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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

Principles of Consolidation

The accompanying Consolidated Financial Statements of Wayfair Inc. include its wholly-owned subsidiaries (collectively the "Company" or "Wayfair"). All intercompany accounts and transactions have been eliminated. Below is a summary of the wholly-owned subsidiaries of the Company with operations:



Subsidiary		Location
Wayfair LLC		U.S.
CastleGate Logistics Inc.		U.S.
SK Retail, Inc.		U.S.
Wayfair Maine LLC		U.S.
Wayfair Transportation LLC		U.S.
Wayfair Securities Corporation		U.S.
Wayfair Stores Limited		Republic of Ireland
Wayfair (UK) Limited		United Kingdom
Wayfair GmbH		Germany
CastleGate Logistics Canada Inc.		Canada
CastleGate Logistics Hong Kong Limited		Hong Kong
Wayfair (BVI) Ltd.		British Virgin Islands

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity (at the date of purchase) of three months or less to be the equivalent of cash for the purpose of Consolidated Balance Sheets and Statements of Cash Flows presentation. Cash equivalents, which consist primarily of money market accounts, are carried at cost, which approximates market value.

Short-Term Investments and Marketable Securities

Short-term investments consist of certificates of deposits and marketable securities with original maturities of greater than three months and maturing in less than twelve months from the balance sheet date.

The Company classifies its marketable securities as "available-for-sale" securities. Available-for-sale securities are classified as short- and long-term investments on the Consolidated Balance Sheets and are carried at fair value. Unrealized gains and losses on available-for-sale securities that are considered temporary are recorded, net of taxes, in the accumulated other comprehensive

(loss) caption of the Company’s Consolidated Balance Sheets. Unrealized losses, excluding losses related to the credit rating of the security (credit losses), on available-for-sale securities that are considered other-than-temporary but relate to securities that the Company (i) does not intend to sell and (ii) will not be required to sell below cost are also recorded, net of taxes, in accumulated other comprehensive (loss). Further, the Company does not believe it will be required to sell such securities below cost. Therefore, the only other-than-temporary losses the Company records in other (income) expense, net in its Consolidated Statements of Operations are related to credit losses. As of December 31, 2019 and 2018, the Company’s available-for-sale securities consisted of corporate bonds and other government obligations that are priced at fair value. The maturities of the Company’s long-term marketable securities generally range from one to two years. The cost basis of a marketable security sold is determined by the Company using the specific identification method.

Fair Value of Financial Instruments

The Company's financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The three levels of inputs used to measure fair value are as follows:


•	Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities


•	Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable or can be corroborated by observable market data for substantially the full-term of the asset or liability


•	Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company measures its cash equivalents and short- and long-term investments at fair value. The Company classifies its cash equivalents within Level 1 because the fair value of the financial asset is valued using quoted market prices of an identical asset. The Company classifies short- and long-term investments within Level 2 because unadjusted quoted prices for identical or similar assets in markets are not active. The Company does not have any assets or liabilities classified as Level 3 financial assets. Refer to Note 3, Marketable Securities and Fair Value Measurements, for additional detail.

Concentrations of Credit Risk

Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, short- and long-term investments, and accounts receivable. The risk with respect to cash and cash equivalents is minimized by the Company's policy to maintain these balances with major financial institutions of high-credit quality. At times, cash balances may exceed federally insured limits; however, to date, the Company has not incurred any losses on these investments. As of December 31, 2019 and 2018, the Company had $48.2 million and $129.5 million, respectively, in banks located outside the U.S.

The risk with respect to short- and long-term investments is minimized by the Company's policy of investing in financial instruments issued by highly-rated financial institutions. The risk with respect to accounts receivable is managed by the Company through its policy of monitoring the creditworthiness of its customers to which it grants credit terms in the normal course of business.

Accounts Receivable

Accounts receivable are stated net of an allowance for doubtful accounts, which is based on historical losses, existing economic conditions, and other information available at the Consolidated Balance Sheets dates. Uncollectible amounts are written off against the allowance after all collection efforts have been exhausted.

Inventories

Inventories consisting of finished goods are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of product for resale. Inventory costs consist of cost of product and inbound shipping and handling costs. Inventory costs also include direct and indirect labor costs, rents and depreciation expenses associated with the Company's fulfillment centers. Inventory valuation requires the Company to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, liquidations, and expected recoverable values of each disposition category.

Goods In-Transit

Goods in-transit to customers are recorded in prepaid expenses and other current assets in the Consolidated Balance Sheets. Risk of loss and the transfer of title from the supplier to the Company occur at freight on board shipping point.

