| Summary of Significant Accounting Policies and Accounting Pronouncements | 2. Summary of Significant Accounting Policies and Accounting Pronouncements Use of Estimates We prepared our financial statements in accordance with GAAP, which requires us to make estimates and use assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis, which form the basis for making judgments about the carrying value of assets and liabilities. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Significant items subject to such estimates and assumptions include revenue, useful lives and impairment of property and equipment, intangible assets, goodwill, deferred income tax assets and liabilities, and valuation allowance. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. Revenue Recognition We recognize revenue when four basic criteria are met: (1) persuasive evidence of a sales arrangement exists; (2) performance of services has occurred; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. We consider persuasive evidence of a sales arrangement to be the receipt of a signed contract. We assess collectability based on a number of factors, including transaction history and the credit worthiness of a customer. If we determine that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We recognize performance incentive rebates and certain other business incentives as a reduction in revenue. We record cash received in advance of revenue recognition as deferred revenue. For arrangements with multiple deliverables, we allocate revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. We determine the fair value of the selling price for a deliverable using a hierarchy of (1) Company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price. We allocate any arrangement fee to each of the elements based on their relative selling prices. To the extent that we offer performance incentive rebates or certain other business incentives to our partners, those incentives will be recognized as a reduction to revenue. Domain Name Registration Fees We recognize revenue from registration fees charged to third parties in connection with new, renewed and transferred domain name registrations on a straight‑line basis over the registration term, which ranges from one to ten years. We record payments received in advance of the domain name registration term in deferred revenue in our balance sheets. The registration term and related revenue recognition commences once we confirm that the requested domain name has been recorded in the appropriate registry under accepted contractual performance standards. We defer the associated direct and incremental costs, which principally consist of registry and ICANN fees, and expense them as cost of revenue on a straight‑line basis over the registration term. Our business includes Name.com, an ICANN accredited registrar. Thus, we are the primary obligor with our registrant customers and are responsible for the fulfillment of our registrar services to those parties. As a result, we report revenue in the amount of the fees we receive directly from our registrant customers. Value‑added Services We recognize revenue from online registrar value‑added services, which include, but are not limited to, security certificates, domain name identification protection, charges associated with alternative payment methodologies, web hosting services and email services on a straight‑line basis over the period in which services are provided. We include payments received in advance of services being provided in deferred revenue. Domain Name Monetization Services Domain name monetization service revenue represents advertising revenue and primarily includes revenue derived from cost‑per‑click advertising links we place on websites owned by us, which we acquire and sell on a regular basis, and on websites owned by certain of our customers, with whom we have revenue sharing arrangements. Where we enter into revenue sharing arrangements with our customers, such as those relating to advertising on our customers’ domains, and when we are considered the primary obligor, we report the underlying revenue on a gross basis in our statements of operations, and record these revenue‑sharing payments to our customers as revenue‑sharing expenses, which are included in cost of revenue. Domain Name Sales Domain name sales revenue represents proceeds received from selling domain names from our portfolio, as well as proceeds received from selling domain names that are not renewed by customers of our registrar platform. Domain name sales are primarily conducted through our direct sales efforts as well as through third-party domain name auction platforms. While certain domain names sold are registered on our registrar platform upon sale, we have determined that sales revenue and related registration revenue represent separate units of accounting, because the domain name has value to the customers on a stand‑alone basis, where a customer could resell it separately, without the registration service, there is objective and reliable evidence of the fair value of the registration service and no general rights of return. We evaluated each deliverable, domain name sale and domain name registration, to determine whether vendor‑specific objective evidence (“VSOE”) or third-party evidence of selling price (“TPE”) existed in order to determine the selling price for each unit of accounting. We determined that there is VSOE for domain name registrations through analysis of historical stand‑alone transactions sold by us, which have been consistently priced with limited discounts. For domain name sales, we have determined that TPE is not a practical alternative due to uniqueness of domain names compared to those sold by competitors and the availability of relevant third-party pricing information. We have not established VSOE for domain names due to the lack of pricing consistency and other factors. Accordingly, we allocate revenue to the domain name sale deliverable in the arrangement based on best estimate of the selling price (“BESP”). We determine BESP by reference to the total transaction price and an estimate of what a market participant would pay without the registration service. Based on the nature of the transaction and its elements, we believe that there are no meaningful discounts embedded in the overall arrangement. We recognize domain name sales revenue when title to the name is transferred to the buyer and the related registration fees are recognized on a straight‑line basis over the registration