LinkedIn 2012 Annual Report Download - page 53

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extent that we change the manner in which we develop and test new features and functionalities related to
our website, assess the ongoing value of capitalized assets or determine the estimated useful lives over
which the costs are amortized, the amount of website and internal-use software development costs we
capitalize and amortize could change in future periods.
Leases
Historically, all of our significant leases have been accounted for as operating leases. Accounting for
these leases requires significant judgment by management. Application of accounting rules and
assumptions made by management will determine whether the lease is accounted for as a capital or
operating lease or whether we are considered the owner for accounting purposes in accordance with
authoritative accounting guidance on leases.
If the lease is considered a capital lease or we are considered the owner for accounting purposes, we
would record the property and a related capital lease obligation on our balance sheet. The asset would
then be depreciated over its expected lease term. Rent payments for these properties would be recognized
as interest expense and a reduction of the capital lease obligation.
If the lease is considered an operating lease, it is not recorded on our balance sheet and rent expense
is recognized on a straight-line basis over the expected lease term.
The most significant estimates used by management in accounting for property leases and the impact
of these estimates are as follows:
•Expected lease term. The expected lease term is used in determining whether the lease is accounted
for as an operating lease or a capital lease. A lease is considered a capital lease if the lease term
exceeds 75% of the leased asset’s useful life. The expected lease term is also used in determining
the depreciable life of the asset or the straight-line rent recognition period. Increasing the expected
lease term will increase the probability that a lease will be considered a capital lease and will
generally result in higher rent expense for an operating lease and higher interest and depreciation
expenses for a capital lease.
•Incremental borrowing rate. We estimate our incremental borrowing rate using treasury rates for
debt with maturities comparable to the expected lease term and our credit spread. The incremental
borrowing rate is primarily used in determining whether the lease is accounted for as an operating
lease or a capital lease. A lease is considered a capital lease if the net present value of the lease
payments is greater than 90% of the fair market value of the property. Increasing the incremental
borrowing rate decreases the net present value of the lease payments and reduces the probability
that a lease will be considered a capital lease.
•Fair market value of leased asset. The fair market value of leased property is generally estimated
based on comparable market data. Fair market value is used in determining whether the lease is
accounted for as an operating lease or a capital lease. A lease is considered a capital lease if the
net present value of the lease payments is greater than 90% of the fair market value of the
property. Increasing the fair market value reduces the probability that a lease will be considered a
capital lease.
If our assumptions change and we amend an existing lease or enter into a new lease, we may have
leases that are accounted for as capital leases, as well as operating leases. Accounting for a lease as a
capital lease would accelerate the timing of expense recognition due to the recognition of larger amounts
of interest expense near the beginning of the lease term. It would also change the characterization of
expense from rent expense to a combination of depreciation and interest expense, both of which are
excluded from our adjusted EBITDA metric and would likely impact other financial metrics. However,
lease classification would not be expected to impact our cash flow.
51