Amazon.com 2005 Annual Report Download - page 71

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restructuring Estimates
Restructuring-related liabilities include estimates for, among other things, anticipated disposition of lease
obligations. Key variables in determining such estimates include anticipated timing of sublease rentals, estimates
of sublease rental payment amounts and tenant improvement costs, and estimates for brokerage and other related
costs. We periodically evaluate and, if necessary, adjust our estimates based on currently-available information.
Additionally, we may determine that certain of the office space previously vacated as part of our 2001
restructuring, which we have been unable to sublease due to poor real estate market conditions, may be necessary
for our future needs. To the extent we elect to utilize this office space we will adjust our restructuring-related
liability and classify future payments to the corresponding operating expense categories on the consolidated
statements of operations. See “Note 8—Other Operating Expense (Income).”
Foreign Currency
We have the following internationally-focused websites: www.amazon.co.uk, www.amazon.de,
www.amazon.fr, www.amazon.co.jp, www.amazon.ca, and www.joyo.com. Net sales generated from
internationally-focused websites, as well as most of the related expenses directly incurred from those operations,
are denominated in the functional currencies of the resident countries. Additionally, the functional currency of
our subsidiaries that either operate or support www.amazon.co.uk, www.amazon.de, www.amazon.fr,
www.amazon.co.jp, www.amazon.ca, and www.joyo.com is the same as the local currency of the United
Kingdom, Germany, France, Japan, Canada, and China. Assets and liabilities of these subsidiaries are translated
into U.S. Dollars at period-end exchange rates, and revenues and expenses are translated at average rates
prevailing throughout the period. Translation adjustments are included in “Accumulated other comprehensive
income,” a separate component of stockholders’ equity (deficit) and in the “Effect of exchange-rate changes on
cash and cash equivalents,” on the consolidated statements of cash flows. Transaction gains and losses arising
from transactions denominated in a currency other than the functional currency of the entity involved are
included in “Other income (expense), net” on the consolidated statements of operations. See “Note 9—Other
Income (Expense), Net.”
A provision of SFAS No. 52, Foreign Currency Translation, requires that gains and losses arising from
intercompany foreign currency transactions considered long-term investments, where 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. In periods ending 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. In connection with the
remeasurement of intercompany balances, we recorded a loss of $47 million in 2005, and gains of $41 million
and $36 million in 2004 and 2003.
Derivative Financial Instruments
During 2003, we terminated our Euro Currency Swap that previously was designated as a cash flow hedge
of a portion of the 6.875% PEACS principal and interest. See “Note 4—Long-Term Debt and Other.”
We hold warrants to purchase equity securities of other companies that are derivative financial instruments,
classified in “Other assets” on the consolidated balance sheets. We do not designate our warrants as hedging
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