Amazon.com 2005 Annual Report Download - page 62

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The PRC regulates Joyo.com’s business through regulations and license requirements restricting (i) the
scope of foreign investment in the Internet, retail and delivery sectors, (ii) Internet content and (iii) the sale of
certain media products. In order to meet the PRC local ownership and regulatory licensing requirements,
Joyo.com’s business is operated through a PRC subsidiary which acts in cooperation with PRC companies owned
by nominee shareholders who are PRC nationals.
Joyo.com does not own any capital stock of the PRC affiliates, but is the primary beneficiary of future
losses or profits through contractual rights. As a result, we consolidate the results of the PRC affiliates in
accordance with FIN 46R, “Consolidation of Variable Interest Entities.” The net assets and operating results for
the PRC affiliates were not significant.
Accounting Change
As of January 1, 2005, we adopted SFAS No. 123(R) using the modified prospective method, which
requires measurement of compensation cost for all stock-based awards at fair value on date of grant and
recognition of compensation over the service period for awards expected to vest. The adoption of SFAS 123(R)
resulted in a cumulative benefit from accounting change of $26 million, which reflects the net cumulative impact
of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when
they occur as previously permitted. See “Note 1—Description of Business and Accounting Policies—Stock-
based Compensation.”
Cash and Cash Equivalents
We classify all highly liquid instruments, including money market funds that comply with Rule 2a-7 of the
Investment Company Act of 1940, with a remaining maturity of three months or less at the time of purchase as
cash equivalents.
Inventories
Inventories, consisting of products available for sale, are accounted for using the 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 third parties and Amazon
Enterprise Solutions programs. In those arrangements, as well as all other product sales by third parties, the third
party maintains ownership of the related products.
Accounts Receivable, Net and Other Current Assets
Included in “Accounts receivable, net and other current assets” are prepaid expenses of $15 million and
$12 million at December 31, 2005 and 2004, representing advance payments for insurance, licenses, and other
miscellaneous expenses.
Allowance for Doubtful Accounts
We estimate losses on receivables based on known troubled accounts, if any, and historical experience of
losses incurred. The allowance for doubtful accounts receivable was $43 million and $23 million at
December 31, 2005 and 2004.
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