Amazon.com 2006 Annual Report Download - page 33

currencies in our international locations, our consolidated net sales, gross profit, and operating expenses will be
higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative
to currencies in our international locations, our consolidated net sales, gross profit, and operating expenses will
be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S.
economy through our growing international businesses benefits our shareholders over the long term. We also
believe it is important to evaluate our operating results and growth rates before and after the effect of currency
changes.
In addition, the remeasurement of our 6.875% PEACS and intercompany balances can result in significant
gains and charges associated with the effect of movements in currency exchange rates. Currency volatilities may
continue, which may significantly impact (either positively or negatively) our reported results and consolidated
trends and comparisons.
For additional information about each line item summarized above, refer to Item 8 of Part II, “Financial
Statements and Supplementary Data—Note 1—Description of Business and Accounting Policies.”
Critical Accounting Judgments
The preparation of financial statements in conformity with generally accepted accounting principles of the
United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as
the ones that are most important to the portrayal of the company’s financial condition and results of operations,
and which require the company to make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical
accounting policies and judgments addressed below. We also have other key accounting policies, which involve
the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional
information, see Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of
Business and Accounting Policies.” Although we believe that our estimates, assumptions, and judgments are
reasonable, they are based upon information presently available. Actual results may differ significantly from
these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
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 of 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 the primary
party 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 percentage, a fixed-payment schedule, or a combination of
the two, we generally record the net amounts as commissions earned.
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 items sold to customers are made
25