term. If we sell a domain name, we recognize any unamortized cost basis as a cost of revenue over the registration term. For sales of domain names generated through third-party auction platforms, we recognize revenue net of auction service fee payments. Intangible Assets Registration and Acquisition Costs of Monetized Domains We capitalize the initial registration and acquisition costs of our monetized domain names, and amortize these costs over the expected useful life of the underlying domain name on a straight line basis, which approximates the estimated pattern in which the underlying economic benefits are consumed. The expected useful lives of the monetized domain names range from 12 months to 72 months. We determine the appropriate useful life by performing an annual analysis of expected cash flows based on historical experience with domain names of similar quality and value. In order to maintain the rights to each monetized domain name acquired, we pay periodic renewal registration fees, which cover a minimum period of twelve months. We record renewal registration fees of domain name intangible assets in deferred registration costs and recognize the costs over the renewal registration period, which is included in cost of revenue. Acquired in Business Combinations We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets. Acquired intangible assets include: trade names, non‑compete agreements, owned website names, customer relationships, and technology. We determine the appropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives of three to 20 years, using the straight‑line method, which approximates the pattern in which the economic benefits are consumed. gTLDs We capitalize payments for gTLD applications and other costs directly attributable to the acquisition of gTLD registry operator rights and include them in other long-term assets. We have received and may continue to receive partial cash refunds for certain gTLD applications, and to the extent we elect to sell or withdraw certain gTLD applications throughout the process, we may also incur gains or losses on amounts invested. These gains have been recorded as gains on other assets, net, on the statements of operations. As gTLDs become available for their intended use, gTLD application fees and acquisition related costs are reclassified as finite lived intangible assets and amortized on a straight-line basis over an estimated useful life of 10 years, which approximates the pattern in which the economic benefits are consumed. Other costs incurred as part of the gTLD Initiative and not directly attributable to the acquisition of gTLD registry operator rights are expensed as incurred. Impairment of Intangible Assets We evaluate the recoverability of our finite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. When such events or circumstances occur, an impairment test would be performed by comparing the estimated undiscounted future cash flows expected to result from the use of the asset group to the related asset group’s carrying value. If an asset is considered impaired, the impairment loss is measured as the amount by which the carrying value of the asset group exceeds its estimated fair value. We have not recognized any such impairment loss associated with our finite-lived intangible assets during 2016, 2015 or 2014. Goodwill Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and the identifiable intangible assets. Goodwill is not amortized; rather, goodwill is tested for impairment at the reporting unit level on an annual basis during the fourth quarter, as of October 1, or more frequently, if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. These events or circumstances could include a significant change in the Company’s business outlook, legal factors, financial performance, industry environment, or a sale or disposition of a significant portion of a reporting unit. A triggering event occurred during the fourth quarter, and as such, an interim impairment test was performed (refer to Note 6—Goodwill for further information). Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to the reporting units, assignment of goodwill to the reporting units and the determination of fair value of the reporting units. Management has determined that we have only one reporting unit. Goodwill is tested annually for impairment using a two-step process. First, we determine if the carrying value of the reporting unit exceeds fair value, which would indicate that goodwill may be impaired. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than carrying value, then goodwill may be impaired and we perform the second step of the test to determine if goodwill is impaired and to measure the amount of impairment loss, if any. In the second step, we compare the implied fair value of the goodwill to its carrying amount in order to determine if there is an impairment loss. If the carrying amount of goodwill exceeds its implied fair value, then an impairment loss is recognized in an amount equal to the excess. We estimate the fair value of the reporting unit in step one using the market approach. The market approach utilizes the Company’s number of outstanding shares and the share price on the date of the annual test to determine a market capitalization value. We estimate the implied fair value of our reporting unit in step two using the discounted cash flows approach. The implied fair value is primarily based on an estimate of the cash flows expected to result from the reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as our software, technology, patents and trademarks, and then discounted using an estimated weighted-average cost of capital. These estimates and the resulting valuations require significant judgment. There were no impairment charges recorded related to goodwill during 2016, 2015 and 2014. Impairment of Long‑lived Assets We evaluate the recoverability of our long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. When such events or circumstances occur, an impairment test would be performed by comparing the estimated undiscounted future cash flows expected to result from the use of the asset group to the related asset group’s carrying value. If an asset is considered impaired, the impairment loss is measured as the amount by which the carrying value of the asset group exceeds its estimated fair value. We have not recognized any such impairment loss associated with our long-lived assets during 2016, 2015 or 2014. Income Taxes For periods prior to the Separation our results were included in the federal income tax return of Demand Media, as well as certain state tax returns where Demand Media files on a combined basis. For periods during which our operations were included with Demand Media, income taxes are presented in these financial statements as if we filed our own tax returns on a separate return basis. We account for our income taxes using the liability and asset method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or in our tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. 