America Online 2014 Annual Report Download - page 91

AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Income taxes are presented on the consolidated financial statements using the asset and liability method
prescribed by the accounting guidance for income taxes. Income taxes (e.g., deferred tax assets, deferred tax
liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on amounts refundable
or payable in the current year and include the deferred income tax effects of temporary differences between the
carrying amounts of assets and liabilities and their tax bases, stated at enacted tax rates expected to be in effect
when the taxes are actually paid or recovered. Deferred income taxes reflect expected future tax benefits (i.e.,
assets) and future tax costs (i.e., liabilities). The tax effect of net operating loss, capital loss and general business
credit carryovers result in deferred tax assets. Valuation allowances are established when management
determines it is “more likely than not” that some portion or all of the deferred tax asset may not be realized. The
Company considers all positive and negative evidence in evaluating its ability to realize its deferred income tax
assets, including its historical operating results, ongoing tax planning, and forecast of future taxable income, on a
jurisdiction by jurisdiction basis.
With respect to uncertain tax positions, AOL recognizes in the consolidated financial statements those tax
positions determined to be “more likely than not” of being sustained upon examination, based on the technical
merits of the positions. AOL records a liability (or reduces deferred tax assets) for the difference between the
benefit recognized and measured pursuant to the accounting guidance for income taxes and the tax position taken
on its tax return. The Company adjusts its estimates for uncertain tax positions periodically because of ongoing
examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations
and interpretations. The consolidated tax provision for any given year includes adjustments to prior year income
tax accruals that are considered appropriate and any related estimated interest. The Company’s policy is to
recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense.
Certain Risks and Concentrations
The Company’s financial instruments include primarily cash and equivalents, accounts receivable, accounts
payable, accrued expenses and other current liabilities. Due to the short-term nature of these assets and liabilities,
their carrying amounts approximate their fair value. Financial instruments that potentially subject the Company
to concentrations of credit risk are primarily cash and accounts receivable.
The Company maintains its cash and equivalents balances in the form of money market accounts, U.S.
treasury bills and time deposits. The Company maintains cash deposits with banks that at times exceed applicable
insurance limits. The Company reduces its exposure to credit risk by maintaining such deposits with high quality
financial institutions that management believes are creditworthy.
The Company is also exposed to counterparty credit risk as a result of the note hedge transactions. Upon
default by the option counterparty, the Company may suffer dilution and tax consequences with respect to its
common stock.
The Company’s exposure to customer credit risk relates primarily to advertising customers and individual
subscribers to AOL’s subscription services, and is dispersed among many different counterparties, with no single
customer having a receivable balance in excess of 10% of total net receivables at December 31, 2014 or 2013.
For each of the periods presented herein, the Company has had a contractual relationship with Google Inc.
(“Google”) whereby Google provides paid text-based search advertising on AOL Properties. For the years ended
December 31, 2014, 2013 and 2012, the revenues associated with the Google relationship (substantially all of
which were search revenues generated on AOL Properties), were $407.4 million, $373.3 million and $350.9
million, respectively.
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