eBay 2006 Annual Report Download - page 63

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, 2004, 2005 and 2006 (in thousands, except percentages):
2004 2005 2006
Year Ended December 31,
Total payment volume ........................ $18,915,000 $27,485,000 $37,752,000
Transaction loss expense ....................... $ 50,459 $ 73,773 $ 126,439
As a % of total payment volume ................. 0.27% 0.27% 0.33%
Determining 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, 2006, a five basis point deviation from our estimates would have resulted in an
increase or decrease in our operating expenses of approximately $18.9 million. The following analysis demon-
strates, 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, 2006, and is not intended to provide a
range of exposure or expected deviation (in thousands, except per share data):
⫺5 Basis
Points 2006
+5 Basis
Points
Transaction loss expense ......................... $ 107,562 $ 126,439 $ 145,315
Income from operations .......................... 1,441,832 1,422,956 1,404,079
Net income ................................... 1,144,515 1,125,639 1,106,762
Diluted earnings per share ........................ $ 0.80 $ 0.79 $ 0.78
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of probable loss
and provided for such losses through charges to our consolidated statement of income. These estimates have been
based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based
upon new information and future events.
From time to time, we are involved in disputes that arise in the ordinary course of business, and we do not
expect this trend to change in the future. We are currently involved in certain legal proceedings as discussed in
“Item 3: Legal Proceedings” and “Note 8 — Commitments and Contingencies — Litigation and Other Legal
Matters” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We
believe that we have meritorious defenses to the claims against us, and we will defend ourselves vigorously.
However, even if successful, our defense against certain actions will be costly and could divert our management’s
time. If the plaintiffs were to prevail on certain claims, we might be forced to pay significant damages and licensing
fees, modify our business practices or even be prohibited from conducting a significant part of our business. Any
such results could materially harm our business and could result in a material adverse impact on the financial
position, results of operations or cash flows of all or any of our three businesses.
Accounting for Income Taxes
We are required to recognize a provision for income taxes based upon the taxable income and temporary
differences for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable
under currently enacted tax laws around the world and an analysis of temporary differences between the book and
tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax
effect of these temporary differences and the estimated tax benefit from our tax net operating losses are reported as
deferred tax assets and liabilities in our consolidated balance sheet. We also assess the likelihood that our net
deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than
not that some portion or all of the deferred tax asset will not be realized, we establish a valuation allowance. At
December 31, 2006, we had a valuation allowance on certain foreign net operating losses based on our assessment
59