Yahoo 2013 Annual Report Download - page 104

The Company’s initial purchase price was based on acquiring a 40 percent equity interest in Alibaba Group on a
fully diluted basis; however, the Company acquired a 46 percent interest based on outstanding shares. In
allocating the initial excess of the carrying value of the investment in Alibaba Group over its proportionate share
of the net assets of Alibaba Group, the Company allocated a portion of the excess to goodwill to account for the
estimated reductions in the carrying value of the investment in Alibaba that may occur as the Company’s equity
interest is diluted to 40 percent based on specific events anticipated at the time. As of both December 31, 2012
and 2013, the Company’s ownership interest in Alibaba Group was approximately 24 percent as a result of the
Initial Repurchase described below.
The investment in Alibaba Group is being accounted for using the equity method, and the total investment,
including net tangible assets, identifiable intangible assets and goodwill, is classified as part of investments in
equity interests on the Company’s consolidated balance sheets.
The Company’s accounting policy is to record its share of the results of Alibaba Group one quarter in arrears,
within earnings in equity interests in the consolidated statements of income. As of December 31, 2013, the excess
of carrying value of the Company’s investment in Alibaba Group and the Company’s proportionate share of the
net assets of Alibaba Group is largely attributable to goodwill.
The Company entered into a patent sale agreement with a wholly-owned affiliate of Alibaba Group during the
fourth quarter of 2013 pursuant to which the Company sold certain patents for aggregate consideration of $70
million. The gain on sale of these patents is recorded as a part of gains on sales of patents in the consolidated
statements of income.
Framework Agreement with Alibaba Group regarding Alipay. Alibaba Group restructured the ownership of
Alipay.com Co., Ltd. (“Alipay”) and deconsolidated Alipay in the first quarter of 2011. The impact of the
deconsolidation of Alipay was not material to the Company’s financial statements. On July 29, 2011, the
Company entered into a Framework Agreement (the “Framework Agreement”) with Alibaba Group, Softbank,
Alipay, APN Ltd., a company organized under the laws of the Cayman Islands (“IPCo”), Zhejiang Alibaba
E-Commerce Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China
(“HoldCo”), Jack Ma Yun, Joseph C. Tsai and certain security holders of Alipay or HoldCo as joinder parties.
The Framework Agreement establishes the ongoing financial and other arrangements between Alibaba Group
and Alipay. The transactions under the Framework Agreement closed on December 14, 2011.
Pursuant to the terms of the Framework Agreement and related documents: (1) Alibaba Group will receive
certain