Essay Example on Non GAAP Standards For analyzing financials Demand

The firm s policy of capitalizing costs of online media content and amortizing them over a 5 year period as opposed to the industry standard of expensing them is unusual The firm is overly aggressive in capitalizing costs in this manner Doing so allows Demand to show lower expenses for the period during which the cost was incurred For example recording an expense of 10000 for freelancers of the content creation as an intangible asset and amortizing it over 5 years allows Demand to show expenses of just 2000 per year which significantly reduces their losses This practice of offsetting content creation costs to future years is a misrepresentation of their finances Costs capitalized by Demand Media relate to content Internet domain registration and maintenance and internal development of software This strategy of reporting could be attributed to the fact that Demand was in line to request for an IPO and wanted to inflate its net income shareholder s equity cash flow from operations Online Content Asset Demand s online content can t be considered an asset it needs to be expensed instead of amortized for accurate reporting Because future benefit is hard to quantify given that online media content can be accessed over several years its benefit is hard to quantify and because of its low market price Statement of Operations Analysis This statement shows that Demand is operating at a net loss every year However the Net loss is decreasing shown by the increase in revenue and due to the fact that Demand is approaching positive cash flows in future years 

Additionally demand continues to lose cash despite overstating its financial position as emphasized by their liquidity ratios Competitors WebMD expenses the cost of creation by including these costs in their cost of operations New York Times only classifies purchased content as an intangible asset and amortizes it Time Warner amortizes capitalized film and TV production costs each quarter We see that even compared to most of their subsidiaries operating within the same space Demand s policies are certainly quite aggressive and misrepresent the firm s status Policy Change Conservative Policy A shift in policy from the 5 year capital asset amortization strategy would reflect a significant impact on Demand s financial statements Even with an increase of a year their net loss would