Amazon.com 2005 Annual Report Download - page 66

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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).
SFAS 109, Accounting for Income Taxes, requires that deferred tax assets be evaluated for future realization
and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many
factors when assessing the likelihood of future realization of our deferred tax assets including our recent
cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-forward
periods available to us for tax reporting purposes, and other relevant factors. In accordance with the provisions of
SFAS 109, we allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis.
We recorded a tax benefit in 2005 of $90 million, representing $0.22 and $0.21 of basic and diluted earnings
per share, as we determined at year end that certain of our deferred tax assets were more likely than not
realizable. The range of possible judgments relating to valuation of our deferred tax assets is very wide. For
example, had we determined that the weight of available evidence did not support a decision that these deferred
tax assets are realizable; the “Provision (benefit) for income taxes” would have been an expense of $185 million
for 2005 rather than an expense of $95 million for the same period. At December 31, 2005 we continue to have a
valuation allowance of $213 million, which relates primarily to deferred tax assets that would only be realizable
upon the occurrence of future capital gains. See “Note 11—Income Taxes.”
Revenue
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 outlined in 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 primarily
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 fixed 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 sales to customers are made
pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier.
Return allowances, which reduce product revenue, are estimated using historical experience. Amounts paid in
advance for subscription services, including amounts received for online DVD rentals and other membership
programs, are deferred 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
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