SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Affymetrix and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The consolidated financial statements include the results of companies acquired by us from the date of each acquisition for the applicable reporting periods.

USE OF ESTIMATES

The preparation of the consolidated financial statements is in conformity with U.S. generally accepted accounting principles ("US GAAP") which require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

BUSINESS COMBINATIONS

The Company's consolidated financial statements include the operations of an acquired business after the completion of the acquisition. The Company accounts for acquired businesses using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date, while transaction costs are expensed as incurred, except for any debt and equity issuance costs. The measurement of the fair value of assets acquired and liabilities assumed requires significant judgment. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill.

FOREIGN CURRENCY

Certain operations from foreign subsidiaries of the Company have a functional currency other than the U.S. dollar. All other subsidiaries have the U.S. dollar as their functional currency.

Assets and liabilities of non-U.S. subsidiaries that use the local currency as their functional currency are translated to U.S. dollars at exchange rates in effect at the balance sheet date with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive income (loss) within stockholders' equity. Income and expense accounts are translated at average exchange rates during the year. Foreign currency transaction gains and losses are recognized, net of hedging activity, in interest income and other, net and were comprised of net loss of $1.0 million for the year ended December 31, 2015, net loss of $2.5 million for the year ended December 31, 2014, and net gain of $0.1 million for the year ended December 31, 2013.

The Company's subsidiaries that use the U.S. dollar as their functional currency re-measure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and other nonmonetary assets and liabilities at historical rates. Gains and losses from these re-measurements were insignificant and have been included in the Company's results of operations.

CASH EQUIVALENTS, AVAILABLE-FOR-SALE SECURITIES AND INVESTMENTS

Marketable Securities

During 2015, the Company purchased interests in a money market fund. The Company reported all securities with maturities at the date of purchase of 90 days or less that were readily convertible into cash and have insignificant interest rate risk as cash equivalents. The Company's investments in marketable securities were carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders' equity. The cost of marketable securities is adjusted for the amortization of premiums and discounts to maturity and is included in interest income and other, net. Realized gains and losses, as well as interest income, on marketable securities are also included in interest income and other, net. The fair values of securities are based on quoted market prices. As of December 31, 2015, the Company held $30.0 million in money market fund. As of December 31, 2014, the Company did not hold any marketable securities.

Other-than-temporary Impairment

All of the Company's non-marketable securities are subject to quarterly reviews for impairment that is deemed to be other-than-temporary ("OTTI"). An investment is considered other-than-temporarily impaired when its fair value is below its amortized cost and (1) the Company intends to sell the security; (2) it is "more likely than not" that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not expected to recover the entire amortized cost basis. Below is a summary of the Company's analysis:

During the years ended December 31, 2015, 2014 and 2013, the Company recorded no impairment charges on its marketable securities. Refer to Note 6. "Financial Instruments" for further information.

The Company monitors the liquidity and financing activities of its non-marketable securities to determine if any impairment exists and accordingly writes down, to the extent necessary, the carrying value of the non-marketable equity securities to their estimated fair values. In order to determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the financial condition of and business outlook of the issuer, including key operational and cash flow metrics, current market conditions; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in estimated fair value. The Company recognized impairment changes of less than $0.1 million, $0.1 million and $0.5 million on its non-marketable securities during the years ended December 31, 2015, December 31, 2014 and 2013, respectively. Refer to Note 6. "Financial Instruments" for further information.

ACCOUNTS RECEIVABLE

Trade accounts receivable are recorded at net invoice value. The Company considers amounts past due based on the related terms of the invoice. The Company reviews its exposure to amounts receivable and provides an allowance for specific amounts if collectability is no longer reasonably assured. The Company also provides an allowance for a percentage of the gross trade receivable balance (excluding any specifically reserved amounts) based on its collection history. The allowance for doubtful accounts was not significant at either December 31, 2015 or 2014.

DERIVATIVE INSTRUMENTS

The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. Derivatives that are not defined as hedges must be adjusted to fair value through earnings at each reporting date.

For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated as cash flow hedges, the Company measures the effectiveness of the derivative instruments by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. The effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) ("OCI") in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions. The net gain or loss on the effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign currency translation adjustment. Refer to Note 6. "Financial Instruments – Derivative Financial Instruments" for further information.

