NetFlix 2005 Annual Report Download - page 71

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share and per share data and percentages)
Foreign Currency Translation and Transactions
The financial statements of the Company’s United Kingdom subsidiary were prepared in its local currency
and translated into U.S. dollars for reporting purposes. The assets and liabilities are translated at exchange rates
in effect at the balance sheet date, while results of operations are translated at average exchange rates for the
respective periods. The cumulative effects of exchange rate changes on net assets are included as a part of
accumulated other comprehensive income. Net foreign currency transaction gains and losses were not significant
for any of the years presented.
In the fourth quarter of 2005, the Company substantially liquidated the assets and liabilities of its United
Kingdom subsidiary and accordingly, the cumulative translation adjustment was reclassified from accumulated
other comprehensive income in stockholders’ equity and reported in “Interest and Other Expense” for the period.
Cash and Cash Equivalents
The Company considers highly liquid instruments with original maturities of three months or less, at the
date of purchase, to be cash equivalents. The Company’s cash and cash equivalents are principally on deposit in
short-term asset management accounts at two large financial institutions.
Restricted Cash
As of December 31, 2005, other assets included restricted cash of $500 related to a workers’ compensation
insurance deposit.
Short-Term Investments
The Company’s short-term investments are classified as available-for-sale and are recorded at fair market
value. Net unrealized gains (losses) are reflected in accumulated other comprehensive income. When the fair
value of an investment declines below its original cost, the Company considers all available evidence to evaluate
whether the decline in value is other-than-temporary. Among other things, the Company considers the duration
and extent to which the market value has declined relative to its cost basis and economic factors influencing the
markets, its ability and intent to hold the investments until a market price recovery, and the severity and duration
of the impairment. No impairment charges were recorded for the periods presented. Gains and losses on
securities sold are determined based on the average cost method and are included in “Interest and other income”
in the Consolidated Statements of Income.
During the second quarter of 2004, the Company completed the sale of its short-term investments and
recorded a realized loss of $274 from the transaction. All proceeds from the sale were re-invested in the
Company’s money market fund, which is classified as cash equivalents.
Amortization of DVD Library
The Company amortizes its DVD library, less estimated salvage value, on a “sum-of-the-months”
accelerated basis over its estimated useful life. The useful life of the new-release DVDs and back-catalogue
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.
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