eBay 2008 Annual Report Download - page 71

Provision for Transaction and Loan Losses
We are exposed to losses due to uncollectible receivable and loan accounts, credit card and other payment
misuse, as well as non-performance of and loan losses from sellers who accept payment through PayPal. Provisions
for these items represent our estimate of actual losses based on our historical experience, actuarial techniques, the
age and delinquency rates of receivables, the credit quality of the relevant loan, as well as economic and regulatory
conditions. The following table illustrates the provision as a percentage of net revenues for 2006, 2007 and 2008 (in
thousands, except percentages):
2006 2007 2008
Year Ended December 31,
Net revenues .................................. $5,969,741 $7,672,329 $8,541,261
Provision for transaction and loan losses .............. $ 266,724 $ 293,917 $ 347,453
Provision for transaction and loan losses as a % of net
revenues.................................... 4.5% 3.8% 4.1%
Determining appropriate allowances for these 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. An aggregate 50 basis point
deviation from our estimates would have resulted in an increase or decrease in operating income of approximately
$42.7 million resulting in an approximate $0.03 change in diluted earnings per share.
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of probable loss,
net of expected recoveries, 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. We are currently
involved in certain legal proceedings as discussed in “Item 1A: Risk Factors,” “Item 3: Legal Proceedings” and
“Note 11 — Commitments and Contingencies — Litigation and Other Legal Matters” to the consolidated financial
statements included in this report. We believe that we have meritorious defenses to the claims against us, and we
intend to 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 is 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, 2008, we had a valuation allowance on certain
foreign net operating losses based on our assessment that it is more likely than not that the deferred tax asset will not
be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the
change with a corresponding increase or decrease in our tax provision in our consolidated statement of income or
against additional paid-in-capital in our consolidated balance sheet to the extent any tax benefits would have
otherwise been allocated to equity.
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