Overstock.com 2008 Annual Report Download - page 93

Table of Contents
Company expenses the costs of producing advertisements at the time production occurs 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) a commission
for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our
Website generated during a given period. Advertising expense included in sales and marketing expenses totaled $68.1million,
$51.0 million and $52.8 million during the years ended December 31, 2006, 2007 and 2008, respectively.
Stock-based Compensation
As of January 1, 2006, the Company adopted SFAS No. 123(R) Share-based Payment ("SFAS No. 123(R)"), 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—Stock Based Awards").
Restructuring
Restructuring expenses comprise primarily lease termination costs and the costs incurred for returning leased facilities back
to their original condition 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 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 No. 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 its deferred assets including expectations of future taxable income, the carry-forward
periods available for tax reporting purposes, and other relevant factors. At December 31, 2007 and 2008, the Company has established
a full valuation allowance against its deferred tax assets. Significant judgment is required in making this assessment, and it is very
difficult to predict when, if ever, the Company's 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 was considered its functional currency. As a
result, all of the subsidiary's assets and liabilities were translated into U.S. dollars at exchange rates existing at the balance sheet dates,
revenue and expenses were translated at weighted average exchange rates, and stockholders' equity was recorded at historical
exchange rates. The resulting foreign currency translation adjustments were recorded as a separate component of stockholders' equity
(deficit) in the consolidated balance sheets as part of accumulated other comprehensive income (loss). Transaction gains and losses
were included in other income (expense) in the consolidated financial statements and were not significant for any period presented.
The Company's subsidiary was located in Mexico and ceased operations on October 24, 2008.
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 hedge, a cash flow hedge or a hedge of a net investment in an international
operation. For derivatives designated as hedges, the changes in fair value are recorded in the balance sheet as an item in other
comprehensive income. Changes in the fair value of derivatives not designated as cash flow hedges are recorded in the statement of
operations. As of December 31, 2007 and 2008, the Company had not designated any derivative instruments as hedges.
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