Overstock.com 2006 Annual Report Download - page 50

Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting policies are as follows:
• revenue recognition;
• estimating valuation allowances and accrued liabilities, specifically, the reserve for returns, the allowance for doubtful
accounts and the reserve for obsolete and damaged inventory;
• internal use software;
• accounting for income taxes;
• valuation of long-lived and intangible assets and goodwill; and
• stock based compensation and performance share plan.
Revenue recognition. We derive our revenue primarily from two sources: (i) direct revenue, which consists of merchandise sales
made to consumers and businesses that are fulfilled from our warehouses; and (ii) fulfillment partner revenue, which consists of
revenue from the sale of merchandise supplied and shipped by fulfillment partners directly to consumers and other businesses. This
also includes listing fees and commissions collected from products being listed and sold through the Auctions tab of our Website as
well as advertisement revenue derived from our cars listing business. All sources of revenue are recorded net of returns, coupons
redeemed by customers, and other discounts. Revenues from our auction services were not material in 2004, 2005 and 2006 and
therefore are included in fulfillment partner revenue.
We record revenue from the majority of these sales transactions involving our fulfillment partners (excluding auctions ) on a
gross basis. Similar to our direct revenue segment, fulfillment partner products are available to both consumers and businesses.
For sales transactions, we comply with the provisions of Staff Accounting Bulletin 104 "Revenue Recognition", which states that
revenue should be recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement
exists; (2) the product has been shipped or the service provided and the customer takes ownership and assumes the risk of loss; (3) the
selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We generally require
payment by credit card at the point of sale. Amounts received prior to when we ship the goods or provide the services to customers are
recorded as deferred revenue. In addition, amounts received in advance for gift cards, Club O memberships and marketing royalties
related to our co-branded credit card program are recorded as deferred revenue and recognized in the period earned.
Reserve for returns, allowance for doubtful accounts and the reserve 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 $5.6 million and $3.6 million as of
December 31, 2005 and 2006, respectively.
From time to time, we may grant credit to certain of our business customers on normal credit terms (typically 30 days). We
perform ongoing credit evaluations of our customers' financial condition and
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