Overstock.com 2004 Annual Report Download - page 40

The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operation provides further information about the
matters discussed above and other important matters affecting our business.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are as follows:
revenue recognition;
estimating valuation allowances and accrued liabilities, specifically, the reserve for returns, the allowance for doubtful accounts and the
allowance for obsolete and damaged inventory;
accounting for income taxes; and
valuation of long-lived and intangible assets and goodwill.
Revenue recognition. We derive our revenue from three sources: (i) direct revenue, which consists of merchandise sales made to consumers and
businesses that are fulfilled from our warehouse; (ii) fulfillment partner revenue, which consists of revenue from the sale of merchandise shipped by
fulfillment partners directly to consumers and other businesses, as well as fee revenue collected from the products listed and sold through the auction tab of
our Website; and (iii) commission revenue from our auctions and travel operations. All sources of revenue are recorded net of returns, coupons redeemed by
customers, and other discounts. Revenue from our auction and travel services were not material in 2004 and therefore are included in fulfillment partner
revenue.
Prior to July 1, 2003, we did not own or physically handle the merchandise sold in fulfillment partner transactions, as the merchandise was shipped
directly by a third party vendor, who also handled all customer returns related to those sales. However, beginning July 1, 2003, we took responsibility for
returned items relating to these sales, and we now handle the resale of returned items. As a result, beginning July 1, 2003, we are considered to be the primary
obligor for the majority of these sales transactions, and we assume the risk of loss on returned items. As a consequence, we now record revenue from the
majority of these sales transactions involving our fulfillment partners (excluding auction and travel products) on a gross basis, rather than recording them on a
net basis as we did prior to July 1, 2003. Similar to our direct revenue segment, fulfillment partner products are available to both consumers and businesses
through our Club O frequent buyers club and our Club O Gold bulk purchase program.
For sales transactions, we comply with the provisions of Staff Accounting Bulletin 104 "Revenue Recognition", which states that revenue should be
recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped or the
service provided and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the
resulting receivable is reasonably assured. We generally require payment by credit card at the point of sale. Amounts received prior to when we ship the goods
or provide the services to customers are recorded as deferred revenue. In addition, amounts received in advance for Club O and Club O Gold membership fees
are recorded as deferred revenue and recognized over the membership period.
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