Demand’s Creative Accounting

Inplace #2

money_small.jpgADOTAS – A couple of months ago, it seemed Demand Media was about to give Wall Street an IPO just in time for the holidays, but alas, All Things D’s Kara Swisher discovered that we’ll have to wait for the new year as the content engine just delivered the Securities Exchange Commission an amended S-1 filing further explaining its accounting procedures for expensing content production. Interestingly, the company that barrages the Internet with a storm of low-cost and low-quality content apparently has some rather creative accounting methods.

Because its primarily instructional videos and the like, Demand argues the majority of its content is evergreen, and thus the company amortize content creation costs over five years through some interesting calculations.

In Demand’s own words:

“Capitalized media content is amortized on a straight-line basis over five years, representing the Company’s estimate of the pattern that the underlying economic benefits are expected to be realized and based on its estimates of the projected cash flows from advertising revenues expected to be generated by the deployment of its content. These estimates are based on the Company’s plans and projections, comparison of the economic returns generated by its content of comparable quality and an analysis of historical cash flows generated by that content to date.”

Growling about Demand Media’s content farming has almost become a pastime of the tech media, so reaction to these accounting methods has been the equivalent of thousands yelling “BS” into an infinite number of megaphones.

Business Insider’s Henry Blodgett sums it up best: “[L]et’s say a particularly productive Demand Media writer earns $100,000 a year… Instead of taking the writer’s compensation as a $100,000 expense in the year in which the writer is paid, Demand Media expenses only $20,000. Then it expenses another $20,000 in each year for the next four years. This has a marvelous impact on the bottom line.”

Demand was shooting to push out an IPO fast as can be, raising $125 million for a reported $1.5 billion valuation. However, this is the second amended filing Demand has entered in the last few months — perhaps the more that comes to light about its accounting, the less promising an IPO will be….