eBay 2006 Annual Report Download - page 62

accounting policies reflect the more significant estimates and assumptions used in the preparation of the consol-
idated financial statements. The following descriptions of critical accounting policies, judgments and estimates
should be read in conjunction with our consolidated financial statements and other disclosures included in this
report.
Provisions for Doubtful Accounts and Authorized Credits
We 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 2004,
2005, and 2006 (in thousands, except percentages):
2004 2005 2006
Year Ended December 31,
Net revenues .................................. $3,271,309 $4,552,401 $5,969,741
Provision for doubtful accounts and authorized credits . . . $ 90,942 $ 89,499 $ 100,729
Provision for doubtful accounts and authorized credits as
a % of net revenues ........................... 2.78% 1.97% 1.69%
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 flows. Based on our
results for the year ended December 31, 2006, a 25 basis point deviation from our estimates would have resulted in
an increase or decrease in operating income of approximately $14.9 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
Points 2006
+25 Basis
Points
Provision for doubtful accounts and related authorized
credits ..................................... $ 85,805 $ 100,729 $ 115,653
Income from operations .......................... 1,437,880 1,422,956 1,408,032
Net income ................................... 1,140,563 1,125,639 1,110,715
Diluted earnings per share ........................ $ 0.80 $ 0.79 $ 0.78
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, 2006, the allowance
for transaction losses totaled $79.5 million and was included in other current assets and accrued expenses and other
current liabilities in our consolidated balance sheet.
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