Amazon.com 2003 Annual Report Download - page 30

Significant Accounting Policies
Revenue Recognition
We recognize 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 to the carrier or services
have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured.
Additionally, revenue arrangements with multiple deliverables are divided into separate units of accounting if the
deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a
standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3)
delivery of any undelivered item is probable.
We evaluate 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. When we are the
primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting
suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not the primary
obligor and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination
of the two, we record 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 our delivery to the carrier. Return allowances, which
reduce product revenue by our best estimate of expected product returns, are estimated using historical
experience.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include
current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for
future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when
accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while
inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on
estimated future redemption rates. Redemption rates are estimated using our historical experience for similar
inducement offers. Current discount offers and inducement offers are presented as a net amount in “Net sales.”
Commissions and per-unit fees received from third-party sellers and amounts earned through our
Merchant.com program are recognized when the item is sold by the third-party seller and our collectibility is
reasonably assured. We record an allowance for estimated refunds on such commissions using historical
experience. We also record an allowance, using historical experience, for losses we incur on our payment
guarantee from disputes by customers against third-party sellers.
Inventories
Inventories, consisting of products available for sale, are accounted for using the first-in first-out (“FIFO”)
method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based
on currently-available information, about the likely method of disposition, such as through sales to individual
customers, returns to product vendors or liquidations, and expected recoverable values of each disposition
category. Based on this evaluation, we record a valuation allowance to adjust the carrying amount of our
inventories to lower of cost or market value.
Currency Effect on Intercompany Balances
A provision of Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency
Translation, requires that gains and losses arising from intercompany foreign currency transactions considered
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