eBay 2007 Annual Report Download - page 96

appears in pages viewed by users of our websites) are delivered; as “clicks” (which are generated each time users on
our websites click through our text-based advertisements to an advertiser’s designated website) are provided to
advertisers; or ratably over the term of the agreement where such agreements provide for minimum monthly or
quarterly advertising commitments or where such commitments are fixed throughout the term. Barter transactions
are valued on amounts realized in similar cash transactions occurring within six months prior to the date of the barter
transaction. To the extent that significant delivery obligations remain at the end of a period or collection of the
resulting account receivable is not considered probable, revenues are deferred until the obligation is satisfied or the
uncertainty is resolved. These amounts are included in deferred revenues in our consolidated balance sheet.
Revenue from barter arrangements totaled $6.7 million and $1.4 million for the years ended December 31, 2005 and
2006 respectively, with the reciprocal arrangements being recognized as an operating expense. Revenue from barter
arrangements was not significant in 2007. The services are normally received in the same period in which the
reciprocal services are provided. In certain circumstances, we are required to record, as a reduction of revenue,
payments to a party who is also a customer. These payments primarily consist of certain promotional activities
which result in payments to our users.
Our other revenues are derived principally from contractual arrangements with third parties that provide
transaction services to eBay and PayPal users and interest earned from banks on certain PayPal customer account
balances. Revenues from contractual arrangements with third parties are recognized as the contracted services are
delivered to end users. Revenues from interest income are recognized when earned.
We evaluate whether payments made to customers or revenues earned from vendors have a separate
identifiable benefit and whether they are fairly valued in determining the appropriate classification of the related
revenues and expense. For revenue agreements with multiple deliverables we ensure all undelivered elements are
accounted for at fair value and recognized as revenue when delivered.
Provisions for doubtful accounts, transaction losses and authorized credits are made at the time of revenue
recognition based upon our historical experience. The provision for doubtful accounts and transaction losses are
recorded as charges to operating expense, while the provision for authorized credits is recognized as a reduction of
net revenues.
Product development costs
Costs related to the planning and post implementation phases of our website development efforts are recorded
as an operating expense. 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, pay-per-click, or on a
straight-line basis over the term of the contract. Advertising expenses totaled $665.1 million, $871.0 million and
$1.0 billion during the years ended December 31, 2005, 2006, and 2007, respectively.
Stock-based compensation
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share Based
Payment” (“FAS 123(R)”) using the modified prospective transition method beginning January 1, 2006. Accord-
ingly, during 2006 and 2007, we recorded stock-based compensation expense for awards granted prior to, but not yet
vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under FAS 123 were in
effect for expense recognition purposes, adjusted for estimated forfeitures. For these awards, we have continued to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)