NetFlix 2006 Annual Report Download - page 48

Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide
indemnification of varying scope and terms to business partners and other parties with respect to certain matters,
including, but not limited to, losses arising out of our breach of such agreements and out of intellectual property
infringement claims made by third parties. In addition, we have entered into indemnification agreements with our
directors and certain of our officers that will require us, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors or officers.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated, so the overall
maximum amount of the obligations cannot be reasonably estimated. To date, we have not incurred material
costs as a result of such obligations and have not accrued any liabilities related to such indemnification
obligations in our financial statements.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This
framework is intended to provide increased consistency in how fair value determinations are made under various
existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier
application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal
year, including any financial statements for an interim period within that fiscal year. We do not expect the adoption
of this standard to have a material effect on our financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The interpretation also provides guidance on the related derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective
for fiscal years beginning after December 15, 2006. We do not expect the adoption of this standard to have a
material effect on our financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments which
amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 155
allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value
basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. We do not expect the adoption of this standard to have a material effect on our financial
position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal, while at the same time
maximizing income we receive from investments without significantly increased risk. Some of the securities we
invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the
principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later rises, the value of our investment will
decline. To minimize this risk, we intend to maintain our portfolio of cash equivalents in a variety of securities.
At December 31, 2006, our cash equivalents are generally invested in money market funds, which are not subject
to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.
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