Overstock.com 2015 Annual Report Download - page 46

We periodically enter into agreements with other parties to jointly market ancillary products or services on our website. As a result of those
agreements, we sometimes receive payments in advance of performing our obligations under those agreements. Such payments received before we perform
our obligations are initially recorded as deferred revenue and then recognized over our service period.
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We inspect returned items when they arrive at our processing facility. We refund the full cost of the merchandise returned and all original shipping
charges if the returned item is defective or we or our partners have made an error, such as shipping the wrong product.
If the return is not a result of a product defect or a fulfillment error and the customer initiates a return of an unopened item within 30 days of delivery,
for most products we refund the full cost of the merchandise minus the original shipping charge and actual return shipping fees. However, we reduce refunds
for returns initiated more than 30 days after delivery or that are received at our returns processing facility more than 45 days after initial delivery.
If our customer returns an item that has been opened or shows signs of wear, we issue a partial refund minus the original shipping charge and actual
return shipping fees.
Revenue is recorded net of estimated returns. We record an allowance for returns based on current period revenues and historical returns experience.
We analyze actual historical returns, current economic trends and changes in order volume and acceptance of our products when evaluating the adequacy of
the sales returns allowance in any accounting period.
The allowance for returns was $17.9 million and $15.5 million at December 31, 2015 and 2014, respectively.
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Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which approximates the first-in-first-
out (“FIFO”) method of accounting, and are valued at the lower of cost or market. We write down our inventory for estimated obsolescence and to the 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. Reversal of the allowance is recognized only when the related inventory has been sold or scrapped.
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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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We are subject to taxation from federal, state and international jurisdictions. A significant amount of judgment is involved in preparing our
provision for income taxes and the calculation of resulting deferred tax assets and liabilities.
We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary
differences between tax and financial reporting. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable
income in effect for the years in which those tax assets are expected to be realized or settled. We use the with-and-without approach for determining the
period in which tax benefits for excess share-based deductions are recognized.
We assess the available positive and negative evidence to estimate whether we will generate sufficient future taxable income to use our existing
deferred tax assets. We have concluded based on all available evidence that it is more likely than not that our deferred tax assets as of December 31, 2015
arising from ordinary income and deductions and tax credits will be realized in the future, with the exception of current year operating losses generated by
separate tax-filing subsidiaries in domestic and foreign jurisdictions and foreign deferred tax assets recorded as part of an acquisition. We have also
concluded
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