Amazon.com 2002 Annual Report Download - page 64

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
in value of the equity securities subsequent to their initial measurement (to the extent that such securities
are not subject to vesting or forfeiture).
Income Taxes
The Company recognizes deferred tax assets and liabilities based on diÅerences between the Ñnancial
reporting basis and tax basis of assets and liabilities using the enacted tax rates and laws that are expected
to be in eÅect when the diÅerences are expected to be recovered. The Company provides a valuation
allowance against its deferred tax assets to the extent such assets are not expected to be realized.
Revenue Recognition
The Company generally recognizes revenue from product sales or services rendered when the
following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery
has occurred or services have been rendered, the selling price is Ñxed or determinable, and collectibility is
reasonably assured.
The Company evaluates the criteria outlined in Emerging Issues Task Force (""EITF'') Issue
No. 99-19, ""Reporting Revenue Gross as a Principal Versus Net as an Agent,'' in determining whether it
is appropriate to record the gross amount of product sales and related costs or the net amount earned as
commissions. Generally, when the Company is the primary obligor in a transaction, is subject to inventory
risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators,
revenue is recorded gross. If the Company is not the primary obligor and amounts earned are determined
using a Ñxed percentage, a Ñxed-payment schedule, or a combination of the two, the Company generally
records the net amounts as commissions earned.
Product sales, net of promotional discounts, rebates and return allowances, are recorded when the
products are shipped and title passes to customers. Retail items sold to customers are made pursuant to a
sales contract that provides for transfer of both title and risk of loss upon the Company's delivery to the
carrier (commonly referred to as ""F.O.B. Shipping Point''). Return allowances (which reduce product
revenue by management's best estimate of expected product returns) are estimated using historical
experience.
The Company periodically provides incentive oÅers to its customers to encourage purchases. Such
oÅers include percentage discounts oÅ current purchases (""current discount oÅers''), oÅers for future
discounts subject to a minimum current purchase (""inducement oÅers'') and other similar oÅers. Current
discount oÅers, when accepted by customers, are treated as a reduction to the purchase price of the related
transaction and are presented as a net amount in ""Net sales.'' Inducement oÅers, when accepted by
customers, are treated as a reduction to purchase price based on estimated redemption rates. Redemption
rates are estimated using the Company's historical experience for similar inducement oÅers.
Commissions received on sales of products through Amazon Marketplace, as well as commissions
earned through the Company's Merchants@ program (see ""Note 15 Ì Segment Information''), are
recorded as a net amount since the Company is acting as an agent in such transactions. In addition, the
Company recognizes amounts earned through its Merchant program (see ""Note 15 Ì Segment
Information'') as a net amount. Amounts earned are recognized as net sales when the item is sold by the
third-party seller and collectibility is reasonably assured. The Company records an allowance for refunds
on such commissions using historical experience.
The Company earns revenues from services primarily by entering into commercial agreements,
including providing its technology services such as search, browse, and personalization; permitting third
parties to oÅer products or services through its Web sites; and powering third-party Web sites, either with
our without providing accompanying fulÑllment services. These commercial agreements also include
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