America Online 2009 Annual Report Download - page 79

Table of Contents
CAPITALIZED SOFTWARE
Internal-use Software
AOL capitalizes certain costs incurred for the development of internal-use software. These costs, which include the costs associated with coding,
software configuration, upgrades and enhancements and are related to both AOL's internal systems (such as billing and accounting) and AOL's user-facing
Internet offerings, are included in property and equipment, net in the consolidated balance sheet.
Capitalized Software Associated with Subscription Access Service
AOL capitalizes costs incurred for the production of computer software that generates the functionality for its subscription access service. Capitalized
costs typically include direct labor and related overhead for software produced by AOL, as well as the cost of software purchased from third parties. Costs
incurred for a product prior to the determination that the product is technologically feasible (i.e., research and development costs), as well as maintenance
costs for established products, are expensed as incurred. Once technological feasibility has been established, development costs are capitalized until the
software has completed testing and is mass-marketed. Amortization is recognized on a product-by-product basis using the greater of the straight-line method
or the current year revenue as a percentage of total revenue estimates for the related software product, not to exceed five years, commencing the month after
the date of the product release. The total net book value of capitalized software costs related to the subscription access service was $1.5 million and $9.5
million at December 31, 2009 and 2008, respectively. Such amounts are included in other long-term assets in the consolidated balance sheet. Amortization of
capitalized software costs related to the Company's subscription access service was $8.0 million, $22.4 million and $62.2 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Research and Development
Research and development costs related to the Company's software development efforts, which are expensed as incurred, are included in costs of
revenues and totaled $63.2 million, $68.8 million and $74.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. These costs consist
primarily of personnel and related costs that are incurred related to the development of software and user-facing Internet offerings that do not qualify for
capitalization.
Leases
The Company leases operating equipment and office space in various locations worldwide. Lease obligations are classified as operating leases or capital
leases, as appropriate. Leased property that meets the capital lease criteria is capitalized and the present value of the future minimum lease payments is
recorded as an asset under capital lease with a related capital lease obligation in the consolidated balance sheets.
Rent expense under operating leases is recognized on a straight-line basis over the lease term taking into consideration scheduled rent increases or any
lease incentives.
Intangible Assets
AOL has a significant number of intangible assets, including acquired technology, trademarks and customer relationships. AOL does not recognize the
fair value of internally generated intangible assets. Intangible assets acquired in business combinations are recorded at fair value on the Company's
consolidated balance sheets and are amortized over estimated useful lives generally on a straight-line basis. Intangible assets subject to amortization are tested
for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
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