eBay 2004 Annual Report Download - page 101

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
collection of the resulting receivable is not considered probable, revenues are deferred until the obligation is
satisÑed or the uncertainty is resolved.
Product development costs
We expense costs related to the planning and post implementation phases of our website development
eÅorts. Direct costs incurred in the development phase are capitalized and amortized over the product's
estimated useful life of one to three years as charges to cost of net revenues.
Advertising expense
We expense the costs of producing advertisements at the time production occurs, and expense the cost of
communicating advertising in the period during which the advertising space or airtime is used. Internet
advertising expenses are recognized based on the terms of the individual agreements, which is generally over
the greater of the ratio of the number of impressions delivered over the total number of contracted
impressions, or on a straight-line basis over the term of the contract. Advertising expenses totaled
$181.8 million, $321.4 million and $459.5 million during the years ended December 31, 2002, 2003, and 2004,
respectively.
Stock-based compensation
We account for stock-based employee compensation issued under compensatory plans using the intrinsic
value method, which calculates compensation expense based on the diÅerence, if any, on the date of the grant,
between the fair value of our stock and the option exercise price. Generally accepted accounting principles
require companies who choose to account for stock option grants using the intrinsic value method to also
determine the fair value of option grants using an option pricing model, such as the Black-Scholes model, and
to disclose the impact of fair value accounting in a note to the Ñnancial statements. In December 2002, the
FASB issued Statement of Financial Accounting Standards No. 148, ""Accounting for Stock-Based Compen-
sation Transition and Disclosure, an Amendment of FASB Statement No. 123.'' We did not elect to
voluntarily change to the fair value based method of accounting for stock based employee compensation and
record such amounts as charges to operating expense. We amortize the stock-based compensation charge in
accordance with FASB Interpretation No. 28 over the vesting period of the related options, which is generally
four years. The impact of recognizing the fair value of option grants and stock grants under our employee stock
purchase plan as an expense under FASB Statement No. 148 would have substantially reduced our net
income, as follows (in thousands, except per share amounts):
Year Ended December 31,
2002 2003 2004
Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 249,891 $ 441,771 $ 778,223
Add: Amortization of stock-based compensation expense
determined under the intrinsic value method ÏÏÏÏÏÏÏÏÏ 5,953 5,492 1,715
Deduct: Total stock-based compensation expense
determined under fair value based method, net of tax ÏÏ (192,902) (201,775) (190,935)
Pro forma net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 62,942 $ 245,488 $ 589,003
Earnings per share:
Basic Ì Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.22 $ 0.35 $ 0.59
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.05 $ 0.19 $ 0.45
Diluted Ì Reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.21 $ 0.34 $ 0.57
Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.05 $ 0.19 $ 0.43
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