BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Ancestry.com LLC (the “Parent”) is a holding company, and all operations are conducted by its wholly-owned subsidiaries. Ancestry.com LLC and its subsidiaries are collectively referred to as “Ancestry.com” or the “Company.” Ancestry.com is a provider of family history and personal DNA testing services that derives revenue primarily from providing customers with a subscription to one of its websites and providing customers with insights to their ethnic origins based on results of a DNA test.

Ancestry.com LLC is a wholly-owned subsidiary of Ancestry.com Holdings LLC (“Holdings LLC”), which is controlled by Permira funds and co-investors (the “Sponsors”). Holdings LLC is a holding company with no material operations and limited assets other than its ownership of the membership interests of Ancestry.com LLC. Holdings LLC has no material liabilities outstanding to third parties other than the senior unsecured payment-in-kind toggle notes (the “PIK Notes”) as discussed further within Note 8 herein. Holdings LLC is not individually responsible for any liabilities of Ancestry.com LLC or its subsidiaries solely for reason of being a member or participating in the management of Ancestry.com LLC.

Basis of Presentation

The Consolidated Financial Statements include the accounts of Ancestry.com LLC and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation. The following prior period amounts have been reclassified to conform to the current year presentation of the financial statements:


•	deferred financing costs have been reclassified to be presented in the Consolidated Balance Sheets as a direct deduction from the debt liability rather than as an asset in accordance with Accounting Standards Update (“ASU”) 2015-03;


•	the current deferred income tax asset has been reclassified as non-current and netted against the non-current deferred income tax liability in accordance with ASU 2015-17;


•	the Income Tax Receivable line item has been reclassified to Other Current Assets on the Consolidated Balance Sheets; and


•	the Prepaid expenses and other current assets line item has been split into individual line items.

Refer to the Recent Accounting Pronouncements section below for further information on the adoption of ASU 2015-03 and ASU 2015-17. The following is a reconciliation of the effect of these reclassifications on the Company’s Consolidated Balance Sheet at December 31, 2014 (in thousands):



	At December 31, 2014
	As Reported		Adjustments			As Revised
Assets:
Income tax receivable	$	458	$	(458	)	$	—
Current deferred income taxes	5,277		(5,277		)	—
Prepaid expenses and other current assets	12,143		(12,143		)	—
Prepaid expenses	—		9,830			9,830
Other current assets	—		1,813			1,813
Other assets	28,514		(25,339		)	3,175
Liabilities:
Current portion of long-term debt	47,495		(958		)	46,537
Long-term debt, net	824,742		(25,339		)	799,403
Deferred income taxes	115,461		(5,277		)	110,184

Use of Estimates

The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

The Company regularly evaluates its estimates to determine their appropriateness, including testing goodwill for impairment, recoverability of long-lived assets, income taxes, timing for recognition of AncestryDNA revenues, determination of the fair value of stock options included in stock-based compensation expense and construction costs incurred under build-to-suit leases, among others. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable, the results of which form the basis for the amounts recorded within the Consolidated Financial Statements.

Revenue Recognition

The Company recognizes revenue related to sales of subscriptions, products and services when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered to the customer, (iii) the fee is fixed or determinable, and (iv) collectability is reasonably assured.

Subscription revenues are derived by providing access to the Company’s technologies and content on its various websites. Subscription fees are collected primarily from credit cards through the Company’s websites at the beginning of the subscription period. Subscription revenues are recognized ratably over the subscription period, ranging from one month to one year, net of estimated cancellations. Subscription revenues are not allocated to any free-trial periods the Company may offer.

Service and other revenues are generated primarily from sales of AncestryDNA testing services, family history research services and other products and services. The Company recognizes revenue from sales of its DNA testing services when the DNA results are delivered to the customer or when the likelihood of the DNA kit being submitted by the customer for testing is remote, as determined based on historical submission patterns. Revenues from family history research services are recognized upon completion of the service. Shipping fees billed to customers are included in Service and other revenues, and related shipping costs are included in Cost of service and other revenues.

