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AOL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2014, 2013 and 2012, property and equipment acquired under capital
lease agreements was $102.5 million, $63.4 million and $50.6 million, respectively, of which the majority is
network equipment.
Capitalized Internal-Use Software Costs
AOL capitalizes certain costs incurred for the purchase and development of internal-use software. These
costs, which include the costs associated with coding, software configuration, major 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 on the consolidated balance sheets. For the years ended
December 31, 2014, 2013 and 2012, AOL capitalized $53.9 million, $43.7 million and $40.5 million,
respectively, related to the purchase and development of internal-use software. At December 31, 2014 and 2013,
the net book value of capitalized internal-use software was $85.3 million and $68.2 million, respectively.
Research and Development
Research and development costs, which are expensed as incurred, are included in costs of revenues and
totaled $37.6 million, $40.6 million and $44.8 million for the years ended December 31, 2014, 2013 and 2012,
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 equipment and 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 on 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, trade names 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. AOL does not have any indefinite lived intangible assets other than goodwill.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising expense was $49.7 million, $61.6
million and $85.8 million for the years ended December 31, 2014, 2013, and 2012, respectively, and is included
in general and administrative expense on the consolidated statements of comprehensive income.
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
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