America Online 2010 Annual Report Download - page 84

Table of Contents
AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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 $41.9 million, $63.2 million and $68.8 million for the years ended December 31, 2010, 2009 and 2008, 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 and 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 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.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising expense to third parties was $79.3 million, $59.1 million and $116.2 million
for the years ended December 31, 2010, 2009 and 2008, respectively.
Loss Contingencies
In the normal course of business, the Company is involved in legal proceedings, tax audits (other than income taxes) and other matters that give rise to
potential loss contingencies. The Company accrues a liability for such matters when it is probable that a liability has been incurred and the amount of loss can
be reasonably estimated. In situations where the Company can determine a best estimate within the range of potential loss, the Company records the best
estimate of the potential loss as a liability. In situations where the Company has
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