eBay 2005 Annual Report Download - page 70

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Based on our results for the year ended December 31, 2005, a 25 basis point deviation from our estimates
would have resulted in an increase or decrease in operating income of approximately $8.7 million. The
following analysis demonstrates, for illustrative purposes only, the potential effect 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):
¿25 Basis °25 Basis
Points 2005 Points
Expense related to doubtful accounts and revenue
reduction related to authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 80,751 $ 89,499 $ 98,247
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,450,455 1,441,707 1,432,959
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,090,791 1,082,043 1,073,295
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.78 $ 0.78 $ 0.77
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, Automated Clearing
House, or ACH, returns, buyer protection program claims and debit card overdrafts. These allowances
represent an accumulation of the estimated amounts, necessary to provide for transaction losses incurred as of
the reporting date, including those of which we have not yet been notified. The allowances, which involve the
use of actuarial techniques, 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 losses is reflected as a general and administrative expense in our
consolidated statement of income. At December 31, 2005, the allowance for transaction losses totaled
$20.2 million and was included in accrued expenses and 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 years ended December 31, 2003, 2004 and 2005 (in thousands, except
percentages).
Years Ended December 31,
2003 2004 2005
Total payment volumeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $12,226,000 $18,915,000 $27,485,000
Transaction loss expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 36,401 $ 50,459 $ 73,773
As a % of total payment volume ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.30% 0.27% 0.27%
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, 2005, a five basis point deviation from our estimates
would have resulted in an increase or decrease in our operating expenses of approximately $13.7 million. The
following analysis demonstrates, for illustrative purposes only, the potential effect a five basis point deviation
from our estimates would have upon our consolidated financial statements for the year ended December 31,
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