Redbox 2014 Annual Report Download - page 72

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In the second quarter of 2013, we completed a review of its content library amortization methodology and updated the
methodology in order to add greater precision to product cost amortization. The previous method recognized accelerated
amortization of content library costs at a rate faster than the decline in the content library's value due to the recognition of
charges in addition to the normal rental curve amortization whenever individual discs were removed from kiosks, a process we
define as "thinning". The Company's most recent analysis has shown that its amortization curves can reasonably capture the
effect of thinning and therefore eliminates the need for additional charges at the time of thinning and provides a better
correlation of costs to revenue. The modified approach to amortizing the cost of the content library is based on updated rental
curves, which incorporate thinning estimates, and provides a more systematic method for recognizing the costs of movie and
game titles. The Company anticipates that this new method will better align the recognition of costs with the related revenue.
The Company believes that the change in its content library amortization methodology, made on a prospective basis, is a change
in accounting estimate that is effected by a change in accounting principle. The Company believes that the modified content
library amortization methodology is preferable because it better reflects the pattern of consumption of the expected benefits of
the content library. A copy of our auditor's preferability letter is filed as an exhibit to our 10-Q for the period ended June 30,
2013.
The effect of this change resulted in a reduction of product costs, as reported in direct operating expenses, of approximately
$21.7 million in the second quarter of 2013, with those costs shifted to primarily the third and fourth quarters and some into
2014. The change resulted in a corresponding increase to the balance of our content library. In addition, the change in
amortization methodology shifted product costs on titles purchased during the second half of 2013 into 2014 as amortization is
less accelerated than under the prior method. Under the modified amortization methodology we continue to recognize
substantially all of the amortization expense within one year of purchase. For year ended December 31, 2013, the change
resulted in a total pretax benefit of $31.8 million or $1.17 per basic share and $1.12 per diluted share.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures that extend the life, increase the
capacity, or improve the efficiency of property and equipment are capitalized, while expenditures for repairs and maintenance
are expensed as incurred. Depreciation is recognized using the straight-line method over the following approximate useful lives:
Useful Life
Coin-counting kiosks and components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 10 years
Redbox kiosks and components. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 5 years
ecoATM kiosk and components. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years
Computers and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 5 years
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 - 7 years
Leased vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 6 years
Leasehold improvements (shorter of life of asset or remaining lease term) . . . . . . . . . . . . . . . . . . 1 - 11 years
Internal-Use Software
We capitalize costs incurred to develop or obtain internal-use software during the application development stage. Capitalization
of software development costs occurs after the preliminary project stage is complete, management authorizes the project, and it
is probable that the project will be completed and the software will be used for the function intended. We expense costs incurred
for training, data conversion, and maintenance, as well as spending in the post-implementation stage. A subsequent addition,
modification or upgrade to internal-use software is capitalized only to the extent that it enables the software to perform a task it
previously could not perform. The internal-use software is included in computers and software under property and equipment in
our Consolidated Balance Sheets. We amortize the internal-use software based on the estimated useful life on a straight-line
basis.
Intangible Assets Subject to Amortization
Our intangible assets subject to amortization are primarily composed of developed technology and retailer relationships
acquired in connection with our acquisitions. We used expectations of future cash flows, with appropriate discount rates based
on the stage of the enterprise acquired, to estimate the fair value of our intangible assets. We amortize our intangible assets on a
straight-line basis over their expected useful lives.