Amazon.com 2005 Annual Report Download - page 63

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Internal-use Software and Website Development
Costs incurred to develop software for internal use are required to be capitalized and amortized over the
estimated useful life of the software in accordance with Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. Costs related to design or maintenance of
internal-use software are expensed as incurred. For the years ended 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.
Depreciation of Fixed Assets
Fixed assets include assets such as furniture and fixtures, heavy equipment, technology infrastructure,
internal-use software and website development, and our DVD rental library. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the assets (generally two years or less for assets such as
internal-use software and our DVD rental library, three years for our technology infrastructure, five years for
furniture and fixtures, and ten years for heavy equipment). Depreciation expense is generally classified within the
corresponding operating expense categories on the consolidated statements of operations, and certain assets, such
as our DVD rental library, are amortized as “Cost of sales.”
Leases and Asset Retirement Obligations
We account for our lease agreements pursuant to SFAS No 13, Accounting for Leases, which categorizes
leases at their inception as either operating or capital leases depending on certain defined criteria. On certain of
our lease agreements, we may receive rent holidays and other incentives. We recognize lease costs on a straight-
line basis without regard to deferred payment terms, such as rent holidays that defer the commencement date of
required payments. Additionally, incentives we receive are treated as a reduction of our costs over the term of the
agreement. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful
life or the life of the lease, without assuming renewal features, if any, are exercised.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations, we establish assets and liabilities for the present value of estimated future costs to return
certain of our leased facilities to their original condition. Such assets are depreciated over the lease period into
operating expense, and the recorded liabilities are accreted to the future value of the estimated restoration costs.
Goodwill
We evaluate goodwill for impairment, at a minimum, on an annual basis and whenever events and changes
in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at
the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value
of the reporting unit. The fair values of the reporting units are estimated using discounted projected cash flows. If
the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second
step is performed to measure the amount of impairment loss, if any. We conduct our annual impairment test as of
October 1 of each year, and have determined there to be no impairment in 2005 or 2004. There were no events or
circumstances from the date of our assessment through December 31, 2005 that would impact this assessment.
At December 31, 2005 and December 31, 2004, approximately 71% and 72% of our acquired goodwill was
assigned to our International segment, the majority of which relates to our acquisition of Joyo.com in 2004.
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