Amazon.com 2013 Annual Report Download - page 54

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Income Taxes
Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, we do not
provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously taxed since we intend
to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these funds are needed for our
U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings. Undistributed
earnings of foreign subsidiaries that are indefinitely invested outside of the U.S were $2.5 billion as of December 31, 2013.
Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not
practicable.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or
recovered.
Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the extent we believe a
portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax
assets, including our recent cumulative earnings experience and expectations of future taxable income and capital gains by
taxing jurisdiction, the carry-forward periods available to us for tax reporting purposes, and other relevant factors. We allocate
our valuation allowance to current and long-term deferred tax assets on a pro-rata basis.
We utilize a two-step approach to recognizing and measuring uncertain income tax positions (tax contingencies). The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second
step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate
settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require
periodic adjustments and which may not accurately forecast actual outcomes. We include interest and penalties related to our
tax contingencies in income tax expense.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. To increase the comparability of fair value measures, the
following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably
available assumptions made by other market participants. These valuations require significant judgment.
We measure the fair value of money market funds and equity securities based on quoted prices in active markets for
identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive
markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by
observable market data. We did not hold any cash, cash equivalents, or marketable securities categorized as Level 3 as of
December 31, 2013, or December 31, 2012.
Cash and Cash Equivalents
We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash
equivalents.
Inventories
Inventories, consisting of products available for sale, are primarily accounted for using the 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.