INVENTORIES

Inventory cost is computed on an adjusted standard basis (which approximates actual cost on a first-in, first-out basis). Provisions for slow moving, potentially excess and obsolete inventories are provided based on estimated demand requirements, product life cycle and development plans, component cost trends, product pricing, product expiration and quality issues.

Inventory that is not expected to be utilized until more than 12 months from the balance sheet date is classified as long-term. Estimating the level of inventory utilization for the upcoming 12 months requires management to exercise significant judgment. The Company maintains inventory levels in excess of 12 months for certain components of work-in-progress that have useful lives of up to 10 years. Carrying such levels of inventory impacts the Company's liquidity and cash flows since the inventory will not be converted to cash for more than one year.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or the lease term, whichever is shorter. Equipment and furniture is depreciated over useful lives generally ranging from 3 to 7 years and leasehold improvements are depreciated over the shorter of the expected life of the asset or lease terms generally ranging from 3 to 15 years. Maintenance and repair costs are expensed as incurred. The Company reassesses the useful life of its property and equipment on a periodic basis and may adjust the lives accordingly.

GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS

Goodwill represents the excess of the fair value of an acquired entity over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in a business combination. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from one to fifteen years, with the amortization recognized in either cost of revenue or operating expenses, as appropriate.

Goodwill is not subject to amortization, but is tested for impairment on an annual basis during the third quarter or whenever events or changes in circumstances indicate the carrying amount of these assets may not be recoverable. Goodwill impairment testing is a two-step process and performed on a reporting unit level. In the first step, the Company conducts an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its carrying amount, it then conducts the second step, a two-part test for impairment of goodwill. The Company first compares the fair value of its reporting units to their carrying values. If the fair values of the reporting units exceed the carrying value of the net assets, goodwill is not considered impaired and no further analysis is required. If the carrying values of the net assets exceed the fair values of the reporting units, then the second part of the impairment test must be performed in order to determine the implied fair value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value, then an impairment loss equal to the difference would be recorded. During the third quarter of 2015, the Company performed an analysis of the qualitative factors and concluded that it was not more likely than not that the fair value of its reporting units are less than their carrying amounts. For the years ended December 31, 2015, 2014 and 2013, no impairment charges on goodwill were recognized.

Finite-lived intangible assets and other long-lived assets are reviewed for impairment when facts or circumstances suggest that the carrying value of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Additionally, during each period, the Company evaluates the estimated remaining useful lives of purchased finite-lived intangible assets and other long-lived assets to determine whether events or changes in circumstances warrant a revision to the remaining period of amortization. For the years ended December 31, 2015, 2014 and 2013, no impairment charges on long-lived assets were recognized.

INCOME TAXES

Income tax expense is based on pre-tax financial accounting income. Under the liability method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. To the extent the Company believes that realization of the deferred tax assets is not more likely than not, the Company establishes a valuation allowance. Significant estimates are required in determining the Company's provision for income taxes, deferred tax assets and liabilities, any valuation allowance to be recorded against net deferred tax assets, and reserves for income tax related uncertainties. Some of these estimates are based on interpretations of existing tax laws or regulations. Various internal and external factors may have favorable or unfavorable effects on the Company's future effective tax rate. These factors include, but are not limited to, changes in overall levels of characterization and geographical mix of pretax earnings (losses), changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, changes in the valuation of deferred tax assets or liabilities, levels of research and development spending, nondeductible expenses, applicability of tax holidays, ultimate outcomes of income tax audits, income tax impacts of any business combination transactions, intraperiod tax allocation provisions, or changes in our equity structure. Relative to uncertain tax positions, the Company only recognizes the tax benefit 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 Company's financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

CONTINGENCIES

The Company is subject to various legal proceedings principally related to intellectual property matters. Based on the information available at the most recent balance sheet date, the Company assesses the likelihood of any material adverse judgments or outcomes that may result from these matters, as well as the range of possible or probable loss, if any. If losses are probable and reasonably estimable, the Company will recognize a liability. Any liability recognized may change in the future due to new developments in each matter.

REVENUE RECOGNITION

Overview

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product or system is required or performance obligations remain, revenue is deferred until all the acceptance criteria or performance obligations have been met.

