Amazon.com 2007 Annual Report Download - page 33

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carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are
estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales
taxes. Amounts paid in advance for subscription services, including amounts received for Amazon Prime and
other membership programs, are deferred and recognized as revenue over the subscription term. For our products
with multiple elements, where a standalone value for each element cannot be established, we recognize the
revenue and related cost over the estimated economic life of the product.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include
current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for
future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when
accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while
inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on
estimated future redemption rates. Redemption rates are estimated using our historical experience for similar
inducement offers. Current discount offers and inducement offers are classified as an offsetting amount in “Net
sales.”
Commissions and per-unit fees received from sellers and similar amounts earned through Amazon
Enterprise Solutions are recognized when the item is sold by the seller and our collectibility is reasonably
assured. When we are responsible for fulfillment-related services, commissions are recognized when risk of loss
and title transfer to the customer. We record an allowance for estimated refunds on such commissions using
historical experience.
Inventories
Inventories, consisting of products available for sale, are accounted for using the first-in first-out (“FIFO”)
method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based
on currently-available information, about the likely method of disposition, such as through sales to individual
customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition
category. Based on this evaluation, we adjust the carrying amount of our inventories to lower of cost or market
value.
We provide fulfillment-related services in connection with certain of our agreements. In those arrangements,
as well as other product sales by other sellers, the seller maintains ownership of the related products. As such,
these amounts are not included in our consolidated balance sheets.
Internal-Use Software and Website Development
Included in fixed assets is the capitalized cost of internal-use software and website development, including
software used to upgrade and enhance our websites and processes supporting our business. As required by
Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use,” we capitalize costs incurred during the application development stage of internal-use software and
amortize these costs over the estimated useful life of two years. Costs incurred related to design or maintenance
of internal-use software are expensed as incurred.
Currency Effect on Intercompany Balances
Gains and losses arising from intercompany foreign currency transactions are included in net income.
Stock-Based Compensation
We measure compensation cost for stock awards at fair value and recognize compensation over the service
period for awards expected to vest. The fair value of restricted stock and restricted stock units is determined
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