EBay (EBAY)

Provision for Transaction and Loan Losses

Provision for transaction and loan losses primarily consists of bad debt expense associated with our accounts receivable balance, loan reserves associated with our principal loan receivable balance and PayPal transaction loss expense, as well our losses resulting from our customer protection programs.

Provision for transaction and loan losses increased by $35.4 million, or 10%, in 2009 compared to 2008. The increase was due primarily to the addition of the provision for loan losses associated with our Bill Me Later business (acquired November 2008) and the expansion of eBay’s Buyer Protection programs, partially offset by decreases in bad debt expense as well as improvements to PayPal’s fraud and credit loss rates. We continue to expect our provision for transaction and loan loss expense to fluctuate depending on many factors, including macroeconomic conditions, our customer protection programs and historical experience.

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Provision for transaction and loan losses increased $53.5 million, or 18%, in 2008 compared to 2007. The increase was due primarily to an increase in transaction loss expense and an increase in bad debt expense. PayPal transaction loss expense increased approximately $32.2 million due primarily to an increase in net TPV. Bad debt expense increased approximately $22.1 million due to increased revenues and an increase in our bad debt reserve rate due to the global economic environment.

Provision for Transaction and Loan Losses

Provision for transaction and loan losses primarily consists of bad debt expense associated with our accounts receivable balance, loan reserves associated with our principal loan receivable balance, and PayPal transaction loss expense, as well our losses resulting from our 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, as well as economic and regulatory conditions. The following table illustrates the provision as a percentage of net revenues for 2007, 2008 and 2009 (in thousands, except percentages):

Determining appropriate allowances for these losses is an inherently uncertain process, 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 $43.6 million in 2009 resulting in an approximate $0.03 change in diluted earnings per share.

Provision for Transaction and Loan Losses

Provision for transaction and loan losses primarily consists of bad debt expense associated with our accounts receivable balance, loan reserves associated with our Bill Me Later loan receivable balance, PayPal transaction loss expense, as well our losses resulting from our customer protection programs.

The decrease in the provision for transaction and loan losses during the first quarter of 2009 of $4.9 million, or 6%, compared to the same period of the prior year, was due primarily to decreases in bad debt expense and customer protections programs, partially offset by an increase in PayPal transaction loss expense and the provision for loan losses associated with our Bill Me Later business (acquired on November 7, 2008).