America Online 2014 Annual Report Download - page 88

AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining
whether the Company acts as the principal or an agent, the Company follows the accounting guidance for
principal-agent considerations and the Company places the most weight on whether or not the Company is the
primary obligor in the arrangement.
Multiple-Element Transactions
Management analyzes contracts with multiple elements under the accounting guidance for multiple-element
arrangements. The Company’s multiple-element arrangements generally include online advertising and non-
advertising (i.e., insertion orders and production of a “microsite”) and involve multiple deliverables to customers
across AOL Properties and/or the Third Party Properties. The guidance requires that revenue arrangements with
multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement
have value to the customer on a standalone basis, and if the delivery of the undelivered items in the arrangement
is considered probable and substantially in the control of the vendor. If these criteria are met, then the
arrangement consideration is allocated among the separate units of accounting based on their relative estimated
selling prices. In such circumstances, the Company uses a selling price hierarchy to determine the selling price to
be used for allocating revenue to the deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”),
(ii) third-party evidence of selling price, and (iii) best estimate of the selling price (“BESP”). VSOE generally
exists only when the Company sells the deliverable separately and VSOE is the price actually charged by the
Company for that deliverable. BESPs reflect the Company’s best estimates of what the selling prices of
deliverables would be if they were sold regularly on a stand-alone basis. The Company recognizes revenue from
the provision of online advertising and non-advertising contracts when the advertising campaigns and the
productions are delivered.
If the deliverables cannot be separated into multiple units of accounting, then the arrangement is accounted
for as a combined unit of accounting and recognized into revenue based on the lower of (i) performance or
(ii) straight-line as calculated in aggregate for the entire deal. Straight-line revenue recognition is determined by
taking the total sold value of all deal components and recognizing that value evenly over the entire deal term.
Subscription Revenues
The Company earns revenue from its subscription services in the form of monthly or annual fees paid by
subscribers to its service offerings, and such revenues are recognized on a straight-line basis as the service is
provided.
Traffic Acquisition Costs
AOL incurs costs through arrangements in which it acquires third-party online advertising inventory for
resale and arrangements whereby partners direct traffic to AOL Properties (e.g., UV acquisitions). AOL
considers these costs to be traffic acquisition costs (“TAC”). TAC arrangements have a number of different
economic structures, the most common of which are: payments based on a cost per thousand impressions or
based on a percentage of the ultimate advertising revenues generated from the advertising inventory acquired for
resale and payments for direct traffic delivered to AOL Properties priced on a per click basis (e.g., search engine
marketing fees). These arrangements are primarily on a variable basis; however, the arrangements can also be on
a fixed-fee basis, which often carry reciprocal performance guarantees by the counterparty, or a combination of
fixed and variable fees. TAC agreements with fixed payments are typically expensed ratably over the term of the
agreement. TAC agreements with variable payments are typically expensed based on the volume of the
underlying activity at the specified contractual rates. TAC agreements with a combination of a fixed fee for a
72