AOL Accounting, Time Warner Restatement

Time Warner says that it should have consolidated losses from an AOL unit two years earlier than it did.

Time Warner Inc. announced that it has set aside $500 million in legal reserves in connection with a government probe and that it will restate its financial results for 2000, 2001, and possibly 2002.

The actions stem from an investigation by the Securities and Exchange Commission into a series of transactions that occurred around the time of the 2001 merger of America Online and Time Warner; into how AOL accounted for losses at its European division; and into Time Warner’s accounting for its stake in AOL Europe.

AOL and German media giant Bertelsmann AG had been equal partners in AOL Europe. In March 2000, they worked out an option agreement in which AOL would buy Bertelsmann’s stake in two stages in 2002.

After the AOL-Time Warner merger, the company didn’t begin consolidating AOL Europe’s results until the Bertelsmann transaction was completed. This week, however, Time Warner conceded that it should have consolidated the venture’s losses from the time the option agreement was negotiated, according to The Wall Street Journal.

Time Warner noted that consolidating AOL Europe would have resulted in a net loss of about $154 million in 2000 and $422 million in 2001.

The company added that the SEC and the Department of Justice continue to investigate a range of transactions, mostly involving AOL, including advertising arrangements and the methods used by AOL to report its subscriber numbers. “It is not yet possible to predict the outcome of these investigations,” noted the company in a statement, “but it is possible that further restatement of the company’s financial statements may be necessary.”

Time Warner added that it believes some portion of the amount $500 million reserve will be available for related shareholder litigation.

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