Amazon.com 2005 Annual Report Download - page 35

to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical
accounting policies and judgments addressed below. We also have other key accounting policies, which involve
the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional
information, see Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of
Business and Accounting Policies.” Although we believe that our estimates, assumptions, and judgments are
reasonable, they are based upon information presently available. Actual results may differ significantly from
these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
We recognize revenue from product sales or services rendered when the following four revenue recognition
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been
rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. Additionally, revenue
arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the
arrangement meet the following criteria: the delivered item has value to the customer on a standalone basis; there
is objective and reliable evidence of the fair value of undelivered items; and delivery of any undelivered item is
probable.
We evaluate the criteria of Emerging Issues Task Force (EITF) Issue No. 99-19, Reporting Revenue Gross
as a Principal Versus Net as an Agent, in determining whether it is appropriate to record the gross amount of
product sales and related costs or the net amount earned as commissions. Generally, when we are the primary
party obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting
suppliers, or have several but not all of these indicators, revenue is recorded gross. If we are not primarily
obligated and amounts earned are determined using a percentage, a fixed-payment schedule, or a combination of
the two, we generally record the net amounts as commissions earned. Under our Syndicated Stores arrangements,
we record gross product sales and costs since we own the inventory, set prices, and are responsible for fulfillment
and customer service, and the other business earns a sales commission.
Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are
recorded when the products are shipped and title passes to customers. Retail items sold to customers are made
pursuant to sales contracts that generally provide for transfer of both title and risk of loss upon our delivery to the
carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are
estimated using historical experience. Amounts paid in advance for subscription services, including amounts
received for online DVD rentals, Amazon Prime, and other membership programs, are deferred and classified in
“Unearned revenue” on our consolidated balance sheets and recognized as revenue over the subscription term.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include
current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for
future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when
accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while
inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on
estimated future redemption rates. Redemption rates are estimated using our historical experience for similar
inducement offers. Current discount offers and inducement offers are classified as an offsetting amount in “Net
sales.”
Commissions and per-unit fees received from third-party sellers and similar amounts earned through
Amazon Enterprise Solutions are recognized when the item is sold by the third-party seller and our collectibility
is reasonably assured. When we are responsible for fulfillment-related services, commissions are recognized
when risk of loss and title transfer to the customer. We record an allowance for estimated refunds on such
commissions using historical experience.
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