eBay 2004 Annual Report Download - page 97

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The consolidated Ñnancial statements include 100% of the assets and liabilities of these majority-owned
subsidiaries and the ownership interests of minority investors are recorded as minority interests. Investments in
entities where we hold more than a 20% but less than a 50% ownership interest and have the ability to
signiÑcantly inÖuence the operations of the investee are accounted for using the equity method of accounting
and the investment balance is included in long-term investments, while our share of the investees' operations is
included in interest and other income, net. Investments in entities where we hold less than a 20% ownership
interest or where we do not have the ability to signiÑcantly inÖuence the operations of the investee are
accounted for using the cost method of accounting and are included in long-term investments.
Certain prior period balances have been reclassiÑed to conform to the current period presentation.
Fair value of Ñnancial instruments
Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities
of three months or less when purchased. Our Ñnancial instruments, including cash, cash equivalents, accounts
receivable, funds receivable, accounts payable, and funds payable are carried at cost, which approximates their
fair value because of the short-term maturity of these instruments.
Short and long-term investments, which include marketable equity securities, government and corporate
bonds, are classiÑed as available-for-sale and reported at fair value using the speciÑc identiÑcation method.
Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive
income (loss), net of related estimated tax provisions or beneÑts. Additionally, we assess whether an other-
than-temporary impairment loss on our investments has occurred due to declines in fair value or other market
conditions. Declines in fair value that are considered other than temporary are recorded as an impairment of
certain equity investments in the consolidated statement of income.
Derivative instruments
We recognize all derivative instruments on the balance sheet at fair value. Changes in the fair value (i.e.,
gains or losses) of the derivatives are recorded each period in the consolidated statement of income or
accumulated other comprehensive income (loss). For a derivative designated as a cash Öow hedge, the gain or
loss on the derivative is initially reported as a component of accumulated other comprehensive income (loss)
and subsequently reclassiÑed into the consolidated statement of income when the hedged transaction aÅects
earnings. For derivatives recognized as a fair value hedge, the gain or loss on the derivative in the period of
change and the oÅsetting loss or gain of the hedged item attributed to the hedged risk, are recognized in
accumulated other comprehensive income until the hedge matures, at which time the gain or loss is
recognized as interest and other income, net. For derivatives not recognized as hedges, the gain or loss on the
derivative in the period of changes is recognized as interest and other income, net.
Concentrations of credit risk
Our cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk.
Cash and cash equivalents are placed with Ñnancial institutions that management believes are of high credit
quality. Our accounts receivable are derived from revenue earned from customers located in the U.S. and
internationally. Accounts receivable balances are settled through customer credit cards, debit cards, and
PayPal accounts, with the majority of accounts receivable are collected upon processing of credit card
transactions. We maintain an allowance for doubtful accounts receivable and authorized credits based upon
our historical experience. Historically, such losses have been within our expectations. However, unexpected or
signiÑcant future changes in trends could result in a material impact to future statements of income or cash
Öows. Due to the relatively small dollar amount of individual accounts receivable, we generally do not require
collateral on these balances. The provision for doubtful accounts is recorded as a charge to operating expense,
while the provision for authorized credits is recognized as a reduction of net revenues.
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