Amazon.com 2001 Annual Report Download - page 58

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.
The Company records its equity in the income or losses of these investees generally one month in arrears for
private companies and three months in arrears for public companies. The Company records its investments in
equity-method investees on the consolidated balance sheets as “Investments in equity-method investees” and its
share of the investees’ earnings or losses as “Equity in losses of equity-method investees, net” on the
consolidated statements of operations.
All other equity investments, which consist of investments for which the Company does not have the ability
to exercise significant influence, are accounted for under the cost method. Under the cost method of accounting,
investments in private companies are carried at cost and are adjusted only for other-than-temporary declines in
fair value, distributions of earnings and additional investments. For public companies that have readily
determinable fair values, the Company classifies its equity investments as available-for-sale and, accordingly,
records these investments at their fair values with unrealized gains and losses included in “Accumulated other
comprehensive loss.” Such investments are included in “Marketable securities” on the accompanying
consolidated balance sheets if the Company does not have the intent to hold the investment for over one year
from the balance sheet date. In cases where the Company does not have the intent and ability to liquidate such
investments within one year from the balance sheet date such investments are included in “Other equity
investments.”
The Company also invests in certain marketable debt securities, which consist primarily of high-quality
short- to intermediate-term fixed income securities that are also classified as available-for-sale securities. Such
investments are included in “Marketable securities” on the accompanying consolidated balance sheets and are
reported at fair value with unrealized gains and losses included in “Accumulated other comprehensive loss.” The
weighted average method is used to determine the cost of Euro-denominated securities sold, and the specific
identification method is used to determine the cost of all other securities.
The initial cost of the Company’s investments is determined based on the fair value of the investment at the
time of its acquisition. The Company has received equity securities as consideration for services to be performed
for the issuer under commercial agreements. In such cases, the Company has estimated the fair value of the
equity securities received. For securities of public companies, the Company generally determines fair value based
on the quoted market price at the time the Company enters into the underlying agreement, and adjusts such
market price appropriately if significant restrictions on marketability exist. As an observable market price does
not exist for equity securities of private companies, estimates of fair value of such securities are more subjective
than for securities of public companies. For significant transactions involving equity securities in private
companies, the Company obtains and considers independent, third party valuations where appropriate. Such
valuations use a variety of methodologies to estimate fair value, including comparing the security with securities
of publicly traded companies in similar lines of business, applying price multiples to estimated future operating
results for the private company, and estimating discounted cash flows for that company. These valuations also
reduce the fair value to account for restrictions on control and marketability where appropriate. Using these
valuations and other information available to the Company, such as the Company’s knowledge of the industry
and knowledge of specific information about the investee, the Company determines the estimated fair value of
the securities received. To the extent that equity securities received or modified after March 16, 2000 are subject
to forfeiture or vesting provisions and no significant performance commitment exists upon signing of the
agreements, the fair value of the securities is determined as of the date of the respective forfeiture or as vesting
provisions lapse.
The Company periodically evaluates whether the declines in fair value of its investments are other-than-
temporary. This evaluation consists of a review of qualitative and quantitative factors by members of senior
management. For investments with publicly quoted market prices, the Company generally considers a decline to
be an other-than-temporary impairment if the quoted market price is less than its accounting basis for two
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