Amazon.com 2015 Annual Report Download - page 56

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Other Operating Expense (Income), Net
Other operating expense (income), net, consists primarily of marketing-related, contract-based, and customer-related
intangible asset amortization expense and expenses related to legal settlements.
Other Income (Expense), Net
Other income (expense), net, consists primarily of foreign currency losses of $(266) million, $(127) million, and $(137)
million in 2015, 2014, and 2013, and realized gains (losses) on marketable securities sales of $(5) million, $3 million, and $(1)
million in 2015, 2014, and 2013.
Income Taxes
Income tax expense includes U.S. (federal and state) and foreign income taxes. Except as required under U.S. tax laws,
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. If our intent changes or if these funds are needed
for our U.S. operations, we would be required to accrue or pay U.S. taxes on some or all of these undistributed earnings and our
effective tax rate would be adversely affected. Undistributed earnings of foreign subsidiaries that are indefinitely invested
outside of the U.S were $1.5 billion as of December 31, 2015. 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 they
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 our tax positions and estimating our 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.
For our cash, cash equivalents, or marketable securities, 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 assets as of December 31, 2015, or December 31, 2014.
As part of entering into commercial agreements, we often obtain equity warrant assets giving us the right to acquire stock
primarily in private companies. We record these assets in “Other assets” on the accompanying consolidated balance sheets.
Equity warrant assets are classified as Level 3 assets, and the balances and related activity for our equity warrant assets were
not significant for the periods ended December 31, 2015, 2014, and 2013.