NetFlix 2013 Annual Report Download - page 55

industry classify these cash flows as operating activities. The Company amortizes its direct purchase DVDs on an
accelerated basis over their estimated useful lives, which range from one year to two years. The Company also
obtains DVD content through revenue sharing agreements with studios and other content providers. Revenue
sharing obligations are expensed as incurred based on shipments.
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.
Revenue Recognition
Revenues are recognized ratably over each monthly membership period. Revenues are presented net of the
taxes that are collected from members and remitted to governmental authorities. Deferred revenue consists of
membership fees billed to members that have not been recognized and gift memberships that have not been
redeemed.
Marketing
Marketing expenses consist primarily of advertising expenses and also include payments made to the
Company’s affiliates and consumer electronics partners. Advertising expenses include promotional activities
such as television and online advertising. Advertising costs are expensed as incurred. Advertising expenses were
$437.9 million, $377.2 million and $299.1 million for the years ended December 31, 2013, 2012 and 2011,
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, 2013 or 2012.
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
53