eBay 2003 Annual Report Download - page 38

policies, judgments and estimates should be read in conjunction with our Consolidated Financial
Statements and other disclosures included in this report.
Provisions for Doubtful Accounts and Authorized Credits
Our U.S. and International segments are exposed to losses due to uncollectible accounts and credits
to sellers. Provisions for these items represent our estimate of actual losses and credits based on our
historical experience, are monitored monthly, and are made at the time the related revenue is recognized.
The provision for doubtful accounts is recorded as a charge to operating expense, while the authorized
credits are recorded as a reduction of revenues. The following table illustrates the provision related to
doubtful accounts and authorized credits as a percentage of net revenues for 2001, 2002, and 2003 (in
thousands, except percents).
Years Ended December 31,
2001 2002 2003
Net revenues from the U.S. and International segments ÏÏ $731,173 $1,118,732 $1,727,474
Provision for doubtful accounts and authorized credits ÏÏÏ 25,243 25,455 46,049
Provision for doubtful accounts and authorized credits as
a % of net revenues from the U.S. and International
segmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.5% 2.3% 2.7%
Historically, our actual losses and credits have been consistent with these provisions. However,
unexpected or signiÑcant future changes in trends could result in a material impact to future statements of
income and cash Öows. Based on our results for the year ended December 31, 2003, a 25 basis point
deviation from our estimates would have resulted in an increase or decrease in operating expenses and/or
net revenues of approximately $4.3 million. The following analysis demonstrates, for illustrative purposes
only, the potential eÅect a 25 basis point deviation from our estimates would have upon our Consolidated
Financial Statements and is not intended to provide a range of exposure or expected deviation (in
thousands, except per share data):
Our
¿25 Basis 2003 °25 Basis
Points Estimate Points
Expense/revenue reduction related to doubtful accounts
and authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 41,731 $ 46,049 $ 50,368
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 633,559 629,241 624,922
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 444,722 441,771 438,816
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.68 0.67 0.67
Provision for Transaction Losses
Our Payments segment is exposed to transaction losses due to credit card and other payment misuse,
as well as non-performance of sellers who accept payment through PayPal. We establish allowances for
estimated losses arising from processing customer transactions, such as charge-backs for unauthorized
credit card use and merchant-related charge-backs due to non-delivery of goods or services, ACH returns,
and debit card overdrafts. These allowances represent an accumulation of the estimated amounts, using an
actuarial technique, necessary to provide for transaction losses incurred as of the reporting date, including
those of 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
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