- Information related to the allocations of components included in packaged or bundled sales.
Requests to publishers for a brief walk-through of their specific royalty statement format can provide authors with the knowledge needed to better understand their statements. If an author has a specific question related to a royalty statement, authors can and should seek additional documentation from their publishers.
Juli Saitz has extensive experience serving textbook authors in audits and disputes and has helped authors and corporate clients recover millions of dollars in asserting their audit rights related to licensed copyrights, trademarks and patents. Saitz is focused on the shift in the publishing industry to electronic content delivery methods and adaptive learning platforms.
Juli will be presenting the TAA Webinar, “What is a Textbook Royalty Audit and How Do I Know If I Need One?” on Tuesday, October 27, 10-11 a.m. ET. Free for TAA members. Register. Not a TAA member? Join TAA between now and September 30, 2015 and get 20% off the regular rates!