NetFlix 2012 Annual Report Download - page 60

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 various content providers.
The Company obtains content distribution rights in order to stream TV shows, movies and original
programming 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, net” for the portion available for streaming within one year and as “Non-current content
library, net” 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 on the Consolidated
Statements of Cash Flows. The streaming content library is reported at the lower of unamortized cost or
estimated net realizable value. The Company am ortizes 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 amortization of the streaming content library is classified in “Cost of revenues” on the Consolidated
Statements of Operations and in the line item “Amortization of streaming content library” within net cash
provided by operating activities on the Consolidated Statements of Cash Flows. Costs related to subtitles,
dubbing, and closed captioning are capitalized i n “Current content library, net” on the Consolidated Balance
Sheets and amortized over the window of availability. Payment terms for these license fees may extend over the
term of the license window, which typically ranges 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 “Current
content liabilities” 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 on the Consolidated Statements 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 the 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” on the Consolidated
Statements of Operations and in the line item “Net income” within net cash provided by operating activities on
the Consolidated Statements of Cash Flows. Changes in prepaid content are classified within net cash provided
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