Property and Equipment

Property and equipment are stated at cost, net of depreciation and amortization. Expenditures for maintenance and repairs are charged to expense as incurred, whereas betterments are capitalized as additions to property and equipment. Depreciation and amortization on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets as follows:



Class		Range of Life (In Years)
Furniture and computer equipment		3 to 7
Site and software development costs		2
Leasehold improvements		The lesser of useful life or lease term
Buildings (leased - Note 6)		30

Site and Software Development Costs

The Company capitalizes certain costs associated with the development of its sites and internal-use software products after the preliminary project stage is complete and until the software is ready for its intended use. The capitalized costs are amortized over a two-year period. Costs incurred in the preliminary stages of development, after the software is ready for its intended use and for maintenance of internal-use software are expensed as incurred. Upgrade and enhancements are capitalized to the extent they will result in added functionality.

Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances, such as service discontinuance or technological obsolescence, indicate that the carrying amount of the long-lived asset may not be recoverable. When such events occur, the Company compares the carrying amount of the asset to the undiscounted expected future cash flows related to the asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the asset.

Leases

The Company adopted ASU No. 2016-02, "Leases" (ASU 2016-02) on January 1, 2019 using the modified retrospective approach. The Company also elected the package of practical expedients, which among other things, allowed the Company to carryforward historical lease classification. The adoption of the standard resulted in (1) the derecognition of building assets and finance lease obligations for certain leases that did not pass the sale-leaseback criteria, (2) the derecognition of construction in progress assets and other long-term liabilities for certain lease arrangements whereby the Company is no longer considered the deemed construction owner of the construction projects, and (3) the recognition of operating lease right-of-use ("ROU") assets and lease liabilities for lease arrangements with an initial term greater than twelve months.

Adoption of ASU 2016-02 resulted in the following adjustments to the Consolidated Balance Sheet:



	December 31, 2018			ASU 2016-02 Adjustments			January 1, 2019
	(in thousands)
Balance sheet line item:
Property and equipment, net	$	606,977		$	(227,709	)	$	379,268
Operating lease right-of-use assets	$	—		$	524,082		$	524,082
Other noncurrent assets	$	18,826		$	(6,814	)	$	12,012
Other liabilities	$	160,388		$	(155,996	)	$	4,392
Other current liabilities	$	127,995		$	(9,624	)	$	118,371
Lease financing obligations, net of current portion	$	183,056		$	(183,056	)	$	—
Operating lease liabilities	$	—		$	636,385		$	636,385
Accumulated deficit	$	(1,082,689	)	$	1,850		$	(1,080,839	)

The adoption of the standard did not have a notable impact on the Company's liquidity or a materially adverse impact on the Company's debt covenant compliance.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities on our Consolidated Balance Sheets. As of December 31, 2019, the Company has not entered into material financing lease arrangements.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that management will exercise that option. The Company has lease arrangements with lease and non-lease components. For the Company's warehouse and fulfillment center lease arrangements, the Company accounts for lease and non-lease components separately. For all other lease arrangements, the Company accounts for lease and non-lease components as a single lease component.

Operating lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate ("IBR") based on the information available at commencement date in determining the present value of future payments. The determination of the Company’s IBR requires judgment. The IBR for each lease is primarily based on publicly-available information for companies within the same industry and with similar credit profiles. The rate is then adjusted for the impact of collateralization, the lease term, and other specific terms included in the Company’s lease arrangements. The IBR was determined at lease commencement, or as of January 1, 2019 for operating leases existing upon adoption of ASC 842. The IBR is subsequently reassessed upon a modification to the lease arrangement. The operating lease ROU asset also includes any lease payments made prior to commencement date and excludes lease incentives and initial direct costs incurred. ROU assets are subsequently assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.

Foreign Currency Translation

The functional currency of the Company is the U.S. dollar, while the functional currency of certain wholly-owned subsidiaries outside of the U.S. is as follows:



Subsidiary		Currency
Wayfair Stores Limited		Euro
Wayfair GmbH		Euro
Wayfair (BVI) Ltd.		Euro
Wayfair (UK) Limited		Pound sterling
CastleGate Logistics Canada Inc.		Canadian dollar
CastleGate Logistics Hong Kong Limited		Hong Kong dollar

The financial statements of the Company are translated to U.S. dollars using year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transaction occurred. The effects of foreign currency translation are included in other comprehensive loss in the Consolidated Statements of Comprehensive Loss. Transaction gains and losses are included in the Company's Consolidated Statements of Operations. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss within total stockholders' equity (deficit)

Contingent Liabilities

The Company has certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable; however, it discloses the range of such reasonably possible losses.

