Overstock.com 2006 Annual Report Download - page 91

or the first time the advertising takes place, and expenses the cost of communicating advertising in the period during which the
advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual
agreements, which are generally: 1) during the period customers are acquired; or 2) based on the number of clicks generated during a
given period over the term of the contract. Advertising expense included in sales and marketing expenses totaled $39.2 million, $75.3
million and $68.1 million during the years ended December 31, 2004, 2005 and 2006, respectively.
Stock-based Compensation
As of January 1, 2006, we adopted SFAS 123(R), Share-based Payment—an Amendment of FASB Statements No 123 and 95,
which requires the Company to measure compensation expense for all outstanding unvested share-based awards at fair value and
recognize compensation expense over the service period for awards expected to vest. The estimation of stock awards that will
ultimately vest requires judgment, and to the extent actual results differ from estimates, such amounts will be recorded as an
adjustment in the period estimates are revised. Management considers many factors when estimating expected forfeitures, including
types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates (see Note 18).
Restructuring
Restructuring expenses are primarily comprised of lease termination costs and the costs incurred for returning leased facilities
back to their original condition, including the removal of an escalator system, in anticipation of subleasing current office space. SFAS
146, Accounting for Costs Associated with Exit or Disposal Activities, requires that when an entity ceases using a property that is
leased under an operating lease before the end of its term contract, the termination costs should be recognized and measured at fair
value when the entity ceases using the facility. Key assumptions in determining the restructuring expenses include the terms that may
be negotiated to exit certain contractual obligations (See Note 4).
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis using enacted tax rates in effect for the year in which the differences are expected to affect
taxable income. Income tax expense (benefit) is the tax payable (receivable) for the period and the change during the period in the
deferred tax assets and liabilities.
SFAS 109, Accounting for Income Taxes, requires that deferred tax assets be evaluated for future realization and be reduced by a
valuation allowance to the extent the deferred tax asset will not be realized. The Company considers many factors when assessing the
likelihood of future realization of our deferred assets including expectations of future taxable income, the carry-forward periods
available for tax reporting purposes, and other relevant factors. At December 31, 2005 and 2006, the Company has established a full
valuation allowance against it deferred tax assets. Significant judgement is required in making this assessment, and it is very difficult
to predict when, if ever, our assessment may conclude that the remaining portion of the deferred tax assets are realizable.
Foreign currency translation
For the Company's subsidiary located in Mexico, the subsidiary's local currency is considered its functional currency. As a result,
all of the subsidiary's assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue
and expenses are translated at weighted average exchange rates, and stockholders' equity is recorded at historical exchange rates. The
resulting
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