Amazon.com 2008 Annual Report Download - page 60

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accrued Expenses and Other
Included in “Accrued expenses and other” at December 31, 2008 and 2007 were liabilities of $270 million
and $230 million for unredeemed gift certificates. We recognize revenue from a gift certificate when a customer
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 $191 million and $91 million at December 31, 2008 and 2007. Non-current
unearned revenue was $46 million and $19 million at December 31, 2008 and 2007.
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 $328 million at December 31, 2008, 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, 2008, our deferred tax assets, net of deferred tax liabilities and
valuation allowance, were $349 million, which includes $165 million relating to net operating loss carryforwards
that were primarily attributed to stock-based compensation. The majority of our net operating loss carryforwards
begin to expire in 2021 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 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. Our policy is to include interest and penalties related to our tax
contingencies in income tax expense. Implementation of FIN 48 was not material.
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