America Online 2010 Annual Report Download - page 65

Table of Contents
AOL INC.
PART II—ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
critical accounting policies: (a) gross versus net revenue recognition; (b) impairment of goodwill; and (c) income taxes.
Gross versus Net Revenue Recognition
We generate a significant portion of our advertising revenues from our advertising offerings on the Third Party Network, which consist of sales of
display and video advertising. In connection with our advertising offerings on the Third Party Network, we typically act as or use an intermediary or agent in
executing transactions with third parties. The significant judgments made in accounting for these arrangements relate to determining whether we should report
revenue based on the gross amount billed to the customer or on the net amount received from the customer after commissions and other payments to third
parties. To the extent revenues are recorded on a gross basis, any commissions or other payments to third parties are recorded as costs of revenues so that the
net amount (gross revenues less expense) is reflected in operating income. Accordingly, the impact on operating income is the same whether we record
revenue on a gross or net basis.
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 the 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 2010, we
earned and reported gross advertising revenues of $335.6 million and incurred costs of revenues of $251.3 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, which could result from significant adverse changes in the business climate and
declines in the value of our business. Such indicators may include a sustained, significant decline in our stock price; a decline in our expected future cash
flows; significant disposition activity; a significant adverse change in the economic or business environment; the testing for recoverability of a significant
asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material
impact on our consolidated financial statements.
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