Overstock.com 2005 Annual Report Download - page 84

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Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fulfillment partner revenue
Fulfillment partner revenue consists of merchandise sold through the Company's Website and shipped by third parties directly to
consumers and other businesses, and is recognized when services have been rendered (generally when verification of the shipment of
the product is communicated to the Company from the third party that shipped the product). Prior to July 1, 2003, the Company did
not physically handle the merchandise sold in these transactions, as the merchandise was shipped directly by a third party vendor, who
also handled all customer returns related to these fulfillment partner sales. During that period, the Company recognized as revenue
only the net portion of the price customers paid for the purchased products since the Company acted as an agent in such transactions.
Beginning July 1, 2003, the Company took responsibility for returned items relating to these sales and began accepting returned items
relating to these sales into the Company's warehouse, and the Company now handles the possible resale of returned items. As a result,
beginning July 1, 2003, the Company is considered to be the primary obligor for these sales transactions, and assumes the risk of loss
on returned items. As a consequence, the Company now records revenue from sales transactions involving fulfillment partners on a
gross basis, rather than on a net basis as was recorded prior to July 1, 2003.
During September 2004, the Company added an online auction service to its Website. The Auctions tab allows sellers to list
items for sale, buyers to bid on items of interest, and users to browse through listed items online. The Company is not considered the
seller of the items sold on the auction site and has no control over the pricing of those items. Therefore, for these sales, only the listing
fees for items listed and commissions for items sold are recorded as revenue during the period items are listed or items are sold. Our
auction business revenues were insignificant in 2004 and 2005. Revenue from the auctions business has been included in the
fulfillment partner segment since 2004, as it is not large enough to separate out as its own segment at this early stage of the business.
Fulfillment partner revenue is reduced by the impact of estimated returns, fraud and coupons redeemed by customers and other
discounts to obtain such sales.
Total revenue is recorded net of estimated returns, coupons and other discounts. Our returns policy for all products other than
those sold in our Electronics and Computers department provides for a $4.95 restocking fee and the provision that we will not accept
product returns initiated more than twenty days after the shipment date. We charge a 15% restocking fee (instead of the $4.95
restocking fee) on all items returned for non-defective reasons from the Electronics and Computers department.
Accounting for merchant and agency revenues for Travel subsidiary
The determination of gross versus net revenue presentation is based principally on the Company's consideration of Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and Emerging Issues Task Force Issue No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent," including the weighing of the relevant qualitative factors regarding
the Company's status as the primary obligor, and the extent of pricing latitude and inventory risk. The method of merchant revenue
presentation by the Company does not impact operating profit, net income, or cash flows, but rather revenues and cost of sales.
The principle factor in determining gross versus net presentation by the Company's travel subsidiary, OTravel.com, Inc.
("OTravel.com"—see Note 8) is the consideration of who is the primary obligor in the
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