NetFlix 2008 Annual Report Download - page 75

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The tax effects of temporary differences and tax carryforwards that give rise to significant portions of the
deferred tax assets are presented below (in thousands):
Year Ended December 31,
2008 2007
Deferred tax assets:
Accruals and reserves ........................................ $ 1,378 $ 2,986
Depreciation ............................................... 2,947 473
Stock-based compensation .................................... 17,440 15,736
R&D credits ................................................ 5,158 —
Other ..................................................... 1,103 (76)
Deferred tax assets .............................................. $28,026 $19,119
In evaluating its ability to realize the deferred tax assets, the Company considered all available positive and
negative evidence, including its past operating results and the forecast of future market growth, forecasted
earnings, future taxable income, and prudent and feasible tax planning strategies. As of December 31, 2008 and
2007, it was considered more likely than not that substantially all deferred tax assets would be realized, and no
valuation allowance was recorded.
On October 3, 2008, the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 was signed into
law. This bill, among other things, retroactively extended the expired research and development tax credit. As a
result, the Company has recorded a tax benefit of approximately $0.5 million in the fourth quarter of calendar
year 2008 to account for the retroactive effects of the research credit extension.
In the first quarter of 2007, the Company adopted the provisions of FIN 48. Beginning with the adoption of
FIN 48, the Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to
result in payment or receipt of cash within one year as non-current liabilities in the consolidated balance sheet.
The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was zero. As of
December 31, 2008, the total amount of gross unrecognized tax benefits was $10.9 million, of which $8.7
million, if recognized, would favorably impact the Company’s effective tax rate. The Company’s total gross
unrecognized tax benefits are classified as non-current liabilities in the Consolidated Balance Sheet. The
aggregate changes in the Company’s total gross amount of unrecognized tax benefits are summarized as follows
(in thousands):
Balance as of December 31, 2007 ...................................... $ —
Increases related to tax positions taken during the current period .......... 10,859
Balance as of December 31, 2008 ...................................... $10,859
The Company’s policy to include interest and penalties related to unrecognized tax benefits within the
provision for income taxes did not change as a result of adopting FIN 48. As of the date of adoption, the
Company had no accrued gross interest and penalties relating to unrecognized tax benefits. As of December 31,
2008, the total amount of gross interest and penalties accrued was $0.3 million, which is classified as non-current
liabilities in the consolidated balance sheet.
The Company files income tax returns in the U.S. federal jurisdiction and all of the states where income tax
is imposed. The Company is subject to U.S. federal or state income tax examinations by tax authorities for years
after 1997. The Company does not believe it is reasonably possible that its unrecognized tax benefits would
significantly change over the next twelve months.
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