NetFlix 2012 Annual Report Download - page 61

by operating activities in the line item “Prepaid content” on 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.
Streaming content licenses (including both those that are recorded in the streaming content library and those
that do not meet the criteria for asset recognition) are reviewed in aggregate at the geographic region level for
impairment when an event or change in circumstances indicates a change in the expected usefulness of the
content. The level of geographic aggregation is determined based on the streaming content rights which are
generally specific to a geographic region inclusive of several countries (such as Latin America). An impairment
would be recorded as necessary to adjust the streaming content library to the lower of unamortized cost or
estimated net realizable value. No material write down from unamortized cost to a lower net realizable value was
recorded in any of the periods presented.
The Company acquires DVD content for the purpose of renting such content to its subscribers and earning
subscription rental revenues, and, as such, the Company considers its direct purchase DVD library to be a
productive asset. Accordingly, the Company classifies its DVD library in “Non-current content library, net” on
the Consolidated Balance Sheets. The acquisition of DVD content library, net of changes in related liabilities, is
classified in the line item “Acquisition of DVD content library” within cash used in investing activities on the
Consolidated Statements of Cash Flows because the DVD content library is considered a productive asset. Other
companies in the in-home entertainment video industry classify these cash flows as operating activities. The
Company amortizes its direct purchase DVDs, less estimated salvage value, on a “sum-of-the-months”
accelerated basis over their estimated useful lives. The useful life of the new release DVDs and back-catalog
DVDs is estimated to be one year and three years, respectively. The amortization of the DVD content library is
classified in “Cost of revenues” on the Consolidated Statements of Operations and on the line item “Amortization
of DVD content library” within net cash provided by operating activities on the Consolidated Statements of Cash
Flows. The Company also obtains DVD content through revenue sharing agreements with studios and other
content providers. Revenue sharing obligations incurred based on utilization are 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. The terms of some revenue sharing
agreements obligate the Company to make a low initial payment for certain titles, representing a minimum
contractual obligation under the agreement. The low initial payment is in exchange for a commitment to share a
percentage of its subscription revenues or to pay a fee, based on utilization, for a defined period of time. The
initial payment may be in the form of an upfront non-refundable payment which is classified in content library or
in the form of a prepayment of future revenue sharing obligations which is classified as prepaid content.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using
the straight-line method over the shorter of the estimated useful lives of the respective assets, generally up to 30
years, or the lease term for leasehold improvements, if applicable. Leased buildings are capitalized and included
in property and equipment when the Company was involved in the construction funding and did not meet the
“sale-leaseback” criteria.
Impairment of Long-Lived Assets
Long-lived assets such as DVD content library, property and equipment and intangible assets subject to
depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and
used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash
flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset
group exceeds fair value of the asset group. There were no events or changes in circumstances that would
indicate that the carrying amount of an asset group may not be recoverable in any of the years presented.
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