aol FINANCIAL ACCOUNTING
Financial Accounting and Reporting
Case: America Online 1. What accounting approach has AOL used in the past that it is now changing (related to the $385 million)?
AOL, prior to October 1, 1996, recorded the expenditure related to subscribers acquisitions as an asset and amortized monthly over a period < 24 months. This was a strongly criticized approach. Furthermore, the accounting approach in the article is considered aggressive.
In October 1996, they discontinued capitalizing customer acquisition and took a one-time charge of $385 million in the first quarter of 1997. (“Deferred Subscriber Acquisition Costs” was expensed in the Income Statement).
2. What was AOL’s rationale for using the past accounting approach? What accounting principle(s) was it following?
AOL management thought that since they put a lot of effort in marketing activities, especially free trial and advertising, to attract new customer, the revenue flow from these activities would be emerged later. For this reason they spread these costs over two years rather than deduct the costs immediately.
The company’s accounting principle prior to October 1996 was the matching principle. The matching principle states that expenses should be recognized in the same time period as the related revenues are recognized.
3. What do you think is meant by the term the “quality of earnings” (see page two of article, top paragraph). What, in your opinion, would constitute “high” quality earnings? In my opinion, “quality of earnings” means that the numbers presented in the statements are able to reflect the real “value” and performance of the company. We have high quality of earnings when the numbers presented in the financial statements accurately represent current operating performance and aid in accurately forecasting future operating performance. In this way earnings are reliable and provide a reasonable basis for valuing a company.
The old accounting approach allowed AOL to report profits for six of
Case: America Online 1. What accounting approach has AOL used in the past that it is now changing (related to the $385 million)?
AOL, prior to October 1, 1996, recorded the expenditure related to subscribers acquisitions as an asset and amortized monthly over a period < 24 months. This was a strongly criticized approach. Furthermore, the accounting approach in the article is considered aggressive.
In October 1996, they discontinued capitalizing customer acquisition and took a one-time charge of $385 million in the first quarter of 1997. (“Deferred Subscriber Acquisition Costs” was expensed in the Income Statement).
2. What was AOL’s rationale for using the past accounting approach? What accounting principle(s) was it following?
AOL management thought that since they put a lot of effort in marketing activities, especially free trial and advertising, to attract new customer, the revenue flow from these activities would be emerged later. For this reason they spread these costs over two years rather than deduct the costs immediately.
The company’s accounting principle prior to October 1996 was the matching principle. The matching principle states that expenses should be recognized in the same time period as the related revenues are recognized.
3. What do you think is meant by the term the “quality of earnings” (see page two of article, top paragraph). What, in your opinion, would constitute “high” quality earnings? In my opinion, “quality of earnings” means that the numbers presented in the statements are able to reflect the real “value” and performance of the company. We have high quality of earnings when the numbers presented in the financial statements accurately represent current operating performance and aid in accurately forecasting future operating performance. In this way earnings are reliable and provide a reasonable basis for valuing a company.
The old accounting approach allowed AOL to report profits for six of