NetFlix 2015 Annual Report Download - page 62

Content obligations include amounts related to the acquisition, licensing and production of content.
Obligations that are in non U.S. Dollar currencies are translated to U.S. Dollar at period end rates. A content
obligation for the production of original content includes non-cancellable commitments under creative talent and
employment agreements. A content obligation for the acquisition and licensing of content is incurred at the time
the Company enters into an agreement to obtain future titles. Once a title becomes available, a content liability is
generally recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license
rights for unknown future titles, the ultimate quantity and/or fees for which are not yet determinable as of the
reporting date. Traditional film output deals, like the U.S. output deal with Disney, or certain TV series license
agreements where the number of seasons to be aired is unknown, are examples of such license agreements. The
Company does not include any estimated obligation for these future titles beyond the known minimum amount.
However, the unknown obligations are expected to be significant.
Lease obligations
The Company leases facilities under non-cancelable operating leases with various expiration dates through
2028. Several lease agreements contain rent escalation clauses or rent holidays. For purposes of recognizing
minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of
initial possession to begin amortization, which is generally when the Company enters the space and begins to
make improvements in preparation for intended use. For scheduled rent escalation clauses during the lease terms
or for rental payments commencing at a date other than the date of initial occupancy, the Company records
minimum rental expenses on a straight-line basis over the terms of the leases in the Consolidated Statements of
Operations. The Company has the option to extend or renew most of its leases which may increase the future
minimum lease commitments.
Because the terms of the Company’s facilities lease agreements for its original Los Gatos, California
headquarters site required the Company’s involvement in the construction funding of the buildings, the Company
is the “deemed owner” (for accounting purposes only) of these buildings. Accordingly, the Company recorded an
asset of $40.7 million , representing the total costs of the buildings and improvements, including the costs paid
by the lessor (the legal owner of the buildings), with corresponding liabilities. Upon completion of construction
of each building, the Company did not meet the sale-leaseback criteria for de-recognition of the building assets
and liabilities. Therefore the leases are accounted for as financing obligations.
In the third quarter of 2015, the Company extended the facilities leases for the original Los Gatos buildings
for an additional three years term, increasing the future minimum payments under the lease financing obligations
by approximately $13.7 million. In this extension, the leases continue to be accounted for as financing
obligations and no gain or loss was recorded as a result of the lease financing modification. At December 31,
2015, the lease financing obligation balance was $29.0 million , the majority of which is recorded in “Other non-
current liabilities,” on the Consolidated Balance Sheets. The remaining future minimum payments under the
lease financing obligation are $21.1 million . The lease financing obligation balance at the end of the extended
lease term will be approximately $21.8 million which approximates the net book value of the buildings to be
relinquished to the lessor.
In addition to the lease financing obligation, future minimum lease payments include $428.7 million as of
December 31, 2015 related to non-cancelable operating leases for the expanded headquarters in Los Gatos,
California and the new office space in Los Angeles, California.
58