NetFlix 2011 Annual Report Download - page 57

Marketing
Marketing expenses consist primarily of advertising expenses and also include payments made to the
Company’s affiliates and consumer electronics partners and payroll related expenses. Advertising expenses
include promotional activities such as television and online advertising, as well as allocated costs of revenues
relating to free trial periods. 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 $299.1
million, $212.4 million and $175.0 million in 2011, 2010 and 2009, respectively.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of
operations 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 significant valuation
allowance as of December 31, 2011 or 2010.
The Company did not recognize certain tax benefits from uncertain tax positions within the provision for
income taxes. The Company recognizes a 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.
Foreign Currency
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into
U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries
are translated using rates that approximate those in effect during the period. Gains and losses from these
translations are recognized in cumulative translation adjustment included in accumulated other comprehensive
income in shareholders’ equity. For transactions that are not denominated in the functional currency, the
Company remeasures monetary assets and liabilities at exchange rates in effect at the end of each period. Gains
and losses from these remeasurements are recognized in interest and other income.
Net Income Per Share
Basic net income per share is computed using the weighted-average number of outstanding shares of
common stock during the period. Diluted net income per share is computed using the weighted-average number
of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the
period. Potential common shares consist of shares issuable upon the assumed conversion of the Company’s
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