Amazon.com 2006 Annual Report Download - page 66

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 No. 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. Additionally, because we implemented SFAS No. 123(R), we no longer have employee stock
awards subject to variable accounting treatment.
The adoption of SFAS No. 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 No. 123(R), cash retained as a result of tax deductions relating to stock-based
compensation was presented in operating cash flows. SFAS No. 123(R) requires tax benefits relating to excess
stock-based compensation deductions be presented as financing cash inflows. Tax benefits resulting from stock-
based compensation deductions in excess of amounts reported for financial reporting purposes were $102
million, $7 million, and $8 million for the years ended December 31, 2006, 2005, and 2004, with the amounts for
2006 and 2005 treated as financing cash flows.
Stock-based compensation for the year ended December 31, 2004 was determined using the intrinsic value
method. The following table provides pro forma financial information as if stock-based compensation had been
computed under SFAS No. 123(R) (in millions, except per share data):
Year Ended
December 31,
2004
Net income—as reported .................................................. $588
Add: Stock-based compensation, as reported ................................... 58
Deduct: Total stock-based compensation determined using a fair value-based method
for all awards ......................................................... (81)
Net income—SFAS 123 fair value adjusted .................................... $565
Basic earnings per share—as reported ........................................ $1.45
Diluted earnings per share—as reported ...................................... 1.39
Basic earnings per share—SFAS 123 fair value adjusted ......................... 1.39
Diluted earnings per share—SFAS 123 fair value adjusted ........................ 1.33
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
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