eBay 2004 Annual Report Download - page 39

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Provisions for Doubtful Accounts and Authorized Credits
Our U.S. Marketplace and International Marketplace 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 2002, 2003, and 2004 (in
thousands, except percentages).
Years Ended December 31,
2002 2003 2004
Net revenues from the U.S. and International
Marketplace segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,118,732 $1,727,474 $2,573,607
Provision for doubtful accounts and authorized credits ÏÏ $ 25,455 $ 46,049 $ 90,942
Provision for doubtful accounts and authorized credits
as a % of net revenues from the U.S. and
International Marketplace segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2.28% 2.67% 3.53%
Historically, our actual losses and credits have been consistent with these provisions. However, future
changes in trends could result in a material impact to future consolidated statements of income and cash Öows.
Based on our results for the year ended December 31, 2004, a 25 basis point deviation from our estimates
would have resulted in an increase or decrease in operating income of approximately $6.4 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 Ñnancial statements and is not intended to provide a
range of exposure or expected deviation (in thousands, except per share data):
Ó25 Basis °25 Basis
Points 2004 Points
Income from operating impact related to doubtful
accounts and authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 84,508 $ 90,942 $ 97,376
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,065,676 1,059,242 1,052,808
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 784,657 778,223 771,789
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.57 $ 0.57 $ 0.56
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. 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. The provision for transaction loss expense is reÖected as a general
and administrative expense in our consolidated statement of income. As of December 31, 2004, the transaction
loss reserve totaled $11.0 million and was included in accrued expenses and other current liabilities in our
consolidated balance sheet.
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