eBay 2005 Annual Report Download - page 89

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
represent an accumulation of the estimated amounts necessary to provide for transaction losses incurred as of
the reporting date, including those to 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. Additions to the allowance, in the form of provisions, are reflected as a general and
administrative expense in our consolidated statement of income. At December 31, 2004 and 2005, the
allowance for transaction losses totaled $11.0 million and $20.2 million, respectively, and was included in
accrued expenses and other current liabilities in our consolidated balance sheet.
Foreign currency
Substantially all of our foreign subsidiaries use the local currency of their respective countries as their
functional currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet
dates. Revenues, costs and expenses are translated into United States dollars at average exchange rates for the
period. Gains and losses resulting from translation are recorded as a component of accumulated other
comprehensive income (loss).
Realized gains and losses from foreign currency transactions are recognized as interest and other income,
net.
Funds receivable and funds payable to customers
Funds receivable and payable relate to our Payments segment and arise due to the time taken to clear
transactions through external payment networks. When customers fund their account using their bank account
or credit card, or withdraw money from their bank account or through a debit card transaction, there is a
clearing period before the cash is received or sent by PayPal, usually two or three business days for
U.S. transactions, and up to five to eight business days for international transactions. Hence, these funds are
treated as a receivable or payable until the cash is settled.
Customer accounts
As an agent on behalf of our customers we deposit all U.S.-based customer funds held in U.S. dollars into
Federal Deposit Insurance Corporation (FDIC) insured bank accounts or PayPal's Money Market Fund.
FDIC insurance is available to U.S.-based PayPal customers if we (1) place pooled customer funds in bank
accounts denominated "PayPal as Agent for the Benefit of its Customers' or similar caption, (2) maintain
records sufficient to identify the claim of each customer in the FDIC-insured account, (3) comply with
applicable FDIC recordkeeping requirements, and (4) truly operate as an agent of our customers. These
customer funds held by us as an agent on behalf of customers are not reflected on our consolidated balance
sheet. Additionally, we receive a custodial credit from our service provider in the form of a reduction in
transaction processing fees based upon balances held with each institution. This credit is recognized as a
reduction in processing costs in cost of revenues.
Effective February 13, 2004, PayPal customers resident in the European Union began to receive services
through PayPal's U.K. subsidiary, which holds an electronic money issuer license. Electronic Money
Institution, or ELMI, regulations require that customer balances in the U.K. subsidiary be represented as
claims on the subsidiary (held as a principal rather than as an agent) and invested only in specified types of
liquid assets. These customer balances are therefore included on our consolidated balance sheet as other
current assets with the corresponding amount due to customers reflected as a liability.
85