Amazon.com 2005 Annual Report Download - page 69

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
expense for restricted stock and restricted stock units at their estimated fair value on date of grant based on the
number of shares granted and the quoted price of our common stock, and for stock options to the extent option
exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were subject to
an exchange offer, other modifications, or performance criteria, such awards were subject to variable accounting
treatment. To the extent stock awards were forfeited prior to vesting, the corresponding previously recognized
expense was reversed as an offset to operating expenses.
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 fair value of restricted
stock and restricted stock units is determined based on the number of shares granted and the quoted price of our
common stock, and the fair value of stock options is determined using the Black-Scholes valuation model, which
is consistent with our valuation techniques previously utilized for options in footnote disclosures required under
SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148, Accounting for Stock-
Based Compensation—Transition and Disclosure. Such value is recognized as expense over the service period,
net of estimated forfeitures, using the accelerated method under SFAS 123(R). The estimation of stock awards
that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our
current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
We consider many factors when estimating expected forfeitures, including types of awards, employee class, and
historical experience. Actual results, and future changes in estimates, may differ substantially from our current
estimates. For example, in the fourth quarter of 2005, we recorded a benefit of $10 million, $6 million net of tax,
or $0.01 per diluted share, representing the cumulative effect of increasing the rate of forfeitures expected over
the life of issued stock awards based on our historical experience. Additionally, because we implemented SFAS
123(R), we no longer have employee stock awards subject to variable accounting treatment.
The adoption of SFAS 123(R) resulted in a cumulative benefit from accounting change of $26 million in
2005, 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.
Prior to the adoption of SFAS 123(R), cash retained as a result of tax deductions relating to stock-based
compensation was presented in operating cash flows, along with other tax cash flows, in accordance with the
provisions of the EITF No. 00-15, Classification in the Statement of Cash Flows of the Income Tax Benefit Received
by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS 123(R) supersedes EITF 00-15,
amends SFAS 95, Statement of Cash Flows, and requires tax benefits relating to excess stock-based compensation
deductions to be prospectively presented in the statement of cash flows as financing cash inflows. Tax benefits
resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes
were $7 million, $8 million, and $4 million for the years ended December 31, 2005, 2004, and 2003. We expect the
corresponding amount for 2006 to increase substantially and possibly be in excess of $100 million, although the
actual amount is subject to considerable variability.
On March 29, 2005, the SEC published Staff Accounting Bulletin (SAB) No. 107, which provides the
Staff’s views on a variety of matters relating to stock-based payments. SAB 107 requires stock-based
compensation be classified in the same expense line items as cash compensation. We have reclassified stock-
based compensation from prior periods to correspond to current period presentation within the same operating
expense line items as cash compensation paid to employees.
61