NetFlix 2011 Annual Report Download - page 39

Indemnifications
The information set forth under Note 6 of Item 8, Financial Statements and Supplementary Data under the
caption “Guarantees—Indemnification Obligations” is incorporated herein by reference.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reported periods. The Securities and
Exchange Commission (“SEC”) has defined a company’s critical accounting policies as the ones that are most
important to the portrayal of a company’s financial condition and results of operations, and which require a
company to make its most difficult and subjective judgments. Based on this definition, we have identified the
critical accounting policies and judgments addressed below. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ
from these estimates.
Content Accounting
We obtain content through streaming content license agreements, DVD direct purchases and DVD revenue
sharing agreements with studios, distributors and other suppliers.
We obtain content distribution rights in order to stream TV shows and movies to subscribers’ TVs,
computers and mobile devices. Streaming content is generally licensed for a fixed-fee for the term of the license
agreement which may have multiple windows of availability. The license agreement may or may not be
recognized in content library.
When the streaming license fee is known or reasonably determinable for a specific title and the specific title
is first available for streaming to subscribers, the title is recognized on the Consolidated Balance Sheets as
“Current content library” for the portion available for streaming within one year and as “Non-current content
library” for the remaining portion. New titles recognized in the content library are classified in the line item
“Additions to streaming content library” within net cash provided by operating activities in the Consolidated
Statements of Cash Flows. We amortize the content library on a straight-line basis over each title’s contractual
window of availability, which typically ranges from six months to five years. The streaming content library is
reported at the lower of unamortized cost or estimated net realizable value. No write down from unamortized cost
to a lower net realizable value was recorded in any of the periods presented. The amortization is classified in
“Cost of revenues-Subscription” in the Consolidated Statements of Operations and in the line item “Amortization
of streaming content library” within net cash provided by operating activities in the Consolidated Statements of
Cash Flows. Payment terms for these license fees may extend over the term of the license agreement, which
could range from six months to five years. For the titles recognized in content library, the license fees due but not
paid are classified on the Consolidated Balance Sheets as “Content accounts payable” for the amounts due within
one year and as “Non-current content liabilities” for the amounts due beyond one year. Changes in these
liabilities are classified in the line item “Change in streaming content liabilities” within net cash provided by
operating activities in the Consolidated Statement of Cash Flows. We record the streaming content library assets
and their related liability on our Consolidated Balance Sheets at the gross amount of the liability. Payments for
the titles not yet available for streaming are not yet recognized in the content library but in prepaid content.
Minimum commitments for the titles not yet available for streaming are not yet recognized in the content library
and are included in Note 5 of Item 8, Financial Statements and Supplementary Data.
When the streaming license fee is not known or reasonably determinable for a specific title, the title does
not meet the criteria for asset recognition in the content library. Titles do not meet the criteria for asset
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