America Online Inc Case Study Essay

3. Was AOLs policy to capitalize subscriber acquisition costs justified prior to 1995? Ans AOLs invoice policy was labeled aggressive and capitalized its subscriber acquisition costs when its archrival CompuServe didnt.AOLs biggest expenditure was the cost of attracting new subscribers and maximizing shareholders value 1. Separate accommodation numbers and passwords were issued to customers. They cost more than $40 per new subscriber in 1994. 2. AOL aggressively marketed its online service both directly and indirectly. 3. To retain new subscribers and append customer loyalty & satisfaction, AOThe noteable accounting procedures followed by AOL were as follows a. AOLs amortisation period for subscriber acquisition costs was about 15 months, such(prenominal) aggressive accounting was attributed to the bundling & direct mail marketing practices b. During family 1995, the company modified the components of subscriber acquisition costs as incurred abridgmenta. It is not advisable for AOL to capitalize the marketing costs because in mid-nineties Web was being established. This would definitely impact the sales. Instead of amortizing the Acquisition be for 15 months, if we treat it as single lumpsum cost, the Income statement shows a dismission for the period. Capitalizing the expenditure for 2 forms contained an implicit assumption for the coming twain years. This was unlikely with the online industry as it had acquired most of its customers in the last 36 months,If AOL were to write off all capitalized subscriber acquisition costs the core on the 1995 balance would be a $77,229,000 reduction in different assets and stockholders equity. If all the subscriber acquisition costs incurred in fiscal year 1995 were expensed in 1995, the effect on the income statement would be an increase in marketing expense of $50,837,000 and an increase in net loss of $50,837,000