American online

...

1. Period determined by calculating the ratio;

Current Revenue relating to direct response advertising Total expected revenues relating to this advertising Or

2. 24 months, whichever is shorter.

Q4. Refer to the appropriate authoritative literature to determine how AOL should account for the costs and provide arguments both for and against AOL’s treatment of the costs.

The below is the appropriate authoritative literature to determine how AOL should account for the costs and provide arguments both for and against AOL’s treatment of the costs.

FASB guideline, SOP 93-7 allows companies to classify the cost of certain types of direct response advertising as the acquisition of an asset that will provide a future benefit in the form of increased revenue. In 1994, AOL used this clause to justify deferring the cost of their direct mailing to potential customers over the following 24 months. However, according to SEC Administrative Proceeding, File No. 3-10203, AOL misclassified these customer acquisition costs as a capital expenditure rather than an expense. Paragraph 48 of SOP 93-7 only allows for the capitalization of customer acquisition costs if the future revenue brought in by these activities can be directly and reliably measured. This wasn’t the case for AOL because it did not meet the requirements that the cost be amortized on a cost-pool by cost-pool basis which measures the revenue brought in by the customers who signed up as a result of the acquisition activity. Another complication was the revenue over following months was not consistent because of pricing changes and the pressures of a competitive market.