eBay 2007 Annual Report Download - page 93

receivable, funds receivable, accounts payable, funds payable and amounts due to customers 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 other-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 use derivative financial instruments primarily foreign exchange currency contracts to hedge foreign
currency risk. We also may use other derivative instruments not designated as hedges such as forwards to hedge
foreign currency balance sheet exposures. We do not use derivative financial instruments for speculative purposes.
We account for our derivative and hedging activities pursuant to Financial Accounting Standards No. 133
“Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). The assets or liabilities associated
with our derivative instruments and hedging activities are recorded at fair value in other current assets or other
current liabilities, respectively, in our consolidated balance sheet. See “Note 6 — Derivative Instruments” for a full
description of our derivative financial instrument activities and related accounting policies
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, 2005, 2006, and 2007, no customers accounted for more than 10% of net
revenues. As of December 31, 2006 and 2007, 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 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. Additions to the
83
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)