America Online 2009 Annual Report Download - page 62

Table of Contents
The determination of whether revenue should be reported gross or net is based on an assessment of whether we are acting as the principal or an agent in
the transaction. If we are acting as a principal in a transaction, we report revenue on a gross basis. If we are acting as an agent in a transaction, we report
revenue on a net basis. The determination of whether we are acting as a principal or an agent in a transaction involves judgment and is based on an evaluation
of the terms of an arrangement. We recognize revenue on a gross basis in situations in which we believe we are the principal in transactions, considering all of
the indicators set forth in the accounting guidance for principal agent considerations. While none of the indicators individually are considered presumptive or
determinative, in reaching our conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not we are the
primary obligor in the arrangement.
As an example of the judgments relating to recognizing revenue on a gross or net basis, we sell advertising on behalf of third parties on the Third Party
Network. The determination of whether we should report our revenue based on the gross amount billed to our advertising customers, with the amounts paid to
the Third Party Network website owner (for the advertising inventory acquired) reported as costs of revenues, requires a significant amount of judgment based
on an analysis of several factors. In these arrangements, we are generally responsible for (i) identifying and contracting with third-party advertisers,
(ii) establishing the selling prices of the inventory sold, (iii) serving the advertisements at our cost and expense, (iv) performing all billing and collection
activities including retaining credit risk and (v) bearing sole liability for fulfillment of the advertising. Accordingly, in these arrangements, we generally
believe we are the primary obligor and therefore report revenues earned and costs incurred related to these transactions on a gross basis. During 2009, we
earned and reported gross advertising revenues of $534.6 million and incurred costs of revenues of $389.8 million related to providing advertising services on
the Third Party Network.
Impairment of Goodwill
Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in
circumstances that indicate goodwill is more likely than not impaired. The testing of goodwill for impairment is required to be performed at the level referred
to as the reporting unit. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component." The level at which
the impairment test is performed requires judgment as to whether there exist any components below the operating segment that constitute one or more self-
sustaining businesses with discrete results reviewed by management. If the operations below the operating segment level are determined to be one or more
self-sustaining businesses, testing is generally required to be performed at this level; however, if multiple self-sustaining business units exist within an
operating segment, an evaluation would be performed to determine if the multiple business units share resources that support the overall goodwill balance and
should be combined for purposes of this test. For purposes of our goodwill impairment test, we operate as a single reporting unit, as management does not
regularly review discrete financial information below the consolidated unit level. Different judgments relating to the determination of reporting units could
significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the estimated fair value of a reporting unit to its
carrying amount, including goodwill. In performing the first step, we determine the fair value of our single reporting unit using a combination of an income
approach by preparing a discounted cash flow ("DCF") analysis and a market-based approach based on the Company's market capitalization. Determining fair
value requires the exercise of significant judgment, including judgments about appropriate discount rates, terminal growth rates, the amount and timing of
expected future cash flows, as well as the premium used to arrive at a controlling interest equity value for the market-based approach. Given that our common
stock started trading on December 10, 2009, we concluded that there was insufficient trading activity to solely consider the market-based approach. This
approach was considered as one data point in determining fair value, but was not the sole indicator of fair value. The cash flows employed in the DCF analysis
are based on our most recent budgets, forecasts and business plans as well as various growth rate assumptions for years beyond the current business plan
period. Discount rate assumptions are based on an assessment of the risk inherent in the
58