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. We evaluate the realizability of our deferred tax assets and valuation allowances are provided when necessary to reduce deferred tax assets to the amounts expected to be realized. We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, and relevant tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies. We recognize 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 we believe has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our income tax (benefit) provision in the accompanying statements of operations. We allocate the total tax expense (or benefit) between continuing operations and discontinued operations utilizing the intraperiod allocation rules of ASC 740. These rules provide for allocation of total tax expense (or benefit) among the various financial statement components. We calculate our current and deferred 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 returns are recorded when identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our 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 our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. Cash and Cash Equivalents We consider all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents. We consider funds transferred from our credit card service providers but not yet deposited into our bank accounts at the balance sheet dates, as funds in transit and these amounts are recorded as unrestricted cash, since the amounts are generally settled the day after the outstanding date. Cash and cash equivalents consist primarily of checking accounts. Accounts Receivable Since our domain name registration services are primarily conducted on a prepaid basis through credit card or internet payments processed at the time a transaction is consummated, we do not carry significant receivables related to these business activities. Accounts receivable primarily consists of amounts due from registries and registrars, as well as gTLD amounts due from our collaboration agreement with Donuts Inc. (“Donuts”), a third-party new gTLD applicant. Receivables from registries represent refundable amounts for registrations that were placed on auto-renew status by the registries, but were not explicitly renewed by a registrant as of the balance sheet dates. We record registry services accounts receivable at the amount of the registration fees paid by us to a registry for all registrations placed on auto-renew status. Subsequent to the lapse of a prior registration period, a registrant either renews the applicable domain name with us, which results in the application of the refundable amount to a consummated transaction, or the registrant lets the domain name registration expire, which results in a refund of the applicable amount from a registry to us. Deferred Revenue and Deferred Registration Costs Deferred revenue consists primarily of amounts received from customers in advance of our performance for domain name registration services and online value‑added services. We recognize deferred revenue as revenue on a systematic basis that is proportionate to the unexpired term of the related domain name registration over online value‑added service period. Deferred registration costs represent incremental direct costs paid in advance to registries, ICANN, and other third parties for domain name registrations and are recorded as a deferred cost. We record the amortization of deferred registration costs to cost of revenue on a straight‑line basis over the registration period. Property and Equipment and Software Development Costs We record property and equipment at cost and provide for depreciation and amortization using the straight-line method for financial reporting purposes over the estimated useful lives. We capitalize certain costs of internally developed software or software purchased for internal use. We capitalize software development costs when application development begins, it is probable that the project will be completed, and the software will be used as intended. We expense costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities as we incur these costs. Our policy provides for the capitalization of certain payroll, benefits, and other payroll-related costs for employees who are directly associated with internal-use software development projects, as well as external direct costs of materials and services associated with developing or obtaining internal-use software. We only capitalize personnel costs that relate directly to time spent on such projects. The estimated useful lives by asset classification are as follows:
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Computer hardware: 2 to 5 years
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Computer software: 2 to 3 years
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Internally developed software: 3 years
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Furniture and equipment: 7 to 10 years
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Leasehold improvements: Shorter of the estimated useful life or life of related lease During 2014, depreciation expense included the write-off of internally developed software of $0.8 million. There were no impairments related to property and equipment during 2016 and 2015. Other Long‑Term Assets ICANN approved a framework for the significant expansion of the number of gTLDs available for businesses and consumers to register as part of a domain name (“New gTLD Program”). The first new gTLDs launched in the fourth quarter of 2013. We capitalize the costs incurred to pursue the acquisition of gTLD operator rights. While there can be no assurance that gTLDs will be awarded to us, we reclassify these payments as finite‑lived intangible assets following the delegation of operator rights for each gTLD by ICANN. Payments for gTLD applications primarily represent amounts paid directly to ICANN and/or third parties in the pursuit of gTLD operator rights. When two or more applicants apply for the same gTLD, an auction