eBay 2007 Annual Report Download - page 73

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an increase or decrease in operating income of approximately $19.2 million. The following analysis demonstrates,
for illustrative purposes only, the potential effect a 25 basis point deviation from our estimates would have upon our
consolidated financial statements and is not intended to provide a range of exposure or expected deviation
(in thousands, except per share data):
⫺25 Basis
Points 2007
+25 Basis
Points
Provision for doubtful accounts and related authorized credits . . $ 77,280 $ 96,461 $115,642
Income from operations .............................. 632,361 613,180 593,999
Net income ....................................... 367,432 348,251 329,070
Diluted earnings per share ............................ $ 0.27 $ 0.25 $ 0.24
Provision for Transaction Losses
Our Payments segment is exposed to transaction losses due to credit card and other payment misuse, as well as
non-performance of and credit losses from sellers who accept payment through PayPal. We establish allowances for
estimated losses arising from processing customer transactions, such as chargebacks for unauthorized credit card
use and merchant-related chargebacks due to non-delivery of goods or services, Automated Clearing House
(“ACH”) returns, buyer protection program claims and debit card overdrafts. These allowances represent an
accumulation of the estimated amounts necessary to provide for transaction losses incurred as of the reporting date,
including those of 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. The provision for
transaction losses is reflected as a general and administrative expense in our consolidated statement of income. At
December 31, 2007, the allowance for PayPal transaction losses totaled $80.1 million.
The following table illustrates the provision for transaction losses as a percentage of net TPV from PayPal
operations for the years ended December 31, 2005, 2006 and 2007 (in thousands, except percentages):
2005 2006 2007
Year Ended December 31,
Total payment volume ........................ $27,485,000 $37,752,000 $47,470,000
Transaction loss expense ....................... $ 73,773 $ 126,439 $ 139,255
As a% of total payment volume ................. 0.27% 0.33% 0.29%
Determining appropriate allowances for transaction losses is an inherently uncertain process, and ultimate
losses may vary from the current estimates. We regularly update our allowance estimates as new facts become
known and events occur that may impact the settlement or recovery of losses. The allowances are maintained at a
level we deem appropriate to adequately provide for losses incurred at the balance sheet date. Based on our results
for the year ended December 31, 2007, a five basis point deviation from our estimates would have resulted in an
increase or decrease in our operating expenses of approximately $23.7 million. The following analysis demon-
strates, for illustrative purposes only, the potential effect a five basis point deviation from our estimates would have
upon our consolidated financial statements for the year ended December 31, 2007, and is not intended to provide a
range of exposure or expected deviation (in thousands, except per share data):
⫺5 Basis
Points 2007
+5 Basis
Points
Transaction loss expense ............................. $115,520 $139,255 $162,990
Income from operations .............................. 636,915 613,180 589,444
Net income ....................................... 371,986 348,251 324,515
Diluted earnings per share ............................ $ 0.27 $ 0.25 $ 0.24
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