Etsy 2015 Annual Report Download - page 83

Download and view the complete annual report

Please find page 83 of the 2015 Etsy annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 126

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126


Etsy, Inc.
Notes to Consolidated Financial Statements
When events or changes in circumstances require, the Company assesses the likelihood of recovering the cost of tangible long-lived assets based on its
expectations of future profitability, undiscounted cash flows and management’s plans with respect to operations to determine if the asset is impaired and
subject to write-off. Measurement of any impairment loss is based on the excess of the carrying value of the asset over the fair value.
Internal-use Software and Website Development Costs
Costs incurred to develop software for internal use and the Company’s website are capitalized and amortized over the estimated useful life of the software,
generally three years. The Company also capitalizes costs related to upgrades and enhancements when it is probable the expenditures will result in additional
functionality or will extend the useful life of existing functionality. Costs related to the design or maintenance of internal-use software and website
development are expensed as incurred. The Company periodically reviews internal-use software and website development costs to determine whether the
projects will be completed, placed in service, removed from service, or replaced by other internally developed or third-party software. If the asset is not
expected to provide any future benefit, the asset is retired and any unamortized cost is expensed.
Leases
The Company leases office space and certain computer equipment in multiple locations under non-cancelable lease agreements. The leases are reviewed for
classification as operating, capital or build-to-suit leases. For operating leases, rent is recognized on a straight-line basis over the lease period. For capital
leases, the Company records the leased asset with a corresponding liability. Payments are recorded as reductions to the liability with an appropriate interest
charge recorded based on the then-outstanding remaining liability.
The Company considers the nature of the renovations and the Company’s involvement during the construction period of newly leased office space to
determine if it is considered, for accounting purposes only, to be the owner of the construction project during the construction period. If the Company
determines that it is the owner of the construction project, it is required to capitalize the fair value of the building as well as the construction costs incurred on
its consolidated balance sheet along with a corresponding financing liability (“build-to-suit accounting”). Upon occupancy for build-to-suit leases, the
Company assesses whether the circumstances qualify for sales recognition under the sale-leaseback accounting guidance. If the lease meets the sale-leaseback
criteria, the Company will remove the asset and related financial obligation from the balance sheet and treat the building lease as an operating lease. If upon
completion of construction, the project does not meet the sale-leaseback criteria, the leased property will be treated as a capital lease for financial reporting
purposes.
Income Taxes
Income tax benefit (provision) is based on (loss) income before income taxes and is accounted for under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable 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. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Management assesses the
need for a valuation allowance on a quarterly basis to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for uncertainty in income taxes using a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more likely than not to be
sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50%
likelihood of being realized upon ultimate audit settlement. The Company has an unrecognized tax benefit of $0.4 million and $22.2 million at December
31, 2014 and 2015, respectively.
The Company recognizes interest and penalties, if any, associated with income tax matters as part of the income tax provision and includes accrued interest
and penalties with the related income tax liability in the consolidated balance sheet.
78