Media and entertainment giant Time Warner Inc. said that it had established $500 million in legal reserves related to pending government investigations, and that it intends to restate its accounting for its interests in AOL Europe prior to 2002.

Time Warner said that the $500 million represents its "current best estimate" of the amounts that would be involved ultimately to resolve the investigations, and that it believes that some portion of that will be available to settle related shareholder litigation.

Both the Securities and Exchange Commission and the Justice Department are investigating the company's accounting and disclosure practices, with a focus on transactions involving its America Online segment entered into after July 1, 1999, including advertising arrangements, the methods used by AOL to report its subscriber numbers, and the accounting related to America Online's interest in AOL Europe prior to January 2002.

Time Warner previously disclosed that it had begun a review of the accounting related to the consolidation of, and equity accounting for, its interest in AOL Europe prior to January 2002, when it acquired 80 percent of Bertelsmann's interest in AOL Europe. Prior to January 2002, the company accounted for its interest in AOL Europe using the equity method of accounting and didn't consolidate the financial results of AOL Europe.

Following its own review and discussions with the SEC staff, Time Warner said that it had determined that the financial results of AOL Europe should have been consolidated beginning in March 2000. Accordingly, AOL said that it will restate its consolidated financial results for the years ended Dec. 31, 2000 and 2001, and said that its results for the year ended Dec. 31, 2002, may be affected, due to "uncertainties related to the application of the equity method of accounting."

Both the SEC and DOJ investigations are ongoing. The company said that it will continue to cooperate with both regulators, and warned that further restatements may be necessary, and that "so long as there are unresolved issues associated with the company's financial statements, the effectiveness of any registration statement of the company or its affiliates may be delayed."

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