Overstock.com 2007 Annual Report Download - page 101

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of the tangible net assets acquired in business combinations.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), goodwill is not amortized but tested for impairment at least
annually. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its
carrying amount. If the carrying amount exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated
by comparing the implied fair value of the goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit
is allocated to all the other assets and liabilities within the reporting unit based on fair value. The excess of the fair value of a reporting unit over the amount
allocated to its other assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized when the carrying amount of goodwill
exceeds its implied fair value. The Company evaluated its goodwill during 2007 and determined that no impairment charge should be recorded.
In conjunction with the discontinuance of the Company's travel subsidiary ("OTravel"), the Company performed an evaluation of the goodwill associated
with the reporting unit pursuant to SFAS 142 and SFAS 144, Accounting for the Impairment of Long-Lived Assets ("SFAS 144"), and determined that
goodwill of approximately $4.5 million and $3.8 million was impaired in 2006 and 2007, respectively (see "Note 4—Acquistion and Subsequent
Discontinued Operations").
Revenue recognition
The Company derives revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and commissions
collected from products being listed and sold through the Auctions tab of its Website as well as advertisement revenue derived from its cars listing business.
The Company has organized its operations into two principal segments based on the primary source of revenue: Direct revenue and Fulfillment partner
revenue (see "Note 23—Business Segments).
From inception through the third quarter of 2007, the Company has recorded revenue based on product ship date. In the fourth quarter of 2007, the
Company determined that it should not record revenue until product delivery date. The Company performed a detailed analysis of this error and the impact of
recording the cumulative effect of the error in the fourth quarter of 2007, and determined that the impact of the correction is immaterial to the full year and
fourth quarter of 2007 and to all prior periods.
As a result, the Company recorded the cumulative effect of this correction in the fourth quarter of 2007. This change resulted in a deferral of
$13.7 million of revenue (including $3.7 million of direct revenue and $10.0 million of fulfillment partner revenue), and a decrease in cost of goods sold of
$11.6 million ($3.1 million direct and $8.5 million fulfillment partner), which reduced gross profit and increased net loss by $2.1 million.
Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. Revenue related to merchandise sales is recognized upon delivery to the Company's customers. As the Company ships high volumes of
packages through multiple carriers, it
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