eBay 2011 Annual Report Download - page 100

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Advertising expense
We expense the costs of producing advertisements at the time production occurs and expense the cost of communicating advertisements in
the period during which the advertising space or airtime is used as sales and marketing expense. 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, on a pay-per-click basis, or on a straight-line basis over the term of the contract. Advertising expense
totaled $976.9 million , $808.4 million and $799.9 million for the years ended December 31, 2011, 2010 and 2009 , respectively.
Stock-based compensation
We issue two types of stock-based awards to employees: restricted stock units (including performance-based restricted stock units) and
stock options. We primarily issue restricted stock units. We determine compensation expense associated with restricted stock units based on the
fair value of our common stock on the date of grant. We determine compensation expense associated with stock options based on the estimated
grant date fair value method using the Black-Scholes valuation model. We generally recognize compensation expense using a straight-line
amortization method over the respective vesting period for awards that are ultimately expected to vest. Accordingly, stock-
based compensation for
2011 , 2010 and 2009 has been reduced for estimated forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as
well as trends of actual option forfeitures. We recognize a benefit from stock-based compensation in equity to the extent that an incremental tax
benefit is realized by following the ordering provisions of the tax law. In addition, we account for the indirect effects of stock-
based compensation
on the research tax credit and the foreign tax credit through our consolidated statement of income.
Provision for transaction losses
We are exposed to losses due to payment card and other payment misuse, as well as non-performance of and credit losses from sellers.
Provisions for these items represent our estimate of actual losses based on our historical experience and actuarial techniques, as well as economic
conditions. Provision for transaction losses includes PayPal's transaction loss expense as well as losses resulting from our customer protection
programs both on and off eBay.
Income taxes
We account for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements
or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future
changes in tax laws or rates are not anticipated. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits
that are not expected to be realized based on available evidence.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We
recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Cash and cash equivalents
Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are
mainly comprised of bank deposits and money market funds.
Allowance for doubtful accounts and authorized credits
We record our allowance for doubtful accounts based upon our assessment of various factors. We consider historical experience, the age of
the accounts receivable balances, credit quality of our customers, current economic conditions and other factors that may affect our customers'
ability to pay. The allowance for doubtful accounts and authorized credits was $87.2 million and $86.5 million at December 31, 2011 and 2010 ,
respectively.
Loans and interest receivable, net
Loans and interest receivable represent purchased consumer receivables arising from loans made by a partner chartered financial institution
to individual consumers in the U.S. to purchase goods and services through our Bill Me Later merchant network. The terms of the consumer
relationship require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the
consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do
not require collateral on these balances.
F-10