Amazon.com 2008 Annual Report Download - page 32

developing revenue models. In this process, a fair value for goodwill is estimated and compared to its carrying
value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment.
Changes in these forecasts could significantly change the amount of impairment recorded, if any.
The financial and credit market volatility directly impacts our fair value measurement through our weighted
average cost of capital that we use to determine our discount rate and through our stock price that we use to
determine our market capitalization. During times of volatility, significant judgment must be applied to
determine whether credit or stock price changes are a short term swing or a longer-term trend.
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 its estimated useful life of two years. Costs incurred related to design or maintenance of
internal-use software are expensed as incurred.
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
based on the number of shares granted and the quoted price of our common stock. 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 higher level of sensitivity and 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
attributable to differences in stock-based compensation between the financial statements and our tax returns.
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