Amazon.com 2008 Annual Report Download - page 61

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value of Financial Instruments
Effective January 1, 2008, we adopted SFAS No. 157, except as it applies to the nonfinancial assets and
nonfinancial liabilities subject to FSP No. 157-2. SFAS No. 157 clarifies the definition of fair value, prescribes
methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair
value, and expands disclosures about fair value measurements. The three-tier fair value hierarchy, which
prioritizes the inputs used in the valuation methodologies, is:
Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by
observable market data.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with
reasonably available assumptions made by other market participants. These valuations require significant
judgment.
Revenue
We recognize revenue from product sales or services rendered when the following four revenue recognition
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been
rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Additionally,
revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables
in the arrangement meet the following criteria: the delivered item has value to the customer on a standalone
basis; there is objective and reliable evidence of the fair value of undelivered items; and delivery of any
undelivered item is probable.
We evaluate the criteria outlined in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus
Net as an Agent, in determining whether it is appropriate to record the gross amount of product sales and related
costs or the net amount earned as commissions. Generally, when we are primarily obligated in a transaction, are
subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of
these indicators, revenue is recorded gross. If we are not primarily obligated and amounts earned are determined
using a fixed percentage, a fixed-payment schedule, or a combination of the two, we generally record the net
amounts as commissions earned.
Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are
recorded when the products are shipped and title passes to customers. Retail sales to customers are made
pursuant to a sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier.
Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from
product sales and services rendered is recorded net of sales taxes. Amounts received in advance for subscription
services, including amounts received for Amazon Prime and other membership programs, are deferred and
recognized as revenue over the subscription term. For our products with multiple elements, where a standalone
value for each element cannot be established, we recognize the revenue and related cost over the estimated
economic life of the product.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include
current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for
future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when
53