Amazon.com Inc. (AMZN)

Amazon.com recognizes revenue from product sales or services rendered when the following four criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the selling price is fixed or determinable, and collectability is reasonably assured. Revenue arrangements with multiple deliverables are divided into separate units and revenue is allocated using estimated selling prices if Amazon.com does not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. Amazon.com allocates the arrangement price to each of the elements based on the relative selling prices of each element. Estimated selling prices are management's best estimates of the prices that Amazon.com would charge the customers if Amazon.com was to sell the standalone elements separately and include considerations of customer demand, prices charged by Amazon.com and others for similar deliverables, and the price if largely based on the cost of producing the product or service.

Sales of certain of Amazon.com's digital devices are considered arrangements with multiple deliverables, consisting of the device, undelivered software upgrades and/or undelivered non-software services such as cloud services. The revenue allocated to the device, which is the substantial portion of the total sale price, and related costs are generally recognized upon delivery. Revenue related to undelivered software upgrades and/or undelivered non-software services is deferred and recognized generally on a straight-line basis over the estimated period the software upgrades and non-software services are expected to be provided for each of these devices.

Sales of Amazon Prime memberships are also considered arrangements with multiple deliverables, including shipping benefits, Prime Video, Prime Music, Prime Photos, and access to the Kindle Owners' Lending Library. The revenue related to the deliverables is amortized over the life of the membership based on the estimated delivery of services. Amazon Prime membership fees are allocated between product sales and service sales. Costs to deliver Amazon Prime benefits are recognized as cost of sales as incurred. As Amazon.com adds more benefits to the Prime membership, Amazon.com updates the method of determining the estimated selling prices of each element as well as the allocation of Prime membership fees.

Amazon.com evaluates whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when Amazon.com is primarily obligated in a transaction, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded at the gross sale price. Amazon.com generally records the net amounts as commissions earned if Amazon.com is not primarily obligated and does not have latitude in establishing prices. Such amounts earned are determined using fixed fees, a percentage of seller revenues, per-unit activity fees, or some combination thereof.

Product sales represent revenue from the sale of products and related shipping fees and digital media content where Amazon.com records revenue gross. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon Amazon.com's delivery to the carrier or the customer. Amazon's electronic devices sold through retailers are recognized at the point of sale to consumers.

Service sales represent third-party seller fees earned (including commissions) and related shipping fees, AWS sales, certain digital content subscriptions, certain advertising services, and Amazon.com's co-branded credit card agreements. Service sales, net of promotional discounts and return allowances, are recognized when service has been rendered.

Return allowances, which reduce revenue and cost of sales, are estimated using historical experience. Allowance for returns was $153 million, $156 million, and $62 million as of December 31, 2015, 2016, and 2017. Additions to the allowance were $1.3 billion, $1.5 billion, and $1.8 billion, and deductions to the allowance were $1.3 billion, $1.5 billion, and $1.9 billion in 2015, 2016, and 2017. Revenue from product sales and services rendered is recorded net of sales and consumption taxes. Additionally, Amazon.com periodically provides incentive offers to the customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when accepted by Amazon.com's customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by the customers, are treated as a reduction to purchase price based on estimated future redemption rates. Redemption rates are estimated using Amazon.com's historical experience for similar inducement offers. Current discount offers and inducement offers are presented as a net amount in "Total net sales."

Source: Amazon.com Inc., Annual Report

Amazon.com Inc., Income Statement, Revenues

USD $ in millions

	12 months ended	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013
	Online stores
	Physical stores
	Third-party seller services
	Subscription services
	AWS
	Other
	Net sales

Source: Amazon.com Inc. Annual Reports