ACC 100C Project
Company: Netflix, Inc.
By: Accounting Student
August 19, 2014

DEFERRED TAXES As of December 31, 2013 Netflix had $21.5 million in deferred tax assets classified as “other current assets” and $69.1 million classified as “other non-current assets”. No valuation account was recorded as it was considered more likely than not that substantially all deferred tax assets would be realized. The Company considered all available positive and negative evidence, including past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies in evaluating its ability to realize the net deferred tax assets. 1 The Company reported $16.3 million in federal R&D tax credit carryforwards which expire in 2033. It reported $29.7 million in state tax credit carryforwards, of which $0.9 million expire in 2023 and $28.8 million can be carried forward indefinitely. 2 Netflix records a provision for income taxes for the anticipated tax consequences of reported results of operations using the asset and liability method. The Company recognizes deferred income taxes by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryforwards. Income is where a change in tax rates affecting deferred tax assets and liabilities is recognized. A valuation allowance for any tax benefits for which future realization is uncertain reduces the measurement of deferred tax assets. 3 Netflix estimated gross tax benefits of $68.2 million at December 31, 2013. If recognized, $57.0 million would favorably impact its future earnings. Estimates of the ultimate settlement of unrecognized tax provisions may change due to uncertainties in any tax audit outcome, and therefore actual tax benefits may differ from estimates.
LEASES
Netflix is deemed owner for accounting purposes on its Los Gatos headquarters, with lease financing obligations of $12.1 million. For this lease the Company recorded an asset of $40.7 million, representing the total costs of the buildings and improvements, including costs paid by the lessor. The facilities leases for this building was extended for an additional five year term after the remaining term of the lease. 4 The Company has non-cancelable operating leases on facilities for $68.1 million with various expiration dates through 2019. It also has commitments of $121.2 million for facilities lease agreements entered in to in the third quarter of 2013 to expand their Los Gatos headquarters to a nearby site. 5 Lease activity was reflected as an outflow of $1,180,000 in the statement of cash flows as “Principal payments of lease financing obligations”.6
PENSIONS 68 Netflix maintains a 401 (k) savings plan that covers a substantially all of its employees. Up to 60% of annual salary can be contributes by eligible employees, but not more than the statutory limits set by the Internal Revenue Service. For 2013 the Company’s matching totaled $6,5 million. 7
DILUTIVE SECURITIES In November 2011 Netflix issued $200 million of Senior Convertible Notes due on December 1, 2018. Net proceeds were approximately $197.8 million, with debt issuance costs of $2.2 million. In 2013 the associated interest expense was $49,000. In April 2013 the Company exercised its option to convert the Convertible Notes into shares of common stock. The conversion ratio of 11.6553 produced 2.3 million shares of common stock. Fair market value on the date of issue was $216.99 per share. 8
STOCK OPTIONS In February 2002, Netflix adopted the 2002 Stock Plan, providing for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock