eBay 2007 Annual Report Download - page 72

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Indemnification Provisions
In the ordinary course of business, we have included limited indemnification provisions in certain of our
agreements with parties with whom we have commercial relations, including our standard marketing, promotions
and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold
harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in
connection with claims by a third party with respect to our domain names, trademarks, logos and other branding
elements to the extent that such marks are applicable to our performance under the subject agreement. In a limited
number of agreements, we have provided an indemnity for other types of third-party claims, which are indemnities
mainly related to various intellectual property rights. In our PayPal business, we have provided an indemnity to our
payment processors in the event of certain third-party claims or card association fines against the processor arising
out of conduct by PayPal or PayPal customers. It is not possible to determine the maximum potential loss under
these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and
circumstances involved in each particular provision. To date, no significant costs have been incurred, either
individually or collectively, in connection with our indemnification provisions.
Critical Accounting Policies, Judgments and Estimates
General
The preparation of our consolidated financial statements and related notes requires us to make judgments,
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our senior management has discussed the development, selection and disclosure of these estimates with the Audit
Committee of our Board. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on
assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that
reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur
periodically, could materially impact the consolidated financial statements. We believe the following critical
accounting policies reflect the more significant estimates and assumptions used in the preparation of our
consolidated financial statements. The following descriptions of critical accounting policies, judgments and
estimates should be read in conjunction with our consolidated financial statements and other disclosures included
in this report.
Provisions for Doubtful Accounts and Authorized Credits
We are exposed to losses due to uncollectible accounts and credits to sellers. Provisions for these items
represent our estimate of actual losses and credits based on our historical experience, are monitored monthly, and
are made at the time the related revenue is recognized. The provision for doubtful accounts is recorded as a charge to
operating expense, while the authorized credits are recorded as a reduction of revenues. The following table
illustrates the provision related to doubtful accounts and authorized credits as a percentage of net revenues for 2005,
2006, and 2007 (in thousands, except percentages):
2005 2006 2007
Year Ended December 31,
Net revenues .................................. $4,552,401 $5,969,741 $7,672,329
Provision for doubtful accounts and authorized credits . . . $ 89,499 $ 100,729 $ 96,461
Provision for doubtful accounts and authorized credits as
a% of net revenues ............................ 1.97% 1.69% 1.26%
Historically, our actual losses and credits have been consistent with these provisions. However, future changes
in trends could result in a material impact to future consolidated statements of income and cash flows. Based on our
results for the year ended December 31, 2007, a 25 basis point deviation from our estimates would have resulted in
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