Etsy 2015 Annual Report Download - page 64

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Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our
estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could
differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, income taxes, website development costs and internal-use software,
purchase price allocations for business combinations, valuation of goodwill and intangible assets, leases and stock-based compensation have the greatest
potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further
information on all of our significant accounting policies, see "Note 1—Basis of Presentation and Summary of Significant Accounting Policies" in the Notes
to Consolidated Financial Statements.
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We operate a platform for third-party sellers. Our business model is based on shared success: we make money when Etsy sellers make money, and we offer
services to help Etsy sellers be more successful. We do not compete with Etsy sellers, hold inventory or sell goods. Our revenue is diversified, generated from
a mix of marketplace activities and the services we provide Etsy sellers to help them create and grow their businesses. Our revenue consists of Marketplace
revenue, Seller Services revenue and Other revenue. Our revenue is recorded net of actual and expected refunds. Marketplace revenue includes the fee an Etsy
seller pays for each completed transaction and the listing fee an Etsy seller pays for each item she lists. Seller Services revenue includes fees an Etsy seller
pays for services such as prominent placement in search results via Promoted Listings, payment processing via Direct Checkout and purchases of shipping
labels through our platform via Shipping Labels. We deduct our cost of shipping labels and estimated refunds from gross shipping fees to determine net
shipping fees. Other revenue includes the fees we receive from a third-party payment processor and derecognized funds we receive from a third-party for
unused Etsy Gift Cards.
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided
to the Etsy seller; (3) the collection of fees is reasonably assured; and (4) the amount of fees to be paid by the Etsy seller is fixed or determinable. We evaluate
whether it is appropriate to recognize revenue on a gross or net basis based upon our evaluation of whether we: are the primary obligor in a transaction, have
inventory risk and have latitude in establishing pricing and selecting suppliers. Based on our evaluation of these factors, revenue is recorded net of
merchandise values associated with the transaction.
 Marketplace revenue consists of the 3.5% fee that an Etsy seller pays for each completed transaction on our platform, exclusive of
shipping fees charged. Marketplace revenue also consists of a listing fee of $0.20 per item that she lists in our marketplace. Revenue from completed
Wholesale transactions is included in Marketplace revenue. Transaction fees are recognized when the corresponding transaction is made. Listing fees are
recognized ratably over a four-month listing period, unless the item is sold or the seller relists it, at which time any remaining listing fee is recognized.
 Seller Services revenue consists of fees an Etsy seller pays us for the Seller Services she uses, including Promoted Listings, Direct
Checkout and Shipping Labels.
• Revenue from Promoted Listings consists of cost-per-click based fees an Etsy seller pays us for prominent placement of her listings in search results
generated by Etsy buyers in our marketplace. Revenue is recognized when the Promoted Listing is clicked.
• Revenue from Direct Checkout consists of fees an Etsy seller pays us to process credit, debit and Etsy Gift Card payments. Direct Checkout fees vary
between 3–4% of the item’s total sale price plus a flat fee per order, depending on the country in which her bank account is located. Direct Checkout fees
are based on the item’s total sale price, including shipping. Revenue from Direct Checkout is recognized when the corresponding transaction is made.
• Revenue from Shipping Labels consists of fees an Etsy seller pays us when she purchases shipping labels through our platform, net of the cost we incur
in purchasing those shipping labels. We are able to provide our sellers shipping labels from the United States Postal Service and Canada Post at a
discounted price due to the volume of purchases through our
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