NetFlix 2014 Annual Report Download - page 54

Table of Contents
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 and other prepaid 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 $533.1 million , $404.0 million and $351.0 million for the years ended December 31, 2014 ,
2013 and 2012 , respectively.
Income Taxes
The Company records a provision for income taxes 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 as well as net
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, 2014 or 2013 .
The Company did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. The Company
may recognize a tax benefit 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 10 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. Revenues 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 (loss) income" in Stockholders’ equity on the Consolidated Balance Sheets.
The Company remeasures monetary assets and liabilities that are not denominated in the functional currency at exchange rates in effect at
the end of each period. Gains and losses from these remeasurements are recognized in interest and other income (expense). Foreign currency
transactions resulted in losses of $8.2 million , $8.4 million , and $4.0 million for the years ended December 31, 2014, 2013, and 2012
respectively.
Earnings Per Share
Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period.
Diluted earnings 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 Convertible Notes (prior to the conversion of such notes in April 2013) and incremental shares issuable upon the assumed exercise
of stock options. The computation of earnings per share is as follows:
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