Demand Media’s IPO is being tripped up by its questionable accounting practices, Kara Swisher at All Things D reports.As venture capitalist Bo Peabody detailed at the end of November, Demand spreads out the cost of content creation over a five year period.
Demand thinks the content its writers generate has a long shelf life, so it doesn’t think it needs to immediately recognise the cost of the content. It is spreading out the costs over a 5 year period.
Government regulators have not called this an illegal manoeuvre, but they are taking a long look at Demand Media to see this if is OK, says Swisher. And they want Demand to fully explain its methods to prospective investors.
In response to the regulators, Demand filed an amendment to its S-1 further explaining its accounting.
In the S-1, Demand says, “Significant judgment is required in estimating the useful life of our content,” and any changes to the five year shelf life estimation, “would have a significant impact on our financial statements.”
How significant? Well, if it decided its content was useful for 6 years, Demand’s net loss for the first nine months of the 2010 would drop by $1.6 million. If it decided its content was useful for just 4 years, its net loss would increase by $2.4 million.
(Loss from operations for the first nine months of 2010 was $3.3 million.)
AOL, Yahoo, and (presumably) other publishers are keeping an eye on how this plays out, says Swisher. If it’s legal, then other companies might start doing the same thing.
Until Demand gets full approval for its accounting methods it’s holding off on a IPO roadshow. So, the IPO which was expected around this time of year is being delayed until 2011.
More On Demand:
Bo Peabody’s deep dive into its financials: DOWN ON THE (CONTENT) FARM: Here’s Why I Would Never Invest In Demand Media’s IPO
And Byrne Hobart’s deep dive: Demand Media’s IPO: Everything You Need To Know
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