NetFlix 2003 Annual Report Download - page 67

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NETFLIX, INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and per DVD data)
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset
group exceeds fair value of the asset group. The Company evaluated its long-lived assets and no impairment
charges were recorded for the periods presented.
Capitalized Software Costs
The Company capitalizes costs related to developing or obtaining internal-use software. Capitalization of
costs begins after the conceptual formulation stage has been completed. Capitalized software costs are included
in property and equipment, net and are amortized over the estimated useful life of the software, which is
generally one year.
Revenue Recognition
Subscription revenues are recognized ratably during each subscriber’s monthly subscription period. Refunds
to customers are recorded as a reduction of revenues. Revenues from sales of used DVDs are recorded upon
shipment.
Cost of Revenues
Cost of subscription revenues consists of revenue sharing expenses, amortization of the DVD library,
amortization of intangible assets related to equity instruments issued to studios, and postage and packaging
expenses related to DVDs provided to paying subscribers. Cost of DVD sales includes the salvage value of used
DVDs that have been sold. Revenue sharing expenses are recorded as DVDs subject to revenue sharing
agreements are shipped to subscribers.
Fulfillment
Fulfillment expenses represent those costs incurred in operating and staffing the Company’s fulfillment and
customer service centers, including costs attributable to receiving, inspecting and warehousing the Company’s
DVD library. Fulfillment expenses also include credit card fees.
Technology and Development
Technology and development expenses consist of payroll and related costs incurred in testing, maintaining
and modifying the Company’s Web Site, our recommendation service, telecommunications systems and
infrastructure and other internal-use software systems. Technology and development expenses also include
depreciation on the computer hardware and capitalized software.
Marketing
Marketing expenses consist of payroll and related costs, advertising, public relations, payments to marketing
affiliates who drive subscriber traffic to the Company’s Web site and other costs related to promotional activities
including revenue-sharing expenses, postage and packaging expenses and DVD library amortization related to
free-trial periods. The Company expenses these costs as incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred income taxes are
recognized by applying enacted statutory tax rates applicable to future years to differences between the financial
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