NetFlix 2004 Annual Report Download - page 70

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share, per share and percentages)
DVDs is estimated to be 1 year and 3 years, respectively. In estimating the useful life of its DVD library, the
Company takes into account library utilization as well as an estimate for lost or damaged DVDs. See Note 2 for
further discussion.
Amortization of Intangible Assets
The Company amortizes the intangible assets associated with certain revenue sharing and strategic
marketing alliance agreements over the terms of the agreements. See Note 3 for further discussion.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using
the straight-line method over the shorter of the estimated useful lives of the respective assets, generally up to five
years, or the lease term, if applicable.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, long-lived assets such as property and equipment and intangible
assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets groups to be
held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted
future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds
its estimated 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 any of the years 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 subscribers 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. Revenue sharing expenses are recorded as DVDs
subject to revenue sharing agreements are shipped to subscribers. Cost of DVD sales include the net book value
of the DVDs sold and, where applicable, a contractually specified percentage of the sales value for the DVDs that
are subject to revenue share agreements.
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