America Online Inc Case Study Essay

three. Was AOL’s coverage to capitalize subscriber acquisition prices justified previous to 1995? Ans: AOL’s accounting coverage was labeled aggressive and capitalized its subscriber acquisition prices 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 clients. They value greater than $40 per new subscriber in 1994. 2. AOL aggressively marketed its on-line service each instantly and not directly. three. To retain new subscribers and enhance buyer loyalty & satisfaction, AO

The noteable accounting procedures adopted by AOL had been as follows: :a.

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

a. It isn’t advisable for AOL to capitalize the advertising prices as a result of in 1990s Net was being established. This may positively affect the gross sales. As an alternative of amortizing the Acquisition Prices for 15 months, if we deal with it as single lumpsum value, the Revenue assertion reveals a loss for the interval.

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

If AOL had been to put in writing off all capitalized subscriber acquisition prices the impact on the 1995 steadiness could be a $77,229,000 discount in different property and stockholders’ fairness. If all of the subscriber acquisition prices incurred in fiscal yr 1995 had been expensed in 1995, the impact on the revenue assertion could be a rise in advertising expense of $50,837,000 and a rise in web lack of $50,837,000