The Company bundles its subscription services with other Ancestry services. For bundles containing multiple elements, revenue is allocated to the elements based on their relative selling price in accordance with the selling price hierarchy. Generally, the stand-alone selling price for each deliverable is determined by vendor specific objective evidence of fair value (“VSOE”), if such information is available. VSOE, generally, only exists when the Company sells the deliverable on a stand-alone basis and the majority of the selling prices fall within a reasonably narrow pricing range. In the absence of VSOE, third-party evidence of the selling price is used. Where neither VSOE nor third-party evidence exists for a given element, management’s best estimate of the selling price is used. Key factors that the Company considers in developing its best estimate of the selling price include historical sales prices, prices the Company charges for similar offerings, and the Company’s current pricing strategy. The subscription element is recognized over its estimated subscription period, and other elements are recognized upon shipment of the product or completion of the service.

The Company also periodically enters into agreements with third-parties to facilitate sales of its products and services and records revenue on either a gross or net basis in accordance with Financial Accounting Standards Board (“FASB”) ASC 605-45, “Revenue Recognition – Principal Agent Considerations.” In determining the appropriate treatment, the Company considers factors such as identification of the primary obligor, latitude in establishing price, determining product or service specifications and credit risk.

In certain sales transactions, the Company is required to collect and remit sales and value-added taxes. The Company accounts for these taxes on a net basis and such taxes are not included in revenues on the Consolidated Statements of Operations.

The Company maintains an allowance for future subscription cancellations and returns based on historical trends and data specific to each reporting period. The historical cancellation and returns rates are applied to the current period’s revenues as a basis for estimating future returns. Actual customer subscription cancellations and returns are charged against this allowance or against deferred revenue to the extent that revenue has not yet been recognized. This allowance has been reflected as a reduction of revenue and accounts receivable.

The following table summarizes the activity for the sales returns allowances (in thousands):



	Year Ended December 31,
	2015			2014			2013
Balance at beginning of period	$	540		$	605		$	661
Amounts reserved against revenue	2,640			2,289			1,900
Actual returns	(2,507		)	(2,354		)	(1,956		)
Balance at end of period	$	673		$	540		$	605

Cost of Revenues

Cost of subscription revenues consists of amortization of content databases, web server operating costs, credit card processing fees, personnel-related costs of web support and customer service employees, and outside service costs for customer services. Web server operating costs include depreciation, software licensing on web servers and related equipment and web hosting costs.

Cost of service and other revenues consists of AncestryDNA direct costs, personnel-related costs of customer service and other fulfillment employees, shipping costs, and credit card processing fees.

Certain Risks and Concentrations

Financial instruments that potentially subject the Company to credit risk consist principally of cash equivalents and accounts receivable. Cash equivalents are comprised of money market funds. Accounts receivable are unsecured and include receivables from businesses and individual customers. No one customer accounted for more than 10% of the Company’s revenues for the years ended December 31, 2015, 2014 and 2013. One customer accounted for 19% and 14% of accounts receivable at December 31, 2015 and 2014, respectively. The customer that accounted for more than 10% of the Company’s accounts receivable balances, which are not material as a percentage of revenues, is a business with extended payment terms that is responsible for the sale of various Company services.

Cash and Cash Equivalents

Cash and cash equivalents consists of highly liquid investments with original maturities of three months or less.

Restricted Cash

As of December 31, 2015, restricted cash consists primarily of cash related to prior acquisitions. As of December 31, 2014, restricted cash also consisted of cash held on behalf of stockholders who exercised their appraisal rights in connection with the Merger, as defined and discussed further in Note 11. As of December 31, 2015 and 2014, the Company had restricted cash of $2.4 million and $49.1 million, respectively, all of which is classified as current assets on the Consolidated Balance Sheet.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. Accounts receivable consists of credit card charges processed by the Company’s credit card processors but not yet deposited into a Company bank account and receivables from businesses with extended payment terms responsible for the sale of various Company services and products. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance for doubtful accounts was immaterial as of December 31, 2015 and 2014.

Inventory

Inventory consists primarily of DNA testing kits, which are classified as finished goods and are stated at lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company maintains an allowance for excess and obsolete inventory based on historical sales and current inventory levels. Inventory is included in Other current assets on the Consolidated Balance Sheets. Net inventory was immaterial as of December 31, 2015 and 2014.

