eBay 2008 Annual Report Download - page 93

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websites click through our text-based advertisements to an advertiser’s designated website) are provided to
advertisers; or ratably over the term of the agreement where such agreements provide for minimum monthly or
quarterly advertising commitments or where such commitments are fixed throughout the term. Revenues related to
revenue sharing arrangements are recognized based on revenue reports received from our partners, provided that
collectibility is reasonably assured. Revenues related to classified fees are fees for listing items on our classified
websites and are recognized over the estimated period of the classified listing. Lead referral fee revenue is generated
from lead referral fees based on the number of times a user clicks through to a merchant’s website from our
websites. Lead referral fees are recognized in the period in which the user clicks through to the merchant’s website.
Other revenues are derived principally from contractual arrangements with third parties that provide services
to eBay and PayPal users and interest earned from banks on certain PayPal customer account balances and interest
and fees earned on the Bill Me Later loan portfolio. Revenues from contractual arrangements with third parties are
recognized as the contracted services are delivered to end users. Revenues from interest income are recognized
when earned. Interest and fees earned on the Bill Me Later loan portfolio are computed and recognized based on the
amount of loans outstanding and their contractual interest and fee rates.
To drive traffic to our websites, we periodically provide incentives to our users such as percentage discounts
off current purchases. The incentives used by our users are reported as a reduction of revenue.
Product development costs
Costs related to the planning and post implementation phases of our website development efforts are recorded
as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the
product’s estimated useful life of one to three years as charges to cost of net revenues. During the years ended
December 31, 2006, 2007 and 2008, we capitalized $67.9 million (including $8.8 million of stock-based
compensation), $110.6 million (including $8.4 million of stock-based compensation) and $112.7 million (including
$10.6 million of stock-based compensation) of software development costs, respectively, the majority of which
relates to site and other product development efforts.
Advertising expense
We expense the costs of producing advertisements at the time production occurs and expense the cost of
communicating advertising in the period during which the advertising space or airtime is used as sales and
marketing expense. Internet advertising expenses are recognized based on the terms of the individual agreements,
which is generally over the greater of the ratio of the number of impressions delivered over the total number of
contracted impressions, pay-per-click, or on a straight-line basis over the term of the contract. Advertising expense
totaled $871.0 million, $1.0 billion and $923.4 million for the years ended December 31, 2006, 2007 and 2008,
respectively.
Stock-based compensation
We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share Based
Payment” (FAS 123(R)) using the modified prospective transition method beginning January 1, 2006. Accordingly,
during 2006, 2007 and 2008, we recorded stock-based compensation expense for awards granted prior to, but not yet
vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under FAS 123 were in
effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we have continued to
recognize compensation expense using the accelerated amortization method under Financial Accounting Standards
Board (FASB) Interpretation 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans” (FIN 28). For stock-based awards granted after January 1, 2006, we have recognized compensation
expense based on the estimated grant date fair value method using the Black-Scholes valuation model. For these
awards, we have recognized compensation expense using a straight-line amortization method. As FAS 123(R)
requires that stock-based compensation expense be based on awards that are ultimately expected to vest.
85
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)