AOL Case Study
1. What accounting approach has AOL used in the past that it is now changing (related to the $385 million)
Prior to October 1, 1996, AOL accounted for the cost of direct response advertising as ?Deferred Subscriber Acquisition Costs,? i.e., it recognized (reported) the costs of mailing out diskettes allowing you to sign-on to AOL for 100 free minutes as an asset on its Balance Sheet. In accounting, we say that the costs were ?capitalized,? meaning reported on the Balance Sheet as an asset. This is in contrast to the costs being ?expensed,? flowing to the Income Statement immediately as an expense.
The asset, Deferred Subscriber Acquisition Costs was amortized, beginning the month after such costs were incurred, over a period determined by calculating the ratio of current revenues related to direct response advertising versus the total expected revenues related to this advertising, or twenty-four months, whichever was shorter.
For example, supposed AOL spent $10 million for advertising costs and expected to generate a total of $55 million in revenues as a result of such expenditures over a two-year period. Suppose in the first year, $20 million in revenues occurred as a result of this advertising program. AOL would recognize, of
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