Demand Media’s Odd Accounting

Demand Media, an online content producer that has postponed a planned IPO, recently revealed some strange wrinkles in its accounting for writer expenses.

The company, which pays freelancers only about $15 for stories of several hundred words, spreads out the cost of expenses for those writers over five years, unlike most publishing companies, which book the expenses at once.

In the company’s most recently amended S-1 filing, Demand Media wrote, “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.”

Regulators are starting to question the company’s accounting, according to All Things Digital.

Demand pays its 13,000 freelancers only about $15 per article or $30 for a video. Nevertheless, the company, which runs a battery of websites like eHow, LiveStrong.com, Cracked.com and GolfLink, and employs around 13,000 freelancers, had until recently insisted that it was running a profit. That is, until the company revealed in its IPO filing that it’s running a net loss of $6 million as of August 2010, and that it posted a net loss of $22 million in 2009, $14 million in 2008, and almost $6 million in 2007, according to CNNMoney.com.

As regulators start to take a closer look at Demand and its practices, the IPO may be a long time in coming.