eBay 2006 Annual Report Download - page 82

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receivable, funds receivable, accounts payable, and funds payable are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Short and long-term investments, which include marketable equity securities and government and corporate
bonds, are classified as available-for-sale and reported at fair value using the specific identification method.
Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive
income (loss), net of related estimated tax provisions or benefits. Additionally, we assess whether an oth-
er-than-temporary impairment loss on our investments has occurred due to declines in fair value or other market
conditions. Declines in fair value that are considered other than temporary are recorded as an impairment of
investments in the consolidated statement of income.
Derivative instruments
We recognize all derivative instruments on the balance sheet at fair value. Changes in the fair value (i.e., gains
or losses) of the derivatives are recorded each period in the consolidated statement of income or accumulated other
comprehensive income (loss). For a derivative designated as a cash flow hedge, the gain or loss on the derivative is
initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified
into the consolidated statement of income when the hedged transaction affects earnings. For derivatives recognized
as a fair value hedge, the gain or loss on the derivative in the period of change and the offsetting loss or gain of the
hedged item attributed to the hedged risk, are recognized in the consolidated statement of income. For derivatives
not recognized as hedges, the gain or loss on the derivative in the period of change is recognized as interest and other
income, net.
Concentrations of credit risk
Our cash, cash equivalents, accounts receivable and funds receivable are potentially subject to concentration of
credit risk. Cash and cash equivalents are placed with financial institutions that management believes are of high
credit quality. Our accounts receivable are derived from revenue earned from customers located in the U.S. and
internationally. Accounts receivable balances are settled through customer credit cards, debit cards, and PayPal
accounts, with the majority of accounts receivable collected upon processing of credit card transactions. We
maintain an allowance for doubtful accounts receivable and authorized credits based upon our historical experience.
Historically, such losses have been within our expectations. However, unexpected or significant future changes in
trends could result in a material impact to future statements of income or cash flows. Due to the relatively small
dollar amount of individual accounts receivable, we generally do not require collateral on these balances. The
provision for doubtful accounts is recorded as a charge to general and administrative expense, while the provision
for authorized credits is recognized as a reduction of net revenues.
During the years ended December 31, 2004, 2005, and 2006, no customers accounted for more than 10% of net
revenues. As of December 31, 2005 and 2006, no customers accounted for more than 10% of net accounts
receivable.
Allowances for transaction losses
Our Payments segment is exposed to transaction losses due to fraud, as well as non-performance of customers.
We establish allowances for estimated losses arising from processing customer transactions, such as charge-backs
for unauthorized credit card use and merchant related charge-backs due to non-delivery of goods or services,
Automated Clearing House, or ACH, returns, and debit card overdrafts. These allowances represent an accumu-
lation of the estimated amounts necessary to provide for transaction losses incurred as of the reporting date,
including those to which we have not yet been notified. The allowances, which involve the use of actuarial
techniques, are monitored monthly and are updated based on actual claims data reported by our claims processors.
The allowances are based on known facts and circumstances, internal factors including our experience with similar
cases, historical trends involving loss payment patterns and the mix of transaction and loss types. Additions to the
78
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)