Revenue Recognition

The Company primarily generated revenue through product sales on its family of sites and through (i) product sales on websites operated by third parties and (ii) fees earned for media solutions.

The Company recognizes net revenue on product sales through the Company's family of sites and third party operated websites using the gross method when the Company has concluded it controls the product before it is transferred to the customer. The Company controls products when it is the entity responsible for fulfilling the promise to the customer and takes responsibility for the acceptability of the goods, assumes inventory risk from shipment through the delivery date, has discretion in establishing prices, and selects the suppliers of products sold. The Company recognizes net revenue from sales of its products upon delivery to the customer. As the Company ships a large volume of packages through multiple carriers, actual delivery dates may not always be available and as such the Company estimates delivery dates based on historical data.

Net revenue from product sales includes shipping costs charged to the customer and is recorded net of taxes collected from customers, which are remitted to governmental authorities. Cash discounts and rebates earned by customers at the time of purchase are deducted from gross revenue in determining net revenue. Allowances for sales returns are estimated and recorded based on prior returns history, recent trends, and projections for returns on sales in the current period. Allowances for sales returns at December 31, 2019 and 2018, were $38.0 million and $35.7 million, respectively. Actual returns in subsequent periods have been consistent with estimated amounts.

The Company also earns revenue through third-party advertisers that pay based on the number of advertisement related clicks, actions, or impressions for advertisements placed on the Company's sites. Revenue earned under these arrangements is included in net revenue and is recognized in the period in which the click, action, or impression occurs.

Net revenue from contracts with customers is disaggregated by geographic region because this manner of disaggregation best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Refer to Note 12, Segment and Geographic Information, for additional detail.

The Company has three types of contractual liabilities: (i) cash collections from its customers prior to delivery of products purchased, which are initially recorded in unearned revenue, and are recognized as net revenue when the products are delivered, (ii) unredeemed gift cards and site credits, which are initially recorded in unearned revenue, and are recognized in the period they are redeemed, and (iii) membership rewards redeemable for future purchases, which are earned by customers on purchases made with the Company's Wayfair branded, private label credit card, and are initially recorded in other current liabilities, and are recognized as net revenue when redeemed. The portion of gift cards and store credits not expected to be redeemed are recognized as net revenue based on historical redemption pattern which is substantially within twenty-four months from the date of issuance.

Contractual liabilities included in unearned revenue and other current liabilities in the Consolidated Balance Sheets were $167.6 million and $4.6 million at December 31, 2019 and $148.1 million and $3.1 million at December 31, 2018, respectively. During the year ended December 31, 2019, the Company recognized $126.0 million and $3.1 million of net revenue included in unearned revenue and other current liabilities, respectively, which was recorded as of December 31, 2018 in the Consolidated Balance Sheets.

The Company adopted ASU 2014-09 as of January 1, 2018 using a modified retrospective approach and recognized a $4.7 million cumulative-effect adjustment to reduced accumulated deficit. The cumulative-effect adjustment to accumulated deficit was due to breakage of gift cards and site credits, to the extent there is no requirement for remitting balances to governmental

agencies. Prior period balances were not retrospectively adjusted. The adoption of ASU 2014-09 did not have a material impact on the Company's Consolidated Balance Sheet and financial results for the year ended December 31, 2018.

Costs of Goods Sold

Cost of Goods Sold

Cost of goods sold consist of:

Product Costs: The Company recognizes costs related to the purchase price of products sold, expenses capitalized into Wayfair inventory, which include direct and indirect labor costs, rent, and depreciation expenses, and inbound shipping and handling costs for Wayfair inventory.

Shipping and Fulfillment Costs: Shipping costs include outbound shipping costs. Fulfillment costs include costs incurred to operate and staff our fulfillment centers and provide other inbound supply chain services such as ocean freight and drayage. Costs to operate and staff the CastleGate and WDN networks include rent and depreciation expenses associated with various facilities, costs to receive, inspect, pick, package and prepare customer orders for delivery, and direct and indirect labor costs including payroll, payroll-related benefits, and equity-based compensation.

