Demand Media, Inc. was founded in 2006 and went public in 2011. The company operated two business segments: Content & Media, and Registrar. The Content & Media segment operated several websites, such as eHow.com, Livestrong.com, and Cracked.com, which provided articles and videos on a wide range of topics. The company’s accounting for content was an area of concern for investors and analysts, who questioned the company’s aggressive amortization policy.
The case issue in the “Note on Accounting for Content at Demand Media” is the accounting treatment for the creation and amortization of content at Demand Media. The company’s aggressive amortization policy came under scrutiny from investors and analysts, leading to questions about the sustainability of the company’s business model.
Demand Media created a large amount of content through a network of freelance writers and editors. The company amortized the costs of this content over a five-year period. The aggressive amortization policy allowed Demand Media to show higher earnings in the short term, but it also raised concerns about the sustainability of the company’s business model.
The SEC began to investigate Demand Media’s accounting practices in 2011. The investigation focused on the company’s use of “traffic acquisition costs” and the amortization of content costs. Demand Media revised its amortization policy in response to the investigation, and the company’s stock price fell as a result.
Demand Media’s accounting for content is an example of how companies can use accounting policies to manipulate earnings. Aggressive amortization policies can boost earnings in the short term but may lead to lower earnings in the future.
Demand Media’s accounting for content highlights the importance of transparent accounting policies. Companies should be upfront about their accounting policies and avoid aggressive amortization policies that may raise concerns about the sustainability of their business model. Investors and analysts should also be vigilant and question companies’ accounting practices if they seem too good to be true.
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Companies should develop accounting policies that are transparent and easily understood by investors and analysts. Aggressive amortization policies should be avoided, and companies should be upfront about the expected life of their assets. Investors and analysts should also be vigilant and question companies’ accounting practices if they seem too good to be true.
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