Amazon.com 2015 Annual Report Download - page 54

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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 service has 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. We allocate the arrangement price to each of the elements based on
the relative 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 the cost of producing the product or
service.
Sales of our digital devices, including Kindle e-readers, Fire tablets, Fire TVs, and Echo, are considered arrangements
with multiple deliverables, consisting of the device, undelivered software upgrades and/or undelivered non-software services
such as cloud storage and free trial memberships to other services. The revenue allocated to the device, which is the substantial
portion of the total sale price, and related costs are generally recognized upon delivery. Revenue related to undelivered software
upgrades and/or undelivered non-software services is deferred and recognized generally on a straight-line basis over the
estimated period the software upgrades and non-software services are expected to be provided for each of these devices.
Sales of Amazon Prime memberships are also considered arrangements with multiple deliverables, including shipping
benefits, Prime Video, Prime Music, Prime Photos, and access to the Kindle Owners’ Lending Library. The revenue related to
the deliverables is amortized over the life of the membership based on the estimated delivery of services. Amazon Prime
membership fees are allocated between product sales and service sales. Costs to deliver Amazon Prime benefits are recognized
as cost of sales as incurred. As we add more benefits to the Prime membership, we will update the method of determining the
estimated selling prices of each element as well as the allocation of Prime membership fees.
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 sale
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 fixed fees, a percentage of seller revenues, per-unit activity fees,
or some combination thereof.
Product sales represent revenue from the sale of products and related shipping fees and digital media content where we
record revenue gross. 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. Amazon’s electronic devices sold
through retailers are recognized at the point of sale to consumers.
Service sales represent third-party seller fees earned (including commissions) and related shipping fees, AWS sales,
digital content subscriptions, advertising services, and our co-branded credit card agreements. Service sales, net of promotional
discounts and return allowances, are recognized when service has been rendered.
Return allowances, which reduce revenue, are estimated using historical experience. Allowance for returns was $153
million, $147 million, and $167 million as of December 31, 2015, 2014, and 2013. Additions to the allowance were $1.3
billion, $1.1 billion, and $907 million, and deductions to the allowance were $1.3 billion, $1.1 billion, and $938 million in
2015, 2014, and 2013. Revenue from product sales and services rendered is recorded net of sales and consumption taxes.
Additionally, 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 net sales.”
Cost of Sales
Cost of sales primarily consists of the purchase price of consumer products, digital media content costs where we record
revenue gross, including Prime Video and Prime Music, packaging supplies, sortation and delivery centers and related
equipment costs, and inbound and outbound shipping costs, including where we are the transportation service provider.
Shipping costs to receive products from our suppliers are included in our inventory, and recognized as cost of sales upon sale of
products to our customers. Payment processing and related transaction costs, including those associated with seller transactions,
are classified in “Fulfillment” on our consolidated statements of operations.