Amazon.com 2011 Annual Report Download - page 52

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 “Long-term liabilities” on our consolidated balance sheets.
Current unearned revenue was $462 million and $461 million at December 31, 2011 and 2010. Non-current
unearned revenue was $87 million and $34 million at December 31, 2011 and 2010.
Income Taxes
Income tax expense includes U.S. and international income taxes. Except as required under U.S. tax law, we
do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries that have not been previously
taxed since we intend to invest such undistributed earnings indefinitely outside of the U.S. Undistributed
earnings of foreign subsidiaries that are indefinitely invested outside of the U.S were $2.0 billion at
December 31, 2011. Determination of the unrecognized deferred tax liability that would be incurred if such
amounts were repatriated is not practicable.
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.
Deferred tax assets are 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 and capital gains by taxing jurisdiction, the carry-forward periods available to us for tax
reporting purposes, and other relevant factors. We allocate our valuation allowance to current and long-term
deferred tax assets on a pro-rata basis.
We utilize a two-step approach to recognizing and measuring uncertain income tax positions (tax
contingencies). 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. 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. We include interest and penalties related to our tax
contingencies in income tax expense.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. To increase the comparability of fair
value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair
value:
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.
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