Overstock.com 2012 Annual Report Download - page 49

Table of Contents
payment history and maintain an allowance for doubtful accounts receivable based upon our historical collection experience and expected collectability
of accounts receivable. The allowance for doubtful accounts receivable was $797,000 and $574,000 at December 31, 2012 and 2011, respectively.
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We write down our inventory for estimated obsolescence and to lower of cost or market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be
required. Once established, the original cost of the inventory less the related inventory allowance represents the new cost basis of such products.
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Included in fixed assets is the capitalized cost of internal-use software and website development, including software used to upgrade and enhance
our Website and processes supporting our business. We capitalize costs incurred during the application development stage of internal-use software and
amortize these costs over the estimated useful life of two to three years. Costs incurred related to design or maintenance of internal-use software are
expensed as incurred.
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Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect our best assessment of estimated
future taxes to be paid. We are subject to taxation from federal and state jurisdictions. Significant judgments and estimates are required in determining
the consolidated income tax expense.
We are not under audit by United States income taxing authorities. Tax periods within the statutory period of limitations not previously audited are
potentially open for examination by the taxing authorities. Potential liabilities associated with these years will be resolved when an event occurs to
warrant closure, primarily through the completion of audits by the taxing jurisdictions and/or the expiration of the statutes of limitation. To the extent
audits or other events result in a material adjustment to the accrued estimates, the effect would be recognized during the period of the event.
Since inception, we determined that it was more likely than not that our historic and current year income tax benefits may not be realized and a full
valuation allowance should be recorded against our deferred tax assets in excess of our deferred tax liabilities. As of December 31, 2012 and 2011, we
have recorded a full valuation allowance of $79.7 million and $83.6 million, respectively, against our net deferred tax assets consisting primarily of net
operating loss carry forwards. In evaluating our ability to recover our deferred tax assets, we considered the four sources of taxable income. Because we
have no carryback ability and have not identified any viable tax planning strategies, two of the sources are not available. Reversing taxable temporary
differences have been properly considered as the deferred tax liabilities reverse in the same period as existing deferred tax assets. However, reversing
the deferred tax liabilities is insufficient to fully recover existing deferred tax assets. Our valuation allowance is net of deferred tax liabilities and there
are no deferred tax assets or liabilities that have an indefinite reversal period. Therefore, future taxable income, the most subjective of the four sources, is
the remaining source available for realization of our net deferred tax assets.
We consider future taxable income and evaluate the need for a valuation allowance on a regular basis. The determination of recording or releasing
tax valuation allowances is made, in part, pursuant to an assessment regarding the likelihood that we will generate future taxable income against which
benefits of our deferred tax assets may be realized. This assessment requires us to exercise significant judgment and make estimates with respect to our
ability to generate revenues, gross profits, operating income and taxable income in future periods. Among other factors, we must make assumptions
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