The Company derives the majority of its revenue from product sales of probe arrays, reagents, and related instrumentation that may be sold individually or combined with any of the Company's products, services or other sources of revenue. When a sale combines multiple elements upon delivery or performance of multiple products, services and/or rights to use assets, the Company allocates revenue for transactions or collaborations that include multiple elements to each unit of accounting based on its relative fair value or best estimate of selling price, and recognizes revenue for each unit of accounting when all revenue recognition criteria have been met. The price charged when an element is sold separately generally determines fair value.

Product Sales

Product sales include sales of probe arrays, antibodies, reagents, kits and related instrumentation. Probe array, reagent and instrumentation revenue is recognized when earned, which is generally upon shipment and transfer of title to the customer and fulfillment of any significant post-delivery obligations. Accruals are provided for anticipated warranty expenses at the time the associated revenue is recognized.

Services

Services revenue includes equipment service revenue; scientific services revenue, which includes associated consumables; and revenue from custom probe array design fees. Revenue from equipment service contracts is recognized ratably over the life of the contract.

Revenue from scientific and DNA analysis services is recognized upon shipment of the required data to the customer.

Revenue from custom probe array design fees associated with the Company's GeneChip CustomExpress and CustomSeq products is recognized when the associated products are shipped.

Royalties and Other Revenue

Royalties and other revenue include license revenue; royalties earned from third party license agreements; milestones and royalties earned from collaborative product development and supply agreements; subscription fees earned under GeneChip array access programs; and research revenue, which mainly consists of amounts earned under government grants.

License revenue is generally recognized upon the execution of an agreement or is recognized ratably over the period of expected performance.

Revenue from royalties is recognized under the terms of the related agreement.

The Company enters into collaborative arrangements which generally include a research and product development phase and a manufacturing and product supply phase. These arrangements may include up-front nonrefundable license fees, milestones, the rights to royalties based on the sale of final product by the partner, product supply agreements and distribution arrangements.

Any up-front, nonrefundable payments from collaborative product development agreements are recognized ratably over the research and product development period and at-risk based milestones are recognized when earned. Any payments received which are not yet earned are included in deferred revenue.

Transactions with Distributors

The Company recognizes revenue from transactions with distributors when the product is delivered either to customers or distributors. The Company's agreements with distributors do not include rights of return.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses consist of costs incurred for internal, collaborative and grant‑sponsored research and development. Research and development expenses include salaries, contractor fees, building costs, utilities and allocations of shared corporate services. In addition, the Company funds research and development at other companies and research institutions under agreements which are generally cancelable. All such costs are charged to research and development expense as incurred.

ADVERTISING COSTS

The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2015, 2014 and 2013 was $2.4 million, $2.7 million, and $2.2 million, respectively.

SHARE‑BASED COMPENSATION

The Company estimates the fair value of its option grants and shares sold under its Employee Stock Purchase Plan using the BSM option pricing model. This model requires the use of certain estimates and assumptions such as the expected term of options, estimated forfeitures, expected volatility of the Company's stock price, expected dividends and the risk-free interest rate at the grant date to determine the fair value of stock-based payments. The fair value of restricted stock awards, restricted stock units and performance based restricted stock units, collectively referred to as restricted stock, is based on the market price of the Company's common stock on the grant date. The Company recognizes the fair value of its share-based compensation as expense on a straight-line basis over the requisite service period of each award, generally four years. Refer to Note 14. "Stockholders' Equity and Share-Based Compensation Expense" for further information.

Performance-Based Awards

The Company's share-based awards program includes performance-based restricted stock awards ("PRSUs") that vest based upon the achievement of certain performance criteria and a service vesting criteria following the achievement of performance criteria. Performance criteria include various operational criteria of the Company such as revenues, earnings before interest, taxes, depreciation and amortization, product launches, and similar criteria, either on a Company-wide or business unit specific basis. The service vesting criteria ranges from six months to four years. The Company recognizes the fair value of these awards to the extent the achievement of the related performance criteria is estimated to be probable. If a performance criteria is subsequently determined to not be probable of achievement, any related expense is reversed in the period such determination is made. Conversely, if a performance criteria is not currently expected to be achieved but is later determined to be probable of achievement, a “catch-up” entry is recorded in the period such determination is made for the expense that would have been recognized had the performance criteria been probable of achievement since the grant of the award.

