Overstock.com 2007 Annual Report Download - page 55

cumulative effect of the error in the fourth quarter of 2007, and have 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, we 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 $2.1 million (see Item 15 of Part IV, "Financial
Statements"—Note 2—"Summary of Significant Accounting Policies"—"Revenue Recognition").
Revenue is recognized when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or the service has been provided; (3) the selling price or fee revenue earned is fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. Revenue related to merchandise sales is recognized upon delivery to our customers. As we ship high volumes of packages through
multiple carriers, it is not practical for us to track the actual delivery date of each shipment. Therefore, we use estimates to determine which shipments are
delivered and therefore recognized as revenue at the end of the period. Our delivery date estimates are based on average shipping transit times, which are
calculated using the following factors: (i) the shipping carrier (as carriers differ in transit times); (ii) the fulfillment source (either our warehouses or those of
our fulfillment partners); (iii) the delivery destination; and (iv) actual transit time experience, which shows that delivery date is typically one to eight business
days from the date of shipment.
We review and update our estimates on a quarterly basis based on our actual transit time experience. However, actual shipping times may differ from our
estimates. The following table shows the effect that hypothetical changes in the estimate of average shipping transit times would have had on the reported
amount of revenue and net loss for the year ended December 31, 2007 ($ in thousands):
Year ended December 31, 2007
Change in the
Estimate of Average
Transit Times (Days)
Effect on Revenue Effect on Net Income
-2 $ 5,866 $ 909
-1 $ 2,863 $ 444
As reported As reported As reported
1 $ (1,857) $ (288)
2 $ (3,507) $ (544)
We evaluate the criteria outlined in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we are the primary obligor in a
transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is
recorded gross. If we are not the primary obligor in the transaction and amounts earned are determined using a fixed percentage, revenue is recorded on a net
basis. Currently, the majority of both direct revenue and fulfillment partner revenue is recorded on a gross basis, as we are the primary obligor.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include discount offers, such as percentage discounts off
current purchases and other similar offers. Discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related
transaction.
Direct revenue
Direct revenue consists of merchandise sold through our Website to individual consumers and businesses that are fulfilled from our leased warehouses.
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