Amazon.com 2007 Annual Report Download - page 62

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 over the service period. Current unearned revenue is included in “Accrued expenses and other”
and non-current unearned revenue is included in “Other long-term liabilities” on our consolidated balance sheets.
Current unearned revenue was $91 million and $78 million at December 31, 2007 and 2006.
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 $126 million at December 31, 2007, since we intend to
invest such undistributed earnings indefinitely outside of the U.S. If such amounts were repatriated,
determination of the amount of U.S. income taxes that would be incurred is not practicable due to the
complexities associated with this calculation.
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, 2007, our deferred tax assets, net of deferred tax liabilities and
valuation allowance, were $385 million, which includes $148 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.
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 (tax contingencies) 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 forecast actual outcomes.
Adopting FIN 48 increased long-term assets by $10 million, long-term liabilities by $21 million,
accumulated deficit by $14 million and additional paid-in capital by $2 million. These amounts include the
associated federal benefit related to unrecognized tax benefits, and interest and penalties which collectively are
not material. As of January 1, 2007, we had $110 million of tax contingencies.
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