Mr. Scott, I'd want to express my heartfelt gratitude for all I've been following your company's excellent

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Question:

Mr. Scott, I'd want to express my heartfelt gratitude for all I've been following your company's excellent performance for almost a decade. I'm afraid that your reported financial results don't accurately represent your true success. Your most recent 10-K filing, in particular, does not represent the developments in your business that I am aware of. Furthermore, there were at least two instances of unclear and, in my opinion, deceptive data:

1. Recognizing Revenue Over Time - Your revenue recognition policy was characterized in your most recent 10-K as "revenue is recognized when services are performed." This is great, however I notice discrepancies in your application of the rules. It looks like you are booking a lot of money up front for advertising that will run for a long time. As far as I can tell, after certain volume thresholds are met, many major marketers enjoy significant pricing cuts. You don't say if you predict and account for these reductions when early advertising is run, therefore income is overstated in the beginning. In forward-looking financial predictions, it's also unclear how you'll account for industry decreases in overall advertising and subscription income.

2. Cost Allocation Across Periods - Your subscriber promotion expenditures are “expensed as incurred” according to your accounting policy. The costs for these products were stated as $100 million, $190 million, and $90 million, respectively, for 2003, 2002, and 2001. The increase in expenses in 2002 had no justification. Were you front-loading expenses to control earnings in 2002? It's also worth noting that 2002 was a year in which you took significant restructuring costs and impairment intangible.

How would you suggest Scott respond to the issues raised Young raised? What answers might you seek to help determine the optimal reporting for each of the two points raised? Below are some further questions to consider:

What guidance, if any, does Reg FD provide regarding how Scott and other World Portal officers should respond to Janice?
Number 1 and 2 deal specifically with revenue and expense recognition in the income statement. What principles govern when and how each of these items should be recorded?