America Online 2010 Annual Report Download - page 64

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the ordinary course of business, we incur indemnification obligations of varying scope and terms to third parties, which could include, without
limitation, customers, vendors, distributors, licensors, licensees, lessors, purchasers of assets or operating subsidiaries and other parties related to certain
matters, including losses arising out of our breach of agreements or representations and warranties made by us, services, software, data or content to be
provided by us, taxes, tariffs, our use of services, software, data or content provided by third parties, the export or import of our software or data, compliance
with applicable laws and regulations, infringement of third party intellectual property or property rights or, with respect to the divestiture of assets or
operating subsidiaries, matters related to our conduct of the business and tax matters prior to the sale. It is not possible to determine the aggregate maximum
potential loss under such indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances
involved in each particular agreement. Historically, we have not incurred material costs as a result of claims made in connection with indemnifications
provided and, as of December 31, 2010, management concluded that the likelihood of any material amounts being paid by us under such indemnifications is
not probable. As of December 31, 2010, amounts accrued in our financial statements related to indemnification obligations are not material.
Customer Credit Risk
Customer credit risk represents the potential for financial loss if a customer is unwilling or unable to meet its agreed-upon contractual payment
obligations. Credit risk originates from sales of advertising and subscription access service and is dispersed among many different counterparties.
We had gross accounts receivable of approximately $323.8 million and maintained an allowance for doubtful accounts of $16.1 million at
December 31, 2010. Our exposure to customer credit risk relates primarily to our advertising customers and individual subscribers to our subscription access
service, and is dispersed among many different counterparties. No single customer had a receivable balance at December 31, 2010 greater than 10% of total
net receivables.
Customer credit risk is monitored on a company-wide basis. We maintain a comprehensive approval process prior to issuing credit to third-party
customers. On an ongoing basis, we track customer exposure based on news reports, ratings agency information and direct dialogue with customers.
Counterparties that are determined to be of a higher risk are evaluated to assess whether the payment terms previously granted to them should be modified.
We also continuously monitor payment levels from customers, and a provision for estimated uncollectible amounts is maintained based on historical
experience and any specific customer collection issues that have been identified. While such uncollectible amounts have historically been within our
expectations and related reserve balances, if there is a significant change in uncollectible amounts in the future or the financial condition of our counterparties
across various industries or geographies deteriorates further, additional reserves may be required.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates, judgments and
assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management considers an accounting
policy to be critical if it is important to our financial condition and results of operations, and if it requires significant judgment and estimates on the part of
management in its application. The development and selection of these critical accounting policies have been determined by our management. Due to the
significant judgment involved in selecting certain of the assumptions used in these areas, it is possible that different parties could choose different assumptions
and reach different conclusions. We consider the policies related to the following matters to be
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