America Online Inc Case Study

3. Was AOL’s coverage to capitalize subscriber acquisition prices justified prior to 1995? Ans: AOL’s accounting policy was labeled aggressive and capitalized its subscriber acquisition costs when its archrival CompuServe didn’t.

AOL’s largest expenditure was the price of attracting new subscribers and maximizing shareholders’ worth: 1. Separate registration numbers and passwords had been issued to prospects. They cost greater than $40 per new subscriber in 1994. 2. AOL aggressively marketed its on-line service both instantly and not directly. 3. To retain new subscribers and improve customer loyalty & satisfaction, AO

The noteable accounting procedures followed by AOL have been as follows: :a.

AOL’s amortization interval for subscriber acquisition costs was about 15 months, such aggressive accounting was attributed to the bundling & direct mail advertising practices b. During September 1995, the corporate modified the elements of subscriber acquisition costs as incurred Analysis

a. It isn’t advisable for AOL to capitalize the advertising costs as a result of in 1990s Web was being established. This would undoubtedly impact the gross sales. Instead of amortizing the Acquisition Costs for 15 months, if we deal with it as single lumpsum value, the Income statement reveals a loss for the interval.

Capitalizing the expenditure for 2 years contained an implicit assumption for the coming two years. This was unlikely with the web trade because it had acquired most of its customers within the final 36 months,

If AOL had been to write down off all capitalized subscriber acquisition costs the effect on the 1995 balance can be a $77,229,000 discount in different assets and stockholders’ equity. If all the subscriber acquisition costs incurred in fiscal yr 1995 had been expensed in 1995, the effect on the revenue statement could be a rise in advertising expense of $50,837,000 and a rise in web loss of $50,837,000