Amazon.com 2013 Annual Report Download - page 52

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determinable, and collectability is reasonably assured. Revenue arrangements with multiple deliverables are divided into
separate units and revenue is allocated using estimated selling prices if we do not have vendor-specific objective evidence or
third-party evidence of the selling prices of the deliverables. We allocate the arrangement price to each of the elements based on
the estimated selling prices of each element. Estimated selling prices are management’s best estimates of the prices that we
would charge our customers if we were to sell the standalone elements separately and include considerations of customer
demand, prices charged by us and others for similar deliverables, and the price if largely based on costs. Sales of our Kindle
device are considered arrangements with multiple deliverables, consisting of the device, 3G wireless access and delivery for
some models, and software upgrades. The revenue related to the device, which is the substantial portion of the total sale price,
and related costs are recognized upon delivery as cost of sales. Revenue related to 3G wireless access and delivery and software
upgrades is amortized over the average life of the device. Sales of Amazon Prime memberships are considered arrangements
with multiple deliverables, including shipping benefits, Prime Instant Video, and access to the Kindle Owners' Lending Library.
The revenue related to the deliverables is amortized over the life of the membership according to the estimated delivery of
services. Amazon Prime membership fees are allocated between product sales and services sales. Costs to deliver Amazon
Prime benefits are recognized as cost of sales as incurred.
We evaluate whether it is appropriate to record the gross amount of product sales and related costs or the net amount
earned as commissions. Generally, when we are primarily obligated 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 at the gross sale
price. We generally record the net amounts as commissions earned if we are not primarily obligated and do not have latitude in
establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination
of the two.
Product sales represent revenue from the sale of products and related shipping fees and digital content where we are the
seller of record. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded
when the products are shipped and title passes to customers. Kindle devices sold through retailers are recognized at the point of
sale to consumers. Retail sales 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.
Services sales represent third-party seller fees earned (including commissions) and related shipping fees, and non-retail
activities such as AWS, advertising services, and our co-branded credit card agreements. Services sales, net of promotional
discounts and return allowances, are recognized when services have been rendered.
Return allowances, which reduce revenue, are estimated using historical experience. Allowance for returns was $167
million, $198 million, and $155 million as of December 31, 2013, 2012, and 2011. Additions to the allowance were $907
million, $702 million, and $542 million, and deductions to the allowance were $938 million, $659 million, and $490 million as
of December 31, 2013, 2012, and 2011. Revenue from product sales and services rendered is recorded net of sales and
consumption taxes. Additionally, 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 “Total net sales.”
Cost of Sales
Cost of sales consists of the purchase price of consumer products and digital content where we are the seller of record,
inbound and outbound shipping charges, and packaging supplies. Shipping charges to receive products from our suppliers are
included in our inventory, and recognized as cost of sales upon sale of products to our customers. Payment processing and
related transaction costs, including those associated with seller transactions, are classified in “Fulfillment” on our consolidated
statements of operations.
Vendor Agreements
We have agreements with our vendors to receive funds for cooperative marketing efforts, promotions, and volume
rebates. We generally consider amounts received from vendors to be a reduction of the prices we pay for their goods or
services, and therefore record those amounts as a reduction of the cost of inventory or cost of services. Vendor rebates are
typically dependent upon reaching minimum purchase thresholds. We evaluate the likelihood of reaching purchase thresholds
using past experience and current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the
rebate as we make progress towards the purchase threshold.