Overstock.com 2004 Annual Report Download - page 41

Reserve for returns, allowance for doubtful accounts and the allowance for obsolete and damaged inventory. Our management must make estimates of
potential future product returns related to current period revenue. Management analyzes historical returns, current economic trends and changes in customer
demand and acceptance of our products when evaluating the adequacy of the sales returns reserve and other allowances in any accounting period. The reserve
for returns was $1.1 million as of December 31, 2003 and $2.8 million as of December 31, 2004.
From time to time, we may grant credit to certain of our business customers on normal credit terms. We perform ongoing credit evaluations of our
customers' financial condition and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected
collectibility of all accounts receivable. We maintained an allowance for doubtful accounts receivable of $650,000 as of December 31, 2003 and $750,000 as
of December 31, 2004.
We write down our inventory for estimated obsolescence or damage equal to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Our inventory balance was $29.9 million, net of reserve for obsolescence or damaged inventory of
$1.1 million as of December 31, 2003. At December 31, 2004, our inventory balance was $45.3 million, net of reserve for obsolescence or damaged inventory
of $1.3 million.
Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net deferred tax assets. As of December 31, 2003 and 2004, we have recorded a full valuation
allowance of $25.7 million and $28.5 million, respectively, against our net deferred tax asset balance due to uncertainties related to our deferred tax assets as a
result of our history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future
periods, we may need to change the valuation allowance, which could materially impact our financial position and results of operations.
Valuation of long-lived and intangible assets and goodwill. Under SFAS 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized,
but must be tested for impairment at least annually. Other long-lived assets must also be evaluated for impairment when management believes that an asset
has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying value of the asset that may not be reflected in an asset's current carrying value, thereby
possibly requiring an impairment charge in the future. There were no impairments of goodwill or long-lived assets during 2003 or 2004. Goodwill amounted
to $2.8 million as of December 31, 2003 and 2004.
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