Amazon.com 2007 Annual Report Download - page 65

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Technology and Content
Technology and content expenses consist principally of payroll and related expenses for employees involved
in, application development, category expansion, editorial content, buying, merchandising selection, and systems
support, as well as costs associated with the compute, storage and telecommunications infrastructure.
Technology and content costs are expensed as incurred, except for certain costs relating to the development
of internal-use software and website development, including software used to upgrade and enhance our websites
and processes supporting our business, which are capitalized and amortized over two years.
General and Administrative
General and administrative expenses consist of payroll and related expenses for employees involved in
general corporate functions, including accounting, finance, tax, legal, and human relations, among others; costs
associated with use by these functions of facilities and equipment, such as depreciation expense and rent;
professional fees and litigation costs; and other general corporate costs.
Stock-Based Compensation
As of January 1, 2005, we adopted SFAS No. 123(R), 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. Such value is recognized as expense over
the service period, net of estimated forfeitures, using the accelerated method. 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.
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 services for the Joyo Amazon websites at www.joyo.cn
and www.amazon.cn. 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 our subsidiaries that either operate or support these
international websites is the same as the local currency of the United Kingdom, Germany, France, Japan, Canada,
and China. Assets and liabilities of these subsidiaries are translated into U.S. Dollars at period-end exchange
rates, and revenues and expenses are translated at average rates prevailing throughout the period. Translation
adjustments are included in “Accumulated other comprehensive income (loss),” a separate component of
stockholders’ equity, and in the “Foreign currency effect on cash and cash equivalents,” on our consolidated
statements of cash flows. Transaction gains and losses arising from transactions denominated in a currency other
than the functional currency of the entity involved are included in “Other income (expense), net” on our
consolidated statements of operations. See “Note 10—Other Income (Expense), Net.”
Gains and losses arising from intercompany foreign currency transactions are included in net income. In
connection with the remeasurement of intercompany balances, we recorded gains of $32 million and $50 million
in 2007 and 2006, and a loss of $47 million in 2005.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted
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