eBay 2003 Annual Report Download - page 39

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, 2003, the allowance for transaction losses totaled
$12.0 million and was included in accrued expenses and other current liabilities in our consolidated
balance sheet.
The following table illustrates the provision for transaction loss expense as a percentage of total
payment volume from PayPal operations for the period from October 3, 2002 through December 31, 2002
and for the year ended December 31, 2003 (in thousands, except percents).
Period from
October 3, 2002
through Year Ended
December 31, 2002 December 31, 2003
Total payment volume ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,138,093 $12,226,305
Transaction loss expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,832 36,401
As a % of total payment volume ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.37% 0.30%
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 we deem appropriate to adequately provide for losses incurred at the
balance sheet date. Based on our results for the year ended December 31, 2003, a Ñve basis point deviation
from our estimates would have resulted in an increase or decrease in our operating expenses of
approximately $6.1 million. The following analysis demonstrates, for illustrative purposes only, the potential
eÅect a Ñve basis point deviation from our estimates would have upon our Consolidated Financial
Statements for the year ended December 31, 2003, and is not intended to provide a range of exposure or
expected deviation (in thousands, except per share data):
Our
¿5 Basis 2003 °5 Basis
Points Estimate Points
Transaction loss expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 30,288 $ 36,401 $ 42,515
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 635,354 629,241 623,127
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 445,949 441,711 437,588
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.68 0.67 0.67
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.
From time to time, we are involved in disputes that arise in the ordinary course of business, and we
do not expect this trend to change in the future. We are currently involved in certain legal proceedings as
discussed in ""Item 3: Legal Proceedings'' and ""Note 11 Ì Commitments and Contingencies Ì Litigation
and Other Legal Matters'' to our Consolidated Financial Statements, which we incorporate by reference
herein. We believe that we have meritorious defenses to the claims against us, and we will defend
ourselves vigorously. However, even if successful, our defense against certain actions will be costly and
could divert our management's time. If the plaintiÅs were to prevail on certain claims, we might be forced
to pay signiÑcant damages and licensing fees, modify our business practices or even be prohibited from
conducting a signiÑcant part of our U.S. business. Any such results could materially harm our business and
37