Overstock.com 2007 Annual Report Download - page 105

Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restructuring
Restructuring expenses are primarily comprised of lease termination costs and the costs incurred for returning leased facilities back to their original
conditionin 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 3—Restructuring Expense").
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, 2006 and 2007, 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 foreign currency translation adjustments are recorded
as a separate component of stockholders' equity in the consolidated balance sheets as part of accumulated other comprehensive income (loss). Transaction
gains and losses are included in other income (expense) in the consolidated financial statements and have not been significant for any periods presented.
Derivative instruments
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") requires companies to recognize their 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 the instrument 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
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