Vendor Rebates

The Company earns rebates on incentive programs with its suppliers. These rebates are earned upon shipment of goods. Amounts earned and due from suppliers under these rebate programs are included in other current assets on the Consolidated Balance Sheets and are reflected as a reduction of cost of goods sold on the Consolidated Statements of Operations. Vendor allowances earned reduce the carrying cost of inventory and are recognized in cost of goods sold when the related inventory is sold.

CastleGate

The Company earns fees from providing logistic services to its suppliers including order fulfillment, warehousing, and inbound supply chain services such as ocean freight and drayage. Fulfillment fees are earned upon completion of preparing customer orders for shipment, warehousing fees are earned upon completion of each storage date, and inbound supply chain services are earned on a straight line basis as the shipments move from origin to destination. CastleGate fees are reflected as a reduction of cost of goods sold.

Advertising Costs

Advertising consists of direct response performance marketing costs, such as display advertising, paid search advertising, social media advertising, search engine optimization, comparison shopping engine advertising, television advertising, direct mail, catalog and print advertising. Expenditures for advertising are expensed in the period that the advertising first takes place.

Merchant Processing Fees

Merchant processing fees totaling $179.7 million, $133.4 million, and $88.7 million in the years ended December 31, 2019, 2018, and 2017, respectively, are included in customer service and merchant fees expense in the Consolidated Statements of Operations. These fees are charged by third parties that provide merchant processing services for customer payments made by credit cards and debit cards.

Equity-Based Compensation

The Company accounts for its equity-based compensation awards in accordance with ASC Topic 718, Compensation—Stock Compensation (ASC 718). ASC 718 requires all equity-based payments to employees to be recognized as expense in the statements of operations based on their grant date fair values. The Company has granted stock options, restricted shares and restricted stock units. The Company has primarily granted restricted stock units, and to a lesser extent, restricted stock. The Company granted only restricted stock units to employees in the years ended December 31, 2019, 2018, and 2017. Restricted stock values are determined based on the quoted market price of our Class A common stock on the date of grant. The Company accounts for equity awards to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, which requires the fair value of an award to non-employees be remeasured at fair value as the award vests.

The Company adopted ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07) on January 1, 2019. This ASU simplifies aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. The adoption of ASU 2018-07 did not have a material impact the Company’s Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity (Deficit) or Cash Flows.

The Company adopted ASU 2016-09 "Compensation - Stock Compensation" as of January 1, 2017 using a modified retrospective approach with the option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, with a cumulative-effect adjustment to retained earnings recognized as of January 1, 2017 of $8.7 million. The adoption of ASU 2016-09 also requires all income tax adjustments to be recorded in the Consolidated Statements of Operations.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized. At December 31, 2019, we maintain a full valuation allowance against our net worldwide deferred tax asset.

The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, no amount of benefit attributable to the position is recognized. The tax benefit to be recognized of any tax position that meets the more likely than not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency.

We evaluate at the end of each reporting period whether some or all of the undistributed earnings of our foreign subsidiaries are permanently reinvested. Our position is based upon several factors including management's evaluation of the Company and its subsidiaries' financial requirements, the short- and long-term operational and fiscal objectives of the Company, and the tax consequences associated with the repatriation of earnings.

Hosting Arrangements

In August 2018, the FASB issued guidance related to a customer’s accounting for implementation costs incurred in hosting arrangements. The guidance aligns the requirements for capitalizing implementation costs incurred in cloud computing arrangements with the requirements for capitalizing costs to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. This guidance may be applied either retrospectively or prospectively. The Company early adopted the guidance on a prospective basis as of January 1, 2019. The adoption of the guidance did not have a material impact on the Company's Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity (Deficit) or Cash Flows.

Net Loss Per Share

The Company follows the two-class method when computing net loss per share for its two issued classes of common stock - Class A and Class B. Basic net loss per share is computed by dividing the net loss by the weighted average number of common stock outstanding for the period. For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share, since dilutive common stock are not assumed to have been issued if their effect is anti-dilutive.

Subsequent Events

The Company considers events or transactions that have occurred after the balance sheet date of December 31, 2019, but prior to the filing of the financial statements with the U.S. Securities and Exchange Commission, to provide additional evidence relative to certain estimates or to identify matters that require additional recognition or disclosure. Subsequent events have been evaluated through the filing of these financial statements.

Recent Accounting Pronouncements, Credit Impairment

Recent Accounting Pronouncements

Credit Impairment

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This ASU revises how entities account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The Company will adopt the new standard as of January 1, 2020 on a prospective basis. We do not believe the adoption of ASU 2016-13 will have a material impact on the Company's Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity (Deficit) or Cash Flows.