NetFlix 2010 Annual Report Download - page 39

assumptions, judgments and estimates. However, we believe that it is more likely than not that substantially all
deferred tax assets recorded on our balance sheet will ultimately be realized. In the event we were to determine
that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to earnings in the period in which we make such determination.
We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes.
We may recognize a tax benefit 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. At December 31, 2010, our estimated gross unrecognized tax
benefits were $20.7 million of which $16.8 million, if recognized, would favorably impact our future earnings.
Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax
positions may change and the actual tax benefits may differ significantly from the estimates. See Note 8 to the
consolidated financial statements for further information regarding income taxes.
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. To achieve this objective,
we follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to
interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one
issuer, as well as our maximum exposure to various asset classes. We maintain a portfolio of cash equivalents
and short-term investments in a variety of securities. These securities are classified as available-for-sale and are
recorded at fair value with unrealized gains and losses, net of tax, included in accumulated other comprehensive
income within stockholders equity in the consolidated balance sheet.
As of December 31, 2010, we had no material impairment charges associated with our short-term
investment portfolio. Although we believe our current investment portfolio has very little risk of material
impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our
investment portfolio will remain materially unimpaired. Some of the securities we invest in may be subject to
market risk due to changes in prevailing interest rates which 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. At December 31, 2010, our
cash equivalents were 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. Our short-term investments were
comprised of corporate debt securities, government and agency securities and asset and mortgage-backed
securities.
At December 31, 2010, we had securities classified as short-term investments of $155.9 million. Changes in
interest rates could adversely affect the market value of these investments. The table below separates these
investments, based on stated maturities, to show the approximate exposure to interest rates.
(in thousands)
Due within one year .............................................. $ 18,966
Due within five years ............................................. 134,014
Due within ten years ............................................. —
Due after ten years ............................................... 2,908
Total .......................................................... $155,888
A sensitivity analysis was performed on our investment portfolio as of December 31, 2010. The analysis is
based on an estimate of the hypothetical changes in market value of the portfolio that would result from an
immediate parallel shift in the yield curve of various magnitudes. This methodology assumes a more immediate
change in interest rates to reflect the current economic environment.
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