Commentary about business and finance. On Wednesday came word that the Justice Department is also investigating. AOL shares, which fell 25 percent in the week after the Post series, promptly dropped 7 percent.
Solely for the purpose of this proceeding, and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C. Respondent 1 America Online, Inc. AOL provides Internet access to millions of subscribers in the U.
Background This case involves AOL's capitalization of certain advertising costs that should have been expensed as they were incurred.
Although AOL was generating positive net revenues gross revenues from subscribers minus direct costs of earning such revenuesAOL was operating in a new, evolving, and unstable business sector, and thus could not provide the "persuasive" historical evidence needed to reliably estimate the future net revenues it would obtain from its advertising expenditures.
During its fiscal years ended June 30, and June 30,AOL rapidly expanded its customer base as an Internet service provider through extensive advertising efforts.
These efforts involved, Aol financial accounting other things, distributing millions of computer disks containing AOL startup Aol financial accounting to potential AOL subscribers, as well as bundling AOL software with computer equipment. Largely as a result of its extensive advertising expenditures, this period was characterized by negative cash flows from operations.
For fiscal years andAOL capitalized most of the costs of acquiring new subscribers as "deferred membership acquisition costs" "DMAC" -- including the costs associated with sending disks to potential customers and the fees paid to computer equipment manufacturers who bundled AOL software onto their equipment -- and reported those costs as an asset on its balance sheet, instead of expensing those costs as incurred.
Substantially all customers were derived from the above direct marketing program. Beginning July 1,the company increased that amortization period to 24 months.
On a quarterly basis, the effect of capitalizing DMAC was that AOL reported profits for six of eight quarters in fiscal years andrather than losses that it would have reported had the costs been expensed as incurred. On October 29,AOL announced through a press release that it would write off all capitalized costs of membership acquisition carried as an asset at September 30,and would expense as incurred all such costs from October 1, forward.
SOP is the authoritative accounting literature governing accounting for costs to gain subscribers. As described more fully below, SOP requires the capitalization and amortization of direct response advertising costs only when persuasive historical evidence exists that allows the entity to reliably predict future net revenues that will be obtained as a result of the advertising.
SOPhowever, contains a narrow exception for certain direct-response advertising costs, which are costs of advertising whose primary purpose is to elicit sales to customers who can be shown to have responded specifically to the advertising.
AOL's direct-response advertising costs included the costs of sending disks with AOL software to potential customers and the cost of bundling AOL software with original computer equipment. To capitalize direct response advertising costs, however, SOP requires that such costs result in probable future economic benefits.
Such benefits are defined to be "probable future revenues arising from that advertising in excess of future costs to be incurred in realizing those revenues.
Demonstrating that direct-response advertising will result in future benefits requires persuasive evidence that its effects will be similar to the effects of responses to past direct-response advertising activities of the entity that resulted in future benefits.
Such evidence should include verifiable historical patterns of results for the entity. Attributes to consider in determining whether the responses will be similar include a the demographics of the audience, b the method of advertising, c the product, and d economic conditions [emphasis added]. Paragraph 48 of SOP specifies that the costs capitalized as an asset be subject to a recoverability "realizability" test: The realizability of the amounts of direct-response advertising reported as assets should be evaluated at each balance-sheet date by comparing the carrying amounts of such assets on a cost-pool-by-cost-pool basis to the probable remaining future net revenues expected to result directly from such advertising.
This constraint required AOL to be able to reliably predict the following: AOL attempted to meet these requirements by estimating future membership retention based on a model that, while adjusted on a quarterly basis, assumed stability in customer retention rates over an extended period, as well as the maintenance of the company's gross profit margin percentage, which was based on the company's existing fee structure and costs of operation.
Instead, the Company aggregated customer acquisition costs capitalized during each quarter or month and compared such costs to average revenue from all customers. AOL was in a volatile, developing market that was subject to unpredictable, potentially material adverse developments and thus, could not reliably forecast future subscriber retention, revenues, or cost of services.
For example, in its annual report on Form K for the fiscal year ended June 30, " Form K"AOL stated that it was engaged in the development of a "new medium. During the relevant period, moreover, AOL's membership, having expanded exponentially, was significantly different-the majority of the members had been with the service for less than one year.
This extraordinary growth made AOL's historical evidence about customer behavior potentially less predictive of future behavior of then-existing customers. In a registration statement on Form S-3, filed March 17,AOL acknowledged that, as the company grew more rapidly, it risked downward pressures on operating margins: AOL may wish to adopt additional strategies designed to continue growth in its subscriber base, such as new promotional offers and implementation of new pricing programs to accomplish this objective Consequently, there can be no assurance that AOL's operating margins have stabilized or that AOL's operating margins will not be affected in the future by such strategies.Jan 11, · The indictments follow a decision by AOL's parent, Time Warner Inc., to pay $ million to settle criminal and civil charges stemming from a wide-ranging accounting scandal at the online unit, including AOL's dealings with PurchasePro.
As part of the settlement, Time Warner agreed to restate its historical financial results to reduce its reported online advertising revenues by approximately $ million (in addition to the $ million already restated) for the fourth quarter of through and to properly reflect the consolidation of AOL Europe in the company's Accounting Principles The general rules and concepts that govern the Accounting filed are referred to as the Principles of regardbouddhiste.com Financial Accounting Standards Board (FASB) using the groundwork of principles and guidelines has formulated these rules.
They lay the foundation for sound and ethical accounting practices. The GAAP (Generally accepted accounting principles or "GAAP. As a consequence, AOL's financial statements as filed with the Commission in quarterly reports on Form Q and annual reports on Form K, from the quarter that began July 1, through the quarter beginning July 1, 6 were rendered inaccurate by AOL's accounting treatment for DMAC.
Therefore, AOL violated Section 13(a) of the Exchange. AOL Time Warner Inc. Securities Litigation. In class action–related securities litigation brought by opt-out plaintiffs, Cornerstone Research supported Timothy Lucas, former director of research and technical activities at the Financial Accounting Standards Board and former chairman of .
Aug 01, · First, this isn't the first time AOL's accounting hasn't been as transparent as it could be. In May , AOL agreed to pay the SEC a $ million fine after being accused of improperly accounting for the way it distributed free disks.