The thing that categorize among a powerful and weak company is their strategies and complying behavior with the regulations and regulatory authorities. Apart from the general operations, organizations have to consider a strong behavior with their accounting department as well. Accounting department is known as an important department with its core adherence with the productivity of a corporation, and it is usually addresses the day to day transactions of a company (Leung, Coram & Cooper, 2007).
In the current economic scenarios, there are certain restrictions and suggestions that are essential for the accounting department of a company, but still there are bulk of examples can be found wherein the stance of misrepresentation and misstatement associated with the organizations. Accounting frauds and manipulation has now emerged as gangrene for the companies, and it is evaluated why regulatory authorities are now making and transforming the things and laws firmer to complete the vision accordingly and on time as well.
Accounting standards are made specifically to empower the companies to enhance their accounting related functions and strategies, and some of the major accounting regulations are International Financial Reporting Standards (IFRS) and US based Generally Accepted Accounting Principles (GAAP). In this assignment, there is case given with the study related to the company AOL, and on the basis of this case, there are three different answers that needed to undertake and analyze accordingly. All of the questions related to the case study, and the study has sufficient material and readings to describe each and every thing in details.
Analysis & Findings
Three different questions have been analyzed that would be answer here accordingly, and every answer related to the company AOL and on the attached case study.
- Summary of Controversial Accounting Policies of AOL
AOL Inc which previously known as America Online, and written as AOL is an American based multinational mass media corporation located in the New York, the United States. AOL develops, invests and grows in the brands and in different websites. The main business of the company spans on the digital based distribution of content, product and services, which it offers specifically to their consumers, advertisers and the publishers. The reported revenue of AOL in the fiscal year 2013 was US$ 2.4 billion with net income of US$ 92.4 million in the same year.
It is evaluated from the core analysis that the controversies in which the company has had involved intentionally and un-intentionally. However, most of the controversies are related to the non compliance with the US GAAP, the most astounding and widely used accounting methods of the U.S. therefore, the controversy can be devoted as intentional controversies. The entire case was about the products and achievement of AOL along with a serious discussion over the future consequences and implications of the company (Leung, Coram & Cooper, 2007). It gives a good idea to the reader about the future strategies of the company which they will try to figure out in the future for their effectiveness. There are certain things that evaluated and could also be named as manipulation, which found in AOL function. As per the case study of the company, the company manipulated the amount of their share price without any evidence. The initiation was taken into consideration in the year 1995, just to increase the level of their equity without any prior notification to the investors as well as to the financial market. As per the US GAAP, no organization can increase the price of their shares without informing their investors, in fact in some cases, the entire decision would be taken by the investors itself regarding the increasing or decreasing the price of the shares of the company. It is also found from the analysis that the annual reports of the company mentioned that investors should possess aggressive strategy, however the trend of short selling found actually with the shares of the company. Retention rate, dividend rate and growth rate are showing high growth percentage without any concrete evidence. Apart from that, there was a serious breached found in the financial statement of the company, in which they manipulated their income statement. According to the US GAAP, income statement should have a section devoted to comprehensive income, but unfortunately, AOL didn’t mention anything about it in their income statement, which is one of the major issues for controversy for AOL in the year 1995.
- Justification for capitalizing subscriber acquisition cost
Merger and acquisition (M&A) is a general term that refers to the consolidation of companies. It is found that merger is a combination of two companies to for a new company, while acquisition means is to purchase a company from the other one. Both of these provisions and terms are essential in the field of business and management (Leung, Coram & Cooper, 2007). During the current economic crisis, there were number of companies who initiated intentional mergers and acquisitions for their retention and survivals, and those mergers have emerged some of the essentials for the growth targets for the company (Leung, Coram & Cooper, 2007).
Capitalization is a term associated with accumulating the financial capital for the organizations, and M&A is one of the strongest mediums to accomplish the same thing for the organizations. According to the case study, AOL had initiated mergers for capitalizing them accordingly. As per the case study, AOL subscribed the capitalization cost by initiating strategic alliance with different internet based companies like Reuters, Shoppers Express, Business Week, Vanguard and National Education Services. Apart from that, the company also initiated strategic alliance with some of the important technological based companies of the world also known as entrepreneurs of technology like Tom and David Gardner. The idea of capitalizing the acquisition cost before 1995 was absolutely right, because the company had a tough time a year before. A significant increase has been envisaged in the revenue services of AOL in the financial year (FY) 1995 by more than 200%, which is showing that the acquisition was successful with the aforementioned companies, and the companies get certain added advantage with the same aspect. For the rationale, escalating total assets and spurring shareholder’s equity are more than enough to find out the relationship among the company, and the capitalization. The acquisition cost would decrease considerably well because the entire work had been initiated on the internet with strategic alliance. The company neither merged with any company to become a new company nor it was acquired by any other company operated in the homogenous manner. The provision of total assets of AOL actually increased by more than 162% in the financial year 1995, as compared to a prior year, while there was an increment of nearly 122% in the shareholder’s equity in AOL as compared to the shareholder’s equity in the financial year 1994
- Subscriber Acquisition Cost Written Off
Accounting is a term that addressed with every organization of the world. This particular department has an inclination towards the interpretation and analyzing all the transactions that completed in a day time period. The beauty of this field is that it has the journal entries of almost everything it has. The field of accounting has a definite accounting cycle that starts with making of General Journal (GJ) and ends with making of trial balance (Leung, Coram & Cooper, 2007). It is a vital link of the accounting cycle used for making the financial statements.
It is not always the case of plus and minus of the numbers, but there are some elements that required to be completely written off from the balance sheet. Acquisition and mergers are some of the essentials for an organization, as definite impact and effective over the economic position of the companies in particular. When a company acquires a new company or having a strategic alliance with it, then all of the respective amount should be managed under the name of Goodwill to be mentioned on the balance sheet, while some of the companies maintained and recorded this cost as Purchased Research & Development cost in their balance sheet. If AOL would capitalized all of its subscriber acquisition cost (SAC) were written off at the end of the year 1995, then the general entry of the same would be like this
SAC Company Name (Debit)
Common Stock/Equity (Credit)
Every department is essential for an entity, and accounting department deem as one of the strongest and important departments for them. Though the level of compliance is extremely high in this particular department, but it is the only department from which an organization can be in regular communication with the shareholders of the company. Proper compliance and adhering with the standards are some of the essentials for this particular department. In this particular assignment, the whole discussion would be lie on a specific case of AOL. There are three different questions related to the AOL case and their capitalizations have been required to answer in this assignment. All of the answers have been given in an effective manner with best possible mean to educate each and every person accordingly, and it will certainly empower the readers regarding the importance of compliance and capitalization.
Leung, P., Coram, P., & Cooper, B. (2007). Modern auditing & assurance services. Milton, Qld.: John Wiley & Sons Australia, Ltd.