Aol Controversial Accounting Policies
AOL ASSIGNMENT
There were two accounting policies used by AOL that were considered aggressive, as well as controversial. The first was to amortize its software development costs and the second was to capitalize subscriber acquisition costs. The lifetime, for amortization purposes, which AOL assigned to software development costs was five years. This was considered by many to be an exceptionally long time considering the pace at which technology was progressing during that period of time. However, none of the regulatory or advisory agencies had established an absolute useful life designation, and the only available reference point at that time was the FASB Statement #86 of August 1985. It established that costs for internally developed software could be capitalized only from the point of “technological feasibility”, and therefore all planning, designing, coding and testing should be expensed. It further stated that the capitalization costs “could be amortized for up to 60 months”. It seems that AOL may have used Statement #86 to determine its amortization period. The second accounting policy termed overly aggressive was AOL’s capitalization of subscriber acquisition costs. These were costs associated with actually enticing and enrolling new customers into AOL’s program and were for direct mail, advertising, and start-up kits. The only advertising/marketing costs AOL did expense were the amounts relating to the free first ten hours that was given to each new subscriber. The amortization period for the expenses of the direct marketing programs was twelve months. Also included in capitalization, but with an eighteen month amortization period, were so-called “bundling costs” for co-marketing efforts with magazine publishers and PC producers. These time frames for amortization were well known in the industry, even if they were controversial. But then in July 1995, the periods for both marketing categories were increased to 24 months, and that
There were two accounting policies used by AOL that were considered aggressive, as well as controversial. The first was to amortize its software development costs and the second was to capitalize subscriber acquisition costs. The lifetime, for amortization purposes, which AOL assigned to software development costs was five years. This was considered by many to be an exceptionally long time considering the pace at which technology was progressing during that period of time. However, none of the regulatory or advisory agencies had established an absolute useful life designation, and the only available reference point at that time was the FASB Statement #86 of August 1985. It established that costs for internally developed software could be capitalized only from the point of “technological feasibility”, and therefore all planning, designing, coding and testing should be expensed. It further stated that the capitalization costs “could be amortized for up to 60 months”. It seems that AOL may have used Statement #86 to determine its amortization period. The second accounting policy termed overly aggressive was AOL’s capitalization of subscriber acquisition costs. These were costs associated with actually enticing and enrolling new customers into AOL’s program and were for direct mail, advertising, and start-up kits. The only advertising/marketing costs AOL did expense were the amounts relating to the free first ten hours that was given to each new subscriber. The amortization period for the expenses of the direct marketing programs was twelve months. Also included in capitalization, but with an eighteen month amortization period, were so-called “bundling costs” for co-marketing efforts with magazine publishers and PC producers. These time frames for amortization were well known in the industry, even if they were controversial. But then in July 1995, the periods for both marketing categories were increased to 24 months, and that