SALE OF PRODUCT LINE

Effective October 11, 2013, the Company sold its Anatrace-branded reagents and the related group of assets used to manufacture the product line for net proceeds of approximately $11.8 million. The carrying value of the group of assets sold was approximately $2.5 million at the date of disposition and was primarily comprised of inventory. The Company recorded a gain on the sale of Anatrace product line of $9.3 million during the fourth quarter of 2013.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes foreign currency translation adjustments, unrealized gains and losses on the Company's non-marketable securities that are excluded from net loss and unrealized gains and losses on cash flow hedges. Total comprehensive income (loss) has been disclosed in the Company's Consolidated Statements of Comprehensive Loss.

At December 31, 2015 and 2014, the components of accumulated other comprehensive income (loss), net of tax, are as follows (in thousands):



	Year Ended December 31,
	2015			2014
Foreign currency translation adjustment	(10,606		)	(2,933		)
Unrealized change on non-marketable securities	1,151			1,219
Unrealized change on cash flow hedges	75			1,102
Total accumulated other comprehensive income (loss), net of tax	$	(9,380	)	$	(612	)

The following table summarizes the amounts reclassified out of accumulated other comprehensive income (loss), net of tax, for the year ended December 31, 2015 (in thousands):



	December 31, 2014			(Decrease) / Increase			Reclassification Adjustment			December 31, 2015
Foreign currency translation adjustment	$	(2,933	)	$	(7,574	)	$	(99	)	$	(10,606	)
Unrealized change on non-marketable securities	1,219			(68		)	—			1,151
Unrealized change on cash flow hedges	1,102			2,162			(3,189		)	75
Total accumulated other comprehensive income (loss), net of tax	$	(612	)	$	(5,480	)	$	(3,288	)	$	(9,380	)

NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is calculated using the weighted‑average number of common shares outstanding during the period less the weighted‑average shares subject to repurchase. Diluted net income (loss) per common share gives effect to dilutive restricted stock, stock options (calculated based on the treasury stock method), shares purchased under the employee stock purchase plan and convertible debt (calculated using an as-if-converted method).

Diluted earnings per share, if any, include certain potential dilutive securities from restricted stock, outstanding stock options (on the treasury stock method), shares purchased under the employee stock purchase plan and convertible notes (on the as-if-converted basis). The potentially dilutive securities excluded from diluted earnings per common share on an actual outstanding basis, were as follows (in thousands):



	Year Ended December 31,
	2015	2014	2013
Employee stock options	2,053	4,195	5,141
Employee stock purchase plan	25	121	153
Restricted stock and restricted stock units	1,716	3,118	4,161
Convertible notes	17,857	17,857	17,862
Total	21,651	25,291	27,317

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09) to provide guidance on revenue recognition. ASU 2014-09 requires a company to 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. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (ASU 2015-14) to defer the effective date for ASU 2014-09 to the first quarter of 2018 for public companies. Early adoption up to the first quarter of 2017 is permitted. Upon adoption, ASU 2014-09 can be applied retrospectively to all periods presented or only to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current period presented. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2014-09 on its consolidated financial statements.

In May 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (ASU 2015-03) to provide guidance on the presentation of debt issuance costs. ASU 2015-03 requires a company to present debt issuance costs as a reduction from the carrying amount of the financial liability and not recorded as separate assets. ASU 2015-03 is effective for the Company in the first quarter of 2016. Early adoption is permitted. Upon adoption, ASU 2015-03 should be applied retrospectively to all periods presented. The Company's adoption of ASU 2015-03 would have resulted in a decrease in Other long-term assets, Convertible notes, and Term loan—long-term portion of $2.2 million as of December 31, 2015.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (ASU 2015-11) to provide guidance on simplifying the measurement of inventory. ASU 2015-11 requires a company to measure inventory at the lower of cost and net realizable value. ASU 2015-11 is effective for the Company in the first quarter of 2017. Early adoption is permitted. Upon adoption, ASU 201511 should be applied prospectively. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2015-11 on its consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes (ASU 2015-17) to provide guidance on the presentation of deferred tax assets and liabilities. ASU 2015-17 requires a company to classify deferred tax assets and liabilities as non-current items. The Company adopted this ASU prospectively as of December 31, 2015 and reclassified Deferred tax assets - short-term portion of $3.8 million to Other long-term liabilities on its consolidated balance sheets. No prior periods were retrospectively adjusted.