Property and Equipment

Property and equipment are recorded at cost and are stated net of accumulated depreciation. Property and equipment acquired in business combinations are recorded at estimated fair value. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are three years for computer equipment, purchased software and furniture and fixtures. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets, generally five years. Repairs and maintenance costs are expensed as incurred. Major renewals and improvements that extend the useful lives of existing assets are capitalized and depreciated over their estimated useful lives.

The Company establishes assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements where the Company is considered the owner for accounting purposes only, to the extent the Company is involved in the construction of the asset or takes construction risk prior to commencement of a lease. Upon completion of the construction of facilities under build-to-suit leases, the Company evaluates whether these arrangements meet the criteria for sale-leaseback accounting treatment. If the lease does not meet sale-leaseback criteria, the Company will treat the build-to-suit as a financing obligation and lease payments will be attributed to (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense (which is considered an operating lease) representing an imputed cost to lease the underlying land of the facility. In addition, the underlying building asset will be depreciated over the building’s estimated useful life. At the conclusion of the lease term, the net book values of the asset and financing obligation would be derecognized.

The Company capitalizes certain internal-use software and website development costs during the application and development stage related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. These costs are generally amortized on a straight-line basis over the estimated useful life of the asset to Cost of revenues. Costs associated with minor enhancements and maintenance for the Company's websites are expensed as incurred.

Content Databases

Content databases consists of historical family history records, including census records, birth records, marriage records, death records, immigration documents, photographs, maps, military records, newspapers and other collections that the Company has accumulated in its databases. These records have been digitized and indexed to allow subscribers to search and view the content online and include the costs to acquire or license the historical records, costs incurred by Company employees or by third parties to scan, key and index the content and the fair value allocated to content databases in business acquisitions. The Company does not capitalize any costs associated with the value of its DNA content. The Company also occasionally enters into non-monetary exchanges in order to obtain content records, which are accounted for under ASC 845 Nonmonetary Transactions. The Company generally amortizes content databases on a straight-line basis over 10 years after the content is released for viewing on the Company’s websites. The amortization expense associated with content databases is included in cost of subscription revenues in the Consolidated Statements of Operations. Costs to renew or extend the term of licensed content databases are capitalized and expensed over the life of the license.

Goodwill

Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized but rather tested for impairment at least annually or more frequently if events or changes in circumstances indicate that it may be impaired. The Company conducts its annual impairment test as of November 30 based on a single reporting unit. Impairment loss, if any, is recognized when the fair value of goodwill is less than its carrying value. No impairment losses related to goodwill were recognized for the years ended December 31, 2015, 2014 and 2013.

Intangible Assets

The Company amortizes its finite-lived intangible assets over their estimated useful lives, ranging from one to 10 years using methods, which approximate the pattern in which the underlying economic benefits are consumed.

Recoverability of Long-Lived Assets

The Company reviews content databases, property and equipment and intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows that the asset or asset group is expected to generate. If assets are determined to be impaired, the impairment loss to be recognized equals the amount that the carrying value of the asset or group of assets exceeds its fair value. Impairment losses recognized for the years ended December 31, 2015, 2014 and 2013 were immaterial.

Debt Financing Costs

Costs related to debt financing are deferred and amortized to interest expense over the terms of the underlying debt instruments using the effective-interest method. See Note 8 for further discussion.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. 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 carryovers. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect 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 in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not 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 recognizes interest related to uncertain tax positions in income tax expense.

Foreign Currency

The financial statements of foreign subsidiaries whose functional currency is the U.S. dollar are remeasured into U.S. dollars using period-end or historical exchange rates for assets and liabilities and average exchange rates for the period for revenues and expenses. Net foreign currency remeasurement gains and losses are included in Other expense, net in the accompanying Consolidated Statements of Operations. Net foreign currency remeasurement gains and losses were immaterial for the years ended December 31, 2015, 2014 and 2013.

Net gains and (losses) related to foreign currency transactions are included in Other expense, net in the accompanying Consolidated Statements of Operations. Net gains and losses from foreign currency transactions were immaterial for the years ended December 31, 2015, 2014 and 2013.

