Amazon.com 2005 Annual Report Download - page 36

Inventories
Inventories, consisting of products available for sale, are accounted for using the first-in first-out (“FIFO”)
method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based
on currently-available information, about the likely method of disposition, such as through sales to individual
customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition
category. Based on this evaluation, we adjust the carrying amount of our inventories to lower of cost or market
value.
We provide fulfillment-related services in connection with certain of our agreements. In those arrangements,
as well as other product sales by third parties, the third-party maintains ownership of the related products.
Internal-Use Software
Included in fixed assets is the capitalized cost of internal-use software and website development, including
software used to upgrade and enhance our websites and processes supporting our business. As required by
Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use,” we capitalize costs incurred during the application development stage of internal-use software and
amortize these costs over the estimated useful life of two years. Costs incurred related to design or maintenance
of internal-use software are expensed as incurred.
During 2005, 2004 and 2003 we capitalized $90 million (including $11 million of stock-based
compensation), $44 million, and $30 million of costs associated with internal-use software and website
development, which are partially offset by amortization of previously capitalized amounts of $50 million, $30
million and $24 million.
Currency Effect on Intercompany Balances
A provision of Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation,
requires that gains and losses arising from intercompany foreign currency transactions considered long-term
investments, in which settlement is not planned or anticipated in the foreseeable future, be excluded in the
determination of net income. Our international operations are financed, in part, by the U.S. parent company. Prior
to the fourth quarter of 2003, currency adjustments for these intercompany balances were recorded to
stockholders’ equity (deficit) as translation adjustments and not included in the determination of net income
because we intended to permanently invest such amounts. During the fourth quarter of 2003, we made the
decision that these amounts would be repaid among the entities and, accordingly, upon consolidation, any
exchange gain or loss arising from remeasurements of intercompany balances is required to be recorded in the
determination of net income. In accordance with SFAS No. 52, currency adjustments arising before the fourth
quarter of 2003 continue to be included as a component of “Accumulated other comprehensive income” on our
consolidated balance sheets. Resulting from the remeasurement of intercompany balances using exchange rates at
the reporting dates, we recorded a loss of $47 million in 2005, and gains of $41 million and $36 million in 2004
and 2003.
Valuation of Deferred Tax Assets
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of
assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are
actually paid or recovered. At December 31, 2005, our deferred tax assets, net of deferred tax liabilities and
valuation allowance, were $291 million, which includes $123 million relating to net operating loss carryforwards
(“NOLs”) that are primarily attributed to stock-based compensation. The majority of our NOLs begin to expire in
2016.
Additionally, we have elected to present our NOL deferred tax assets attributed to stock-based compensation
net of the related allowance as of the adoption of SFAS 123(R). Total gross deferred tax assets related to our
NOLs at December 31, 2005 were $616 million (relating to approximately $1.9 billion of NOLs).
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