Overstock.com 2011 Annual Report Download - page 53

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Table of Contents
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires estimates and assumptions
that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. The Securities and Exchange Commission ("SEC") has defined a company's critical accounting policies as the
ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most
difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have
identified the critical accounting policies, estimates and judgments addressed below. We also have other key accounting policies, which involve the use of
estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Item 1 of Part I, "Financial
Statements"—Note 2—"Accounting Policies." Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon
information presently available. Actual results may differ significantly from these estimates. Our critical accounting policies are as follows:
revenue recognition;
estimating valuation allowances and accrued liabilities (specifically, the allowances for returns, credit card chargebacks, doubtful accounts and
obsolete and damaged inventory);
internal use software and website development (acquired and developed internally);
accounting for income taxes;
valuation of long-lived and intangible assets and goodwill; and
loss contingencies.
Revenue recognition
We derive our 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, which we removed from our site in July 2011, advertisement revenue derived from our real estate
listing business, which we removed from our site in June 2011, from our cars listing business, and from advertising on our shopping, travel and insurance
pages. We have organized our operations into two principal segments based on the primary source of revenue: direct revenue and fulfillment partner revenue.
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 type of shipping carrier (as carriers have different 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.
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