eBay 2011 Annual Report Download - page 74

other types of third-party claims, which are indemnities mainly related to various intellectual property rights, and we have provided similar
indemnities in a limited number of agreements for our other businesses. In our PayPal business, we have provided an indemnity to our payment
processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal
customers. In connection with the sale of Skype, we made certain customary warranties to the buyer in the purchase agreement. Our liability to the
buyer for inaccuracies in these warranties is generally subject to certain limitations. With respect to certain specified litigation matters involving
Skype that were pending as of the closing of the transaction, we also agreed, among other things, to bear 50% of the cost of any monetary
judgment that is rendered in respect of those matters. It is not possible to determine the maximum potential loss under these indemnification
provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.
To date, losses recorded in our statement of income in connection with our indemnification provisions have not been significant, either
individually or collectively.
Critical Accounting Policies, Judgments and Estimates
General
The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have based
our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our
senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of
Directors. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that
are highly uncertain at the time the estimate is made, and if different estimates 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 consists primarily of transaction loss expense associated with our customer protection programs,
fraud, chargebacks and merchant credit losses; bad debt expense associated with our accounts receivable balance; and loan reserves associated
with our loan receivables balance. Our provision for transaction and loan loss expense fluctuates depending on many factors, including
macroeconomic conditions, our customer protection programs and the impact of regulatory changes.
The following table illustrates the provision for transaction and loan losses as a percentage of net revenues for 2011 , 2010 and 2009 (in
thousands, except percentages):
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 provision for transaction and loan losses as a
percentage of net revenues would have resulted in an increase or decrease in operating income of approximately $58.3 million in 2011 , resulting
in an approximate $0.04 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
67
Year Ended December 31,
2011 2010 2009
Net revenues
$
11,651,654
$
9,156,274
$
8,727,362
Provision for transaction and loan losses
$
516,656
$
392,240
$
382,825
Provision for transaction and loan losses as a % of net revenues
4.4
%
4.3
%
4.4
%