Pandora 2012 Annual Report Download - page 82

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Table of Contents
Pandora Media, Inc.
Notes to Consolidated Financial Statements - Continued
General and Administrative
General and administrative expenses include employee and employee-related costs consisting of salaries and benefits for finance, accounting, legal,
internal information technology and other administrative personnel. In addition, general and administrative expenses include professional services costs for
outside legal and accounting services, and infrastructure costs for facility, supporting overhead costs and merchant and other transaction costs, such as credit
card fees.
Content Acquisition Costs
Content acquisition costs principally consist of royalties paid for the right to stream music to the Company's listeners. Royalties are calculated using
negotiated rates documented in master royalty agreements and are based on usage measures or revenue earned. The performance rights organizations to which
royalties are paid have the right to audit the Company's playlist and payment records. The Company may also recognize content acquisition costs based on
estimated rates during periods of contract negotiation with performance rights organizations.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the financial statements or in the Company's tax returns. Deferred income taxes are
recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which
the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company evaluates the realizability of deferred tax assets and valuation allowances are provided when necessary to reduce net deferred
tax assets to the amounts expected to be realized.
The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that 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 will recognize interest
and penalties related to unrecognized tax benefits in the income tax provision in the accompanying statement of operations.
The Company calculates the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results
reflected in income tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount of income
taxes paid is subject to examination by U.S. federal and state tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to
management's assessment of relevant risks, facts and circumstances existing at that time. To the extent that the assessment of such tax positions change, the
change in estimate is recorded in the period in which the determination is made.
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