Overstock.com 2005 Annual Report Download - page 87

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the provisions of SFAS 123R. The Company estimates that stock-based compensation will be approximately $3.8 million for 2006.
The Company generally has two categories of stock-based awards: restricted stock and stock options. Through December 31,
2005, the Company accounted for stock-based awards under the intrinsic value method, which follows the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The intrinsic
value method of accounting results in compensation expense to the extent option exercise prices are set below market prices on the
date of grant. Also, to the extent stock awards were granted subsequent to December 31, 2002, or were subject to an exchange offer,
other modifications, or performance criteria, such awards were subject to variable accounting treatment.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of Position ("SOP") 93-7 Reporting on Advertising
Costs. As such, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the cost of
communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are
recognized based on the terms of the individual agreements, which is generally: 1) during the period customers are acquired; or
2) based on the number of clicks generated during a given period over the term of the contract. Advertising expenses totaled
$18.6 million, $39.2 million and $77.8 million during the years ended December 31, 2003, 2004 and 2005, respectively.
Foreign currency translation
For the Company's subsidiary located in Mexico, the subsidiary's local currency is considered its functional currency. As a result,
all of the subsidiary's assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue
and expenses are translated at weighted average exchange rates, and stockholders' equity is recorded at historical exchange rates. The
resulting foreign currency translation adjustments are recorded as a separate component of stockholders' equity in the consolidated
balance sheets as part of accumulated other comprehensive income (loss). Transaction gains and losses are included in other income
(expense) in the consolidated financial statements and have not been significant for any periods presented.
Derivative instruments
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" requires companies to recognize their derivative
instruments, including certain derivative instruments embedded in other contracts, as either assets or liabilities in the balance sheet at
fair value. The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been
designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in an international operation. For
derivatives designated as hedges, the changes in fair value are recorded in the balance sheet as an item in other comprehensive
income. Changes in the fair
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