Chegg 2013 Annual Report Download - page 107

Textbook Library
We consider our textbook library to be a long-term productive asset and, as such, we classify it as a non-
current asset in our consolidated balance sheets. Additionally, cash outflows for the acquisition of the textbook
library, net of changes in related accounts payable and accrued liabilities, as well as cash inflows received from
the liquidation of textbooks, are classified as cash flows from investing activities in our consolidated statements
of cash flows, consistent with other long-term asset activity. The gain or loss from the liquidation of textbooks
previously rented is recorded as a component of operating expenses in our consolidated statements of operations
and is classified as cash flow from operating activities.
All textbooks in our textbook library are stated at cost, which includes the purchase price less accumulated
depreciation.
We record allowances for lost or damaged textbooks in cost of revenues in our consolidated statements of
operations based on our assessment of our textbook library on a book-by-book basis. Factors considered in the
determination of textbook allowances include historical experience, management’s knowledge of current
business conditions and expectations of future demand. Write-offs result from lost or damaged books, books no
longer considered to be rentable or when books are not returned to us by our customers after the rental period.
We depreciate our textbooks, less an estimated salvage value, over an estimated useful life of three years
using an accelerated method of depreciation, as we estimate this method most accurately reflects the actual
pattern of decline in the economic value of the assets as described below. The salvage value considers the
historical trend and projected liquidation proceeds for textbooks. The useful life is determined based on the time
period in which the textbooks are held and rented before liquidation. In accordance with our policy, we review
the estimated useful lives of our textbook library on an ongoing basis.
We will continue to review the accelerated method of depreciation to ensure consistency with the value of the
textbook to the customer during its useful life. Based on historical experience, we believe that a textbook has more
value to our customers and us early in its useful life and an accelerated depreciation method reflects the actual
pattern of decline in economic value and aligns with the textbook’s condition, which may deteriorate over time. In
addition, we consider the utilization of the textbooks and the rental revenue we can earn, recognizing that a used
textbook rents for a lower amount than a new textbook. Should the actual rental activity or deterioration of books
differ from our estimates, our loss (gain) on liquidation of textbooks or write-offs could differ.
In addition, we will continue to evaluate the appropriateness of the estimated salvage value and estimated
useful life based on historical liquidation transactions with both vendors and customers and reviewing a blend of
actual and estimates of the lifecycle of each book and the number of times rented before it is liquidated,
respectively. Our estimates utilize data from historical experience, including actual proceeds from liquidated
textbooks as a percentage of original sourcing costs, channel mix of liquidations and consideration of the
estimated sales price, largely driven by the average market price data of used books and the projected values of a
book in relation to the original source cost over time. Changes in the estimated salvage value, method of
depreciation or useful life can have a significant impact on our depreciation expense, write-offs liquidations and
gross margins.
We will continue to use judgment in evaluating the assumptions related to our textbook library on a
prospective basis. As we continue to accumulate additional data related to our textbook library, we may make
refinements to our estimates, which could materially impact our depreciation expense, write-offs and
liquidations.
Depreciation expense and write-offs of textbooks are recorded in cost of revenues in our consolidated
statements of operations. During 2013, 2012 and 2011, textbook library depreciation expense was approximately
$64.8 million, $57.2 million and $56.1 million, respectively, and write-offs were approximately $5.9 million,
$4.6 million and $5.3 million, respectively.
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