Amazon.com 2011 Annual Report Download - page 29

whether credit or stock price changes are a short-term swing or a longer-term trend. As a measure of sensitivity, a
prolonged 20% decrease from our December 31, 2011, closing stock price would not be an indicator of possible
impairment.
Stock-Based Compensation
We measure compensation cost for stock awards at fair value and recognize it as compensation expense
over the service period for awards expected to vest. The fair value of 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 for the amount that will be forfeited, 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
employee class, economic environment, and historical experience. We update our estimated forfeiture rate
quarterly. A 1% change to our estimated forfeiture rate would have had an approximately $24 million impact on
our 2011 operating income. Our estimated forfeiture rates at December 31, 2011 and 2010, were 28% and 30%.
We utilize the accelerated method, rather than the straight-line method, for recognizing compensation
expense. Under this method, over 50% of the compensation cost is expensed in the first year of a four year
vesting term. 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 and estimating our tax positions and determining our provision and accruals for these
taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate
tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being
lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries
where we have higher statutory rates, by losses incurred in jurisdictions for which we are not able to realize the
related tax benefit, by changes in foreign currency exchange rates, entry into new businesses and geographies and
changes to our existing businesses, acquisitions, by changes in the valuation of our deferred tax assets and
liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and
interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional
income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits
and any related litigation could be materially different from our historical income tax provisions and accruals.
The results of an audit or litigation could have a material effect on our operating results or cash flows in the
period or periods for which that determination is made, as well as prior and subsequent periods.
If we determine that additional portions of our deferred tax assets are realizable, the majority of the benefit
will come from the assets associated with the stock-based compensation that was not recognized in the financial
statements, but was claimed on the tax return. Since this compensation did not originally run through our
consolidated statements of operations, the benefit generated will be recorded to stockholders’ equity.
Recent Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Description of Business and
Accounting Policies—Recent Accounting Pronouncements.”
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