eBay 2002 Annual Report Download - page 42

transaction losses incurred as of the reporting date, including those to which we have not yet been notiÑed.
The allowances are monitored monthly and are updated based on actual claims data reported by our
claims processors. Customers typically have up to 180 days to Ñle transaction disputes. Consequently, the
time between estimating the loss provisions and realization of the actual amount is short. The allowances
are based on known facts and circumstances, internal factors including our experience with similar cases,
historical trends involving loss payment patterns and the mix of transaction and loss types. Additions to the
allowance, in the form of provisions, are reÖected as a general and administrative expense in our results of
operations, while write-oÅs to the allowance are made when a loss is determined to have occurred.
Recoveries, when collected, are recorded as an increase to the allowance for transaction losses. As of
December 31, 2002, the allowance for transaction losses totaled $10.1 million and was included in other
current liabilities in our consolidated balance sheet.
The following table illustrates the provision for transaction losses as a percentage of total payment
volume from PayPal operations for the post-acquisition period from October 4, 2002 through
December 31, 2002 (in thousands, except percents).
2002
Total Payment Volume from the PayPal operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,138,093
Provision for transaction losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,832
Provision for transaction losses as a % of total payment volume from PayPal
operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.37%
Prior to our October 3, 2002 acquisition of PayPal, no provision for transaction losses was recorded as
our third-party banking service provider assumed all transaction loss exposure. The fees charged to us by
this banking service provider reÖected the assumption of this loss exposure and other services rendered.
Charges for the services were reported as a cost of net revenues.
The establishment of appropriate allowances for transaction losses is an inherently uncertain process,
and ultimate losses may vary from the current estimates. We regularly update our allowance estimates as
new facts become known and events occur that may impact the settlement or recovery of losses. The
allowances are maintained at a level deemed appropriate by management to adequately provide for losses
incurred at the balance sheet date. Based on our results for the post-acquisition period from October 4,
2002 through December 31, 2002, a Ñve basis point deviation from our estimates would have resulted in an
increase or decrease in expense of approximately $1.0 million. The following analysis demonstrates the
potential eÅect a Ñve basis point deviation from our estimates would have upon our Ñnancial statements
for the period that we consolidated PayPal's operations and is not intended to provide a range of exposure
or expected deviation (in thousands, except per share data):
Management's
¿5 Basis 2002 °5 Basis
Points Estimate Points
Provision for transaction losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,842 $ 7,832 $ 8,980
Income from operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 355,187 354,197 353,049
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 250,516 249,891 249,166
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.86 0.85 0.85
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of
probable loss and provided for such losses through charges to our income statement. These estimates have
been based on our assessment of the facts and circumstances at each balance sheet date and are subject to
change based upon new information and future events.
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