Amazon.com 2007 Annual Report Download - page 34

based on the number of shares granted and the quoted price of our common stock. Since we primarily issue
restricted stock units to our employees, the complexity of valuation issues for stock compensation is greatly
reduced. 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 estimates may
differ substantially from our current estimates.
We utilize the accelerated method, rather than a straight-line method, for recognizing compensation
expense. Under this method, over 50% of the compensation cost would be expensed in the first year of a four
year vesting term. The accelerated method also adds a level of complexity in estimating forfeitures. If forfeited
early in the life of an award, the forfeited amount is much greater under an accelerated method than under a
straight-line method.
Income Taxes
We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgment is
required in evaluating our tax positions and determining our provision for income taxes. During the ordinary
course of business, there are many transactions and calculations for which the ultimate tax determination is
uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to
which, additional taxes will be due. These reserves for tax contingencies are established when we believe that
certain positions might be challenged despite our belief that our tax return positions are fully supportable. We
adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audit. The
provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered
appropriate.
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. The majority of our gross deferred tax assets relate to net operating loss carryforwards
that related to differences in stock-based compensation between the financial statements and our tax returns.
Statement of Financial Accounting Standards (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 the provisions of SFAS No. 109, we allocate our valuation
allowance to current and long-term deferred tax assets on a pro-rata basis.
If we determine that additional portions of our deferred tax assets are realizable the majority of the benefit
will come from the assets associated with the stock-based compensation that was not recognized in the financial
statements but was claimed on the tax return. Since this compensation did not originally run through our
consolidated statements of operations, the benefit generated will be recorded to stockholders’ equity.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN 48 contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which
is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes.
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