Overstock.com 2006 Annual Report Download - page 51

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 $1.8 million and $2.1 million as of
December 31, 2005 and 2006, 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. At December 31, 2005, our inventory balance was
$93.3 million, net of reserve for obsolescence or damaged inventory of $5.2 million. As of December 31, 2006, our inventory balance
was $20.3 million, net of allowance for obsolescence or damaged inventory of $6.6 million.
Internal-Use Software and Website Development. Included in fixed assets is the capitalized cost of internal-use software and
website development, including software used to upgrade and enhance our websites and processes supporting our business. As
required by Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," we
capitalize costs incurred during the application development stage of internal-use software and amortize these costs over the estimated
useful life of three years. Costs incurred related to design or maintenance of internal-use software are expensed as incurred.
During the years ended December 31, 2005 and 2006, we capitalized $24.4 million and $15.0 million, respectively, of costs
associated with internal-use software and website development, which are partially offset by amortization of previously capitalized
amounts of $3.9 million and $14.6 million for those respective periods.
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, 2005
and 2006, we have recorded a full valuation allowance of $36.6 million and $74.4 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 not 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 as of December 31, 2005 and 2006. There was no impairment of goodwill or long-lived assets
during the year ended December 31, 2005. In conjunction with the decision to sell OTravel, our travel subsidiary, we performed an
evaluation of its goodwill , pursuant to SFAS 144, Accounting for the Impairment Long-Lived Assets, and SFAS 142, Goodwill and
Other Intangible Assets, and determined that goodwill was subject to an impairment loss of approximately $4.5 million in the year
ended December 31, 2006.
Stock-based compensation. As of January 1, 2006, we adopted SFAS 123(R), which requires us to measure compensation cost
for all outstanding unvested share-based awards at fair value and recognize compensation over the service period for awards expected
to vest. The estimation of stock awards that will
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