Overstock.com 2005 Annual Report Download - page 44

other allowances in any accounting period. The reserve for returns was $2.8 million and $5.6 million as of December 31, 2004 and
2005, respectively.
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 $750,000 and $1.18 million as of December 31, 2004 and 2005, respectively.
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. Once established, the original cost
of the inventory less the related inventory reserve represents the new cost basis of such products. Reversal of these reserves is
recognized only when the related inventory has been sold or scrapped. Our inventory balance was $46.6 million, net of allowance for
obsolescence or damaged inventory of $1.3 million as of December 31, 2004. At December 31, 2005, our inventory balance was
$93.3 million, net of reserve for obsolescence or damaged inventory of $5.2 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, 2004
and 2005, we have recorded a full valuation allowance of $27.4 million and $36.6 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. Goodwill totaled $2.8 million and $13.2 million as of December 31, 2004 and 2005. The Company added an
additional $10.4 million in conjunction with the acquisition of Ski West, Inc. on July 1, 2005. There was no impairment of goodwill or
long-lived assets during the years ended December 31, 2004 and 2005.
Derivative instruments. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
requires companies to recognize all of its derivative instruments, including certain derivative instruments embedded in other contracts,
as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging
relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge or a hedge of a net investment in
an international operation. For derivatives designated as hedges, the changes in fair value are recorded in the balance sheet as an item
in other comprehensive income. Changes in the fair value of derivatives not designated as hedges are recorded in the statement of
operations. As of December 31, 2005, we have not designated any derivative instruments as hedges.
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