Stock-Based Compensation

The Company’s stock-based compensation plan allows for the issuance of stock-based awards, including stock options and restricted share units (“RSUs”) to employees, officers and directors. As of December 31, 2015 and 2014, outstanding stock-based awards are in an indirect parent entity of the Company. Each award represents a contingent right to receive an equivalent investor interest upon exercise of the option or vesting of an RSU.

Stock-based compensation expense is recorded by amortizing the fair value of each stock-based award expected to vest on a straight-line basis over the requisite service period of the award. The fair value of each stock option award is calculated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model requires various assumptions, including fair value of the underlying investor interest, volatility, expected option life, risk-free interest rate and expected dividends. The fair value of the underlying investor interest is determined based on the fair value as of the grant date.

In addition, assumptions are made regarding the rate of forfeiture of stock-based awards prior to vesting. The Company estimates forfeiture rates based on historical forfeitures of its stock options and RSUs. To the extent the actual forfeiture rate is different from the estimate, stock-based compensation expense is adjusted accordingly. If any of the assumptions used in estimating the fair value of awards change significantly or the actual forfeiture rate is different than the estimate, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Because the Company’s indirect parent entity is privately held and there is no public market for its equity, the fair value of an investor interest is determined by the Company’s Operating Committee, which considered numerous objective and subjective factors to determine the fair value of its investor interests at each meeting at which awards were approved. The factors included, but were not limited to: (i) estimates of fair value completed by third-party valuation firms; (ii) the Company’s actual operating and financial results; (iii) current business conditions and projections; and (iv) the lack of marketability.

Investor interests for RSUs are issued on their respective vesting dates, generally, net of the minimum statutory tax withholding requirements. As a result, the actual number of investor interests issued will generally be fewer than the actual number of RSUs outstanding.

Leases

Leases are categorized at their inception as either operating or capital leases. Lease costs, including any rent holidays or other incentives, are recognized on a straight-line basis over the term of the lease.

External Marketing and Advertising

The Company expenses the production costs of advertising the first time the advertising takes place. All other types of marketing and advertising costs are expensed as incurred. Total external marketing and advertising expenses were $146.3 million, $143.8 million, and $120.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Research and Development

All expenditures for research and development are charged to technology and development expense as incurred.

Recent Accounting Pronouncements

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. Deferred tax assets and deferred tax liabilities have historically been separated between current and non-current; however, this amendment, in connection with the FASB’s Simplification Initiative, requires these items now be classified as non-current in the balance sheet. For public business entities, this becomes effective December 15, 2016 and all interim periods within those annual periods. For all other entities this is effective December 15, 2017 and interim periods beginning after December 15, 2018. Early adoption is permitted, and the application of this amendment may be applied prospectively or retrospectively. The Company early adopted this standard as of December 31, 2015 and applied the guidance retrospectively. The effect of the adoption of ASU 2015-17 on the Company’s Consolidated Balance Sheet at December 31, 2014 is shown in the Basis of Presentation section above.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability instead of being presented as an asset. This guidance is effective for public companies for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. For all other entities, this guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The new guidance is to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance and represents a change in accounting principle. The Company early adopted this standard as of March 31, 2015. The effect of the adoption of ASU 2015-03 on the Company’s Consolidated Balance Sheet at December 31, 2014 is shown in the Basis of Presentation section above.

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. This update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. This guidance is effective for public companies for fiscal years and interim periods beginning after December 15, 2015. For all other entities, this guidance is effective for annual periods beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for all entities. The new guidance is to be applied either prospectively to new cloud computing arrangements or retrospectively. The Company early adopted this standard as of March 31, 2015 and applied the guidance prospectively. It did not have a material impact on the Company’s Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. In August 2015, the FASB issued ASU 2015-14, which defers by one year the effective dates of its new revenue recognition standard for public and nonpublic entities. As a result, this guidance will be effective for public companies for interim and annual periods beginning on or after December 15, 2017. For non-public companies, this guidance is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Public and nonpublic entities would be permitted to adopt the standard as early as the original public entity effective date; early adoption prior to that date would not be permitted. As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company has elected to delay adoption of new or revised accounting standards applicable to public companies until such pronouncements are made applicable to private companies. Once effective, entities can choose to apply the standard using either a full retrospective approach or a modified retrospective approach. The Company has not yet selected a transition method and is currently assessing the potential impact that this standard will have on its Consolidated Financial Statements.