America Online 2010 Annual Report Download - page 77

Table of Contents
AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
actual level of expense that would have been incurred by AOL if it had operated as an independent, publicly-traded company or of the costs expected to be
incurred in the future. These allocated expenses relate to various services that were provided to AOL by Time Warner, including cash management and other
treasury services, administrative services (such as government relations, tax, employee benefit administration, internal audit, accounting and human
resources), equity-based compensation plan administration, aviation services, insurance coverage and the licensing of certain third-party patents. See "Note
13" for further information regarding the allocation of Time Warner corporate expenses and the relationship with Time Warner.
The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency.
Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated
at average rates of exchange during the period. Resulting translation gains or losses are included in the consolidated balance sheet as a component of
accumulated other comprehensive income (loss), net.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make
estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could
differ from those estimates. Significant estimates inherent in the preparation of the consolidated financial statements include accounting for asset impairments,
reserves established for doubtful accounts, equity-based compensation, depreciation and amortization, business combinations, income taxes, litigation matters
and contingencies.
Summary of Significant Accounting Policies
Revenues
The Company generates revenue primarily from advertising and from its subscription access service. Revenue is recognized when persuasive evidence
of an arrangement exists, performance under the contract has begun, the contract price is fixed or determinable and collectability of the related fee is
reasonably assured.
Advertising Revenues
Advertising revenues are generated on AOL Properties through display advertising and search and contextual advertising. Display advertising revenue
is generated by the display of graphical advertisements and other performance-based advertising. Search and contextual advertising revenue is generated when
a user clicks on a text-based advertisement on the user's screen. These text-based advertisements are either generated from a user-initiated search query or
generated based on the content of the webpage the user is viewing. Advertising revenues derived from impression-based contracts, in which AOL provides
impressions in exchange for a fixed fee (generally stated as cost-per-thousand impressions), are generally recognized as the impressions are delivered. An
"impression" is delivered when an advertisement appears in pages viewed by users. Revenues derived from time-based contracts, in which AOL provides a
minimum number of impressions over a specified time period for a fixed fee, are recognized on a straight-line basis over the term of the contract, provided
that AOL is meeting and will continue to meet its obligations under the contract (e.g., delivery of impressions over the term of the contract). Advertising
revenues derived from contracts where AOL is compensated based on certain performance criteria are recognized as AOL completes the contractually
specified performance. Performance can be measured in terms of "click-throughs" when a user clicks on a company's advertisement or other user actions such
as product/customer registrations, survey participation, sales leads or product purchases.
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