America Online Inc Case Study Essay

3. Was AOL’s policy to capitalise subscriber acquisition costs justified prior to 1995? Autonomic nervous system: AOL’s accounting policy was labeled aggressive and capitalized its subscriber acquisition costs when its archrival CompuServe didn’t.

AOL’s biggest outgo was the cost of pulling new endorsers and maximising shareholders’ value: 1. Separate enrollment Numberss and watchwords were issued to clients. They cost more than $ 40 per new endorser in 1994. 2. AOL sharply marketed its on-line service both straight and indirectly. 3. To retain new endorsers and increase client trueness & A ; satisfaction. AO

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The noteable accounting processs followed by AOL were as follows: : a. AOL’s amortisation period for subscriber acquisition costs was approximately 15 months. such aggressive accounting was attributed to the bundling & A ; direct mail selling patterns B. During September 1995. the company modified the constituents of subscriber acquisition costs as incurred Analysis

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a. It is non advisable for AOL to capitalise the selling costs because in 1990s Web was being established. This would decidedly impact the gross revenues. Alternatively of amortising the Acquisition Costs for 15 months. if we treat it as individual lumpsum cost. the Income statement shows a loss for the period. Capitalizing the outgo for 2 old ages contained an inexplicit premise for the coming two old ages. This was improbable with the online industry as it had acquired most of its clients in the last 36 months.

If AOL were to compose off all capitalized subscriber acquisition costs the consequence on the 1995 balance would be a $ 77. 229. 000 decrease in other assets and stockholders’ equity. If all the subscriber acquisition costs incurred in financial twelvemonth 1995 were expensed in 1995. the consequence on the income statement would be an addition in marketing disbursal of $ 50. 837. 000 and an addition in net loss of $ 50. 837. 000

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