eBay 2010 Annual Report Download - page 77

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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.
Provision for Transaction and Loan Losses
Provision for transaction and loan losses primarily consists of bad debt expense associated with our
accounts receivable balance, PayPal transaction loss expense, and loan reserves associated with our Bill Me Later
principal loan receivable balance, as well as our losses resulting from our eBay and PayPal customer protection
programs. Provisions for these items represent our estimate of actual losses based on our historical experience,
actuarial techniques, the age and delinquency rates of receivables, the credit quality of the relevant loan, charge
off rates, and economic and regulatory conditions. The following table illustrates the provision for transaction
and loan losses as a percentage of net revenues for 2008, 2009 and 2010 (in thousands, except percentages):
Year Ended December 31,
2008 2009 2010
Net revenues ............................................ $8,541,261 $8,727,362 $9,156,274
Provision for transaction and loan losses ...................... $ 347,453 $ 382,825 $ 392,240
Provision for transaction and loan losses as a % of net revenues .... 4.1% 4.4% 4.3%
Determining appropriate allowances for these losses is an inherently uncertain process and is subject to
numerous estimates and judgments, 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. An aggregate 50 basis point deviation from our estimates would have
resulted in an increase or decrease in operating income of approximately $45.8 million in 2010, resulting in an
approximate $0.03 change in diluted earnings per share.
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of probable loss,
net of expected recoveries, and provided for such losses through charges to our consolidated statement of
income. These estimates have been based on our assessment of the facts and circumstances at each balance sheet
date and are subject to change based upon new information and future events.
From time to time, we are involved in disputes that arise in the ordinary course of business. We are
currently involved in certain legal proceedings as discussed in “Item 1A: Risk Factors,” “Item 3: Legal
Proceedings” and “Note 13 — Commitments and Contingencies” to the consolidated financial statements
included in this report. We believe that we have meritorious defenses to the claims against us, and we intend to
defend ourselves vigorously. However, even if successful, our defense against certain actions will be costly and
could require significant amounts of management’s time and result in the diversion of significant operational
resources. If the plaintiffs were to prevail on certain claims, we might be forced to pay significant damages and
licensing fees, modify our business practices or even be prohibited from conducting a significant part of our
business. Any such results could materially harm our business and could result in a material adverse impact on
the financial position, results of operations or cash flows of either or both of our business segments.
Accounting for Income Taxes
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us
in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by
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