Overstock.com 2005 Annual Report Download - page 85

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
relationship with the customer. Our Travel business provides extensive customer service and support for its customers; however, the
supplier hotel is principally liable to its merchant hotel customers in all situations where the customer does not receive the hotel
services booked through OTravel.com. In this case, OTravel.com provides customer service support to help resolve issues, even
though such customer support could typically involve issues for which OTravel.com is not principally liable.
OTravel.com generates both merchant hotel revenues and agency air, hotel, car and cruise revenues. Merchant hotel revenues are
recognized as net revenue at the time of booking since all transactions are billed directly to customers, are nonrefundable and
generally non-cancelable, and require no significant post-delivery obligations for OTravel.com. A reserve for charge-backs and
cancellations is recorded at the time of the transaction based on historical experience.
Agency revenues are derived from airline ticket transactions, certain hotel transactions as well as cruise and car rental
reservations. Agency revenues are recognized on a net basis on air transactions when the reservation is made and secured by a credit
card. A cancellation allowance is recognized on these revenues based on historical experience. OTravel.com recognizes agency
revenues on hotel reservations, cruise and car rental reservations, either on an accrual basis for payments from a commission
clearinghouse or on receipt of commissions from an individual supplier.
Cost of goods sold
Cost of goods sold include product costs, warehousing costs, inbound and outbound shipping costs, handling and fulfillment
costs, customer service costs and credit card fees, and are recorded in the same period in which related revenues have been recorded.
Fulfillment costs include warehouse handling labor costs, fixed warehouse costs, credit card fees and customer service costs. For the
years ended December 31, 2003, 2004 and 2005, fulfillment costs totaled $20.3 million, $34.3 million and $59.9 million, respectively.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to affect
taxable income. Income tax expense (benefit) is the tax payable (receivable) for the period and the change during the period in the
deferred tax assets and liabilities.
SFAS 109, "Accounting for Income Taxes," requires that deferred tax assets be evaluated for future realization and be reduced by
a valuation allowance to the extent the deferred tax asset will not be realized. The Company considers many factors when assessing
the likelihood of future realization of our deferred assets including expectations of future taxable income, the carry-forward periods
available for tax reporting purposes, and other relevant factors. Significant judgement is required in making this assessment, and it is
very difficult to predict when, if ever, our assessment may conclude that the remaining portion of the deferred tax assets are realizable.
F-15