NetFlix 2009 Annual Report Download - page 63

NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the period between technological feasibility and general availability of the software. Capitalized software costs
are included in property and equipment, net and are amortized over the estimated useful life of the software,
generally up to three years. The net book value of capitalized software costs is not significant as of December 31,
2009 and 2008.
Revenue Recognition
Subscription revenues are recognized ratably over each subscriber’s monthly subscription period. Refunds
to subscribers are recorded as a reduction of revenues. Revenues are presented net of the taxes that are collected
from customers and remitted to governmental authorities. Deferred revenue consists of subscriptions revenues
billed to subscribers that have not been recognized and gift subscriptions that have not been redeemed.
Marketing
Marketing expenses consist primarily of advertising expenses and payments made to affiliates including the
Company’s consumer electronics partners. Advertising expenses include marketing program expenditures and
other promotional activities, including allocated costs of revenues relating to free trial periods. Also included in
marketing expenses are payroll related expenses. Advertising costs are expensed as incurred except for
advertising production costs, which are expensed the first time the advertising is run. Advertising expense totaled
approximately $205.9 million, $181.4 million and $207.9 million in 2009, 2008, and 2007, respectively.
The Company and its vendors participate in a variety of cooperative advertising programs and other
promotional programs in which the vendors provide the Company with cash consideration in exchange for
marketing and advertising of the vendor’s products. If the consideration received represents reimbursement of
specific incremental and identifiable costs incurred to promote the vendor’s product, it is recorded as an offset to
the associated marketing expense incurred. Any reimbursement greater than the specific incremental and
identifiable costs incurred is recognized as a reduction of cost of revenues when recognized in the Company’s
consolidated statements of operations.
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
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits for which future realization is uncertain. There was no
valuation allowance as of December 31, 2009 or 2008.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such positions are then measured based on
the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company
recognizes interest and penalties related to uncertain tax positions in income tax expense. See Note 8 to the
consolidated financial statements for further information regarding income taxes.
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