Amazon.com 2006 Annual Report Download - page 63

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
redeems it. If a gift certificate is not redeemed, we recognize revenue when it expires or, for a certificate without
an expiration date, when the likelihood of its redemption becomes remote, generally two years from date of
issuance.
Unearned Revenue
Unearned revenue is recorded when payments are received in advance of performing our service obligations
and is recognized ratably over the service period. Unearned revenue was $78 million and $48 million at
December 31, 2006 and 2005. These amounts are included in “Accrued expenses and other” on our consolidated
balance sheets.
Income Taxes
Income tax expense includes U.S. and international income taxes. We do not provide for U.S. taxes on our
undistributed earnings of foreign subsidiaries, totaling $53 million at December 31, 2006, since we intend to
invest such undistributed earnings indefinitely outside of the U.S.
Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of
assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are
actually paid or recovered. At December 31, 2006, our deferred tax assets, net of deferred tax liabilities and
valuation allowance, were $264 million, which includes $130 million relating to net operating loss carryforwards
(“NOLs”) that were primarily attributed to stock-based compensation. The majority of our NOLs begin to expire
in 2019 and thereafter.
SFAS No. 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 and expectations of future taxable income by taxing jurisdiction, the carry-
forward periods available to us for tax reporting purposes, and other relevant factors. In accordance with SFAS
No. 109, we allocate our valuation allowance to current and long-term deferred tax assets on a pro-rata basis.
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.
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
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