Amazon.com 2011 Annual Report Download - page 53

We measure the fair value of money market funds and equity securities based on quoted prices in active
markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades
of securities in inactive markets or based on quoted market prices of similar instruments and other significant
inputs derived from or corroborated by observable market data. We did not hold any cash, cash equivalents, or
marketable securities categorized as Level 3 as of December 31, 2011, or December 31, 2010.
Revenue
We recognize revenue from product sales or services rendered when the following four 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. Revenue arrangements with multiple
deliverables are divided into separate units and revenue is allocated using estimated selling prices if we do not
have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. Sales of
our Kindle device are considered arrangements with multiple deliverables, consisting of the device, 3G wireless
access and delivery for some models, and software upgrades. We allocate the arrangement price to each of the
elements based on the estimated selling prices of each element. Estimated selling prices are management’s best
estimates of the prices that we would charge our customers if we were to sell the standalone elements separately
and include considerations of customer demand, prices charged by us and others for similar deliverables, and the
price if largely based on costs. The revenue related to the device, which is the substantial portion of the total sale
price, and related costs are recognized upon delivery. Revenue related to 3G wireless access and delivery and
software upgrades is amortized over the average life of the device, which is estimated to be three years.
We evaluate 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 at the gross sales price. We generally record the net amounts as commissions
earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are
determined using a fixed percentage, a fixed-payment schedule, or a combination of the two.
Product sales represent revenue from the sale of products and related shipping fees and digital content where
we are the seller of record. 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. Kindle devices sold
through retailers are recognized at the point of sale to consumers. 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.
Services sales represent third-party seller fees earned (including commissions) and related shipping fees and
non-retail activities such as AWS, miscellaneous marketing and promotional activities, other seller sites, and our
co-branded credit card arrangements. Services sales, net of promotional discounts and return allowances, are
recognized when services have been rendered.
Return allowances, which reduce revenue, are estimated using historical experience. Revenue from product
sales and services rendered is recorded net of sales and consumption 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.
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
accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while
inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on
estimated future redemption rates. Redemption rates are estimated using our historical experience for similar
inducement offers. Current discount offers and inducement offers are presented as a net amount in “Total sales.”
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