NetFlix 2011 Annual Report Download - page 55

Short-term investments are reviewed periodically to identify possible other-than-temporary impairment.
When evaluating the investments, the Company reviews factors such as the length of time and extent to which
fair value has been below cost basis, the financial condition of the issuer, the Company’s intent to sell, or
whether it would be more likely than not that the Company would be required to sell the investments before the
recovery of their amortized cost basis.
Content Library
The Company obtains content through streaming content license agreements, DVD direct purchases and
DVD revenue sharing agreements with studios, distributors and other suppliers.
The Company obtains 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 in
“Current content library” for the portion available for streaming within one year and in “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. The Company amortizes 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 steaming 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. The Company records the
streaming content library assets and their related liability on the 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 titles not yet available for streaming are not yet recognized in
the content library and are included in Note 5 to the consolidated financial statements.
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
recognition in the content library because the underlying license agreement does not specify the number of titles
or the license fee per title or the windows of availability per title, so that the license fee is not known or
reasonably determinable for a specific title. Typical payment terms for these agreements, which can range from
three to five years, require the Company to make equal fixed payments at the beginning of each quarter of the
license term. To the extent that cumulative payments exceed cumulative amortization, “Prepaid content” is
recorded on the Consolidated Balance Sheets. The Company amortizes the license fees on a straight-line basis
over the term of each license agreement. The amortization is classified in “Cost of revenues—Subscription” in
the Consolidated Statements of Operations and in the line item “Net income” within net cash provided by
operating activities in the Consolidated Statements of Cash Flows. Changes in prepaid content are classified
within net cash provided by operating activities in the line item “Prepaid content” in the Consolidated Statements
of Cash Flows. Commitments for licenses that do not meet the criteria for asset recognition in the content library
are included in Note 5 to the consolidated financial statements.
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