Amazon.com 2012 Annual Report Download - page 28

Financial and credit market volatility directly impacts our fair value measurement through our weighted
average cost of capital that we use to determine our discount rate and through our stock price that we use to
determine our market capitalization. During times of volatility, significant judgment must be applied to
determine 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, 2012, 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 $22 million impact on
our 2012 operating income. Our estimated forfeiture rates at December 31, 2012 and 2011, were 27% and 28%.
We utilize the accelerated method, rather than the straight-line method, for recognizing compensation
expense. For example, over 50% of the compensation cost related to an award vesting ratably over four years is
expensed in the first year. If forfeited early in the life of an award, the compensation expense adjustment is much
greater under an accelerated method than under a straight-line method.
Income Taxes
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is
required in evaluating and estimating our provision and accruals for these taxes. During the ordinary course of
business, there are many transactions for which the ultimate tax determination is uncertain. 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, by entry into new businesses and geographies and changes to our existing businesses, by acquisitions
(including integrations) and investments, by changes in the valuation of our deferred tax assets and liabilities, or
by changes in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and
interpretations, with a number of countries actively considering changes in this regard. In addition, we are subject
to audit in various jurisdictions, and such jurisdictions may assess additional income tax liabilities against us.
Although we believe our tax estimates are reasonable, the final outcome of tax audits and any related litigation
could be materially different from our historical income tax provisions and accruals. Developments in an audit or
litigation could have a material effect on our operating results or cash flows in the period or periods for which
that development occurs, as well as for prior and subsequent periods.
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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