process is used to determine the eventual owner. If a private auction is used, the highest bidder is required to pay the other applicants the proceeds from the auction in return for the withdrawal of their application for the gTLD. We may also receive partial cash refunds from ICANN for certain gTLD applications, and to the extent we elect to sell or withdraw of our interest in certain gTLD applications throughout the process, we may also incur gains or losses on amounts invested. Gains on the withdrawal of our interest in gTLD applications are recognized when realized, while losses are recognized when deemed probable. Potential losses are limited to the non‑refundable portion of our deposits, while gains realized during the initial ICANN rights delegation phase are based on proceeds received from third parties and may be significant as compared to our initial investment (deposit) in a particular gTLD. We expense other costs incurred by us as part of the gTLD Initiative not directly attributable to the acquisition of gTLD operator rights. We amortize capitalized costs on a straight‑line basis over the estimated useful life of the gTLD operator rights acquired commencing the date that each asset is available for its intended use. Investments The cost of marketable securities sold is based upon the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of other income (expense), net. Leases We categorize leases as either operating or capital leases at their inception. We lease office space and equipment under non-cancelable operating and capital leases. The terms of our lease agreements generally provide for rental payments on a graduated basis. We record rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Advertising Costs Advertising costs are expensed as incurred and generally consist of online advertising, sponsorships, and trade shows. Such costs are included in sales and marketing expense in our statements of operations. Advertising expense was $2.4 million, $2.6 million and $1.4 million for 2016, 2015 and 2014, respectively. Stock-based Compensation Expense We measure stock-based compensation expense at the grant date based on the fair value of the award. Our stock-based payment awards are comprised principally of restricted stock units and stock options. We recognize compensation expense on a straight-line basis over the requisite service period. The requisite service period is generally four years. The compensation cost is recognized net of estimated forfeiture activity. For awards issued to employees with service based vesting conditions the fair value is estimated using the Black-Scholes Option Pricing Method (“Black-Scholes”). The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Stock-based compensation expense is classified in the consolidated statement of operations based on the department to which the related employee provides service. The Black-Scholes approach requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include the expected volatility and expected term of the award. We estimated the expected volatility of our awards from our company’s historical volatility. We calculated the weighted average expected life of our options based upon the “simplified method” as prescribed by the SEC. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury notes with terms approximately equal to the expected life of the option. The expected dividend rate is zero as we currently have no history or expectation of paying cash dividends on our common stock. Foreign Currency Transactions Our foreign subsidiaries have a functional currency of U.S. dollars. We record realized and unrealized foreign currency transaction gains and losses as incurred. Foreign currency transaction gains and losses are included in other income (expense) in our statements of operations. The net effect of our foreign currency gains and losses was not significant for 2016, 2015 and 2014. Fair Value of Financial Instruments Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure our financial assets and liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Assets and liabilities recognized or disclosed at fair value in our financial statements on a nonrecurring basis include items such as property and equipment, cost and equity method investments, and other assets. These assets are measured at fair value if determined to be impaired. The fair values of these investments are determined based on valuation techniques using the best information available and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. Assets and Liabilities Measured at Fair Value on a Recurring Basis Assets and liabilities recognized or disclosed at fair value in our financial statements on a recurring basis include items such as cash equivalents and short-term investments. These assets are measured at fair value at each balance sheet date. Cash equivalents consist of financial instruments that have original maturities of 90 days or less. Short-term investments consist of financial instruments with maturities greater than 90 days, but that generally mature in less than one year. Discontinued Operations Components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on our operations or financial results are reported as discontinued operations. We reclassify the results of operations for current and prior periods into a single caption titled Income from discontinued operations, net of income tax in the consolidated statements of operations. In addition, assets and liabilities that qualify for reporting as discontinued operations are reflected in the consolidated balance sheets as Assets held for sale and Liabilities held for sale. We also classify cash flows related to discontinued operations as one line item within each category of cash flows in our consolidated statements of cash flows. Adoption of New Accounting Pronouncements In August 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. As of December 31, 2015, we had $0.3 million of debt issuance costs that remained classified as an other asset on our balance sheets because it is related to our line of credit agreement In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. service contracts. In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern Accounting Pronouncements Not Yet Adopted In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers (Topic 606 Deferral of the Effective Date, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), Identifying Performance Obligations and Licensing Narrow-Scope Improvements and Practical Expedients, |
