Back to the Drawing BoardThe renewed accounting scrutiny is damaging enough to a company that has made a concerted effort to put its troubled past behind it. CEO Dick Parsons very publicly spent last year trying to simplify the company's capital structure, cut debt and clean up the last remaining messes of the merger of America Online and Time Warner -- including the symbolic measure of dropping the "AOL" from the company's name. Reining in investors' serially disappointed expectations for the merged company, Parsons once referred to 2003 as a "reset year." Then, in releasing
Ads That SubtractAt issue in the Bertelsmann case are certain advertising deals struck in 2001 while AOL Time Warner was negotiating with Bertelsmann over the dissolution of their partnership in AOL Europe. Under an earlier version of the dissolution pact, Bertelsmann had the right to put its AOL Europe shares to AOL Time Warner in two stages, for a total of $6.75 billion. AOL Time Warner had the right to choose whether to pay for those shares in cash or in AOL Time Warner stock. In separate agreements reached in March and December of 2001, the companies changed the earlier terms to specify a cash payment, rather than stock. Meanwhile, "contemporaneously" with the agreements to pay in cash, Time Warner said in SEC filings, the companies reached two separate agreements under which Bertelsmann agreed to purchase additional advertising from AOL Time Warner, valued at $125 million and $275 million. Time Warner and its auditors say the $396.4 million worth of advertising that ran in 2001 and 2002, virtually all of it at the AOL unit, should be recognized as revenue. The SEC staff said in March 2003 that it believed "at least some portion of the revenue" should instead have been treated as a reduction in the AOL Europe purchase price paid to Bertelsmann.
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Stock fighting back
A restatement would make the unpleasant decline in AOL's online advertising sales look even worse. Advertising and commerce revenue for AOL fell from $2.6 billion in 2001 to $1.6 billion in 2002. But subtracting out the disputed Bertelsmann deals as well as a total of $400 million in advertising charged to other units of AOL Time Warner, a steep decline turns into an absolute rout -- from $2.24 billion in 2001 to $1.15 billion in 2002.