AOL Accounting Approach Changes and Impact on Financial

Team: Radhika Khandelwal, Bianca Dy, Olivia Harwood, Max Kimmel, Andrew Dohmann, Wolfgang Jorde 1.WhataccountingapproachhasAOLusedinthepastthatitis now changing (related to the $385 million)? Prior to this change, AOL was not immediately recording their massive marketing spend, most of which could be attributed to acquisition costs. Instead, they would defer the quarterly cost of these marketing activities and then amortize the cost over a period of time of up to 24 months. As a result of this change, they recorded a charge of $385 million which represented the balance of deferred acquisition costs as of September 30, 1996 when this balance was recorded. By not recording these as quarterly expenses when they were incurred, it would have made their quarterly earnings look more attracted to stakeholders. 2.What was AOL's rationale for using the past accounting approach? What accounting principle(s) was it following? AOL was using the matching principle used in accrual based accounting. They believed that spreading these costs out over a longer course of time would better match them to the revenues that they would later incur as a result of this massive marketing spend. This allowed them to record a higher volume of smaller expenses over time, rather than a massive expense all at once that hasn't get generated any realized earnings. 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? I think the term "quality of earnings" here refers to the way in which earnings are portrayed on the financial statements. If earnings are represented in a misleading way, then I think they would have a lower quality. In the case of AOL, not recognizing the massive expense as it was incurred would have made quarterly earnings look more attractive, but in reality, the expense was still incurred on the date of payment and just wasn'tbeingimmediatelyaccountedfor.Thiscouldbeconsideredmisleading to relevant stakeholders, so I think the "quality of earnings" for what they reported could certainly be contested. 4.What was AOL's rationale for the accounting change?