Amazon.com 2003 Annual Report Download - page 64

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We hold warrants to purchase equity securities of other companies. Warrants that can be exercised and
settled by delivery of net shares such that we pay no cash upon exercise are derivative financial instruments. Our
net share warrants are not designated as hedging instruments; accordingly, gains or losses resulting from changes
in fair value are recognized on the consolidated statements of operations, “Remeasurement of 6.875% PEACS
and other,” in the period of change. We determine the fair value of our warrants through option-pricing models
using current market price and volatility assumptions, including public-company market comparables for our
private-company warrants.
The adoption of SFAS No. 133 on January 1, 2001 resulted in cumulative transition losses of $11 million
included in the results of operations and a stockholders’ deficit adjustment of $12 million. Transition losses
included in “Cumulative effect of change in accounting principle” are attributable to approximately $3 million in
losses reclassified from “Accumulated other comprehensive income (loss)” on warrants previously reported at
fair value and classified as available-for-sale, and approximately $8 million in losses on warrants previously
reported at cost. No warrant investments are designated as hedging instruments. Transition losses in
“Accumulated other comprehensive income (loss)” are attributable to approximately $15 million in losses on the
swap agreement designated as a cash flow hedge of a portion of the 6.875% PEACS offset by the approximately
$3 million in losses reclassified to results of operations on derivative instruments not designated as hedging
instruments.
Earnings (Loss) Per Share
In accordance with SFAS No. 128, Earnings Per Share, the weighted average shares used to calculate basic
earnings (loss) per share excludes the weighted average of restricted shares outstanding because they are subject
to repurchase or forfeiture.
The effect of outstanding stock awards, including restricted stock, is antidilutive for periods that we have a
net loss and, accordingly, is excluded from the calculation of diluted loss per share. The dilutive effect of stock
awards and restricted stock is included in the calculation of weighted average shares, using the treasury stock
method, for periods that we have net income.
The “if converted” number of shares associated with each of our convertible debt instruments are excluded
from diluted shares as their effect is anti-dilutive. See “Note 6—Long-Term Debt and Other.”
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, effective for the
period ending December 31, 2003. This Interpretation requires the consolidation of Variable Interest Entities in
which a company holds a qualifying variable interest. The provisions of this Interpretation do not have a
significant effect on our financial position or operating results.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies
and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after September 15, 2003. The provisions of this Standard do not
have a significant effect on our financial position or operating results.
In November 2003, the EITF reached a consensus on issue 03-10, Application of EITF 02-16 by Resellers to
Sales Incentives Offered to Consumers by Manufacturers, addressing how a reseller is to account for the
redemption of a manufacturer’s coupon by a consumer at the reseller’s location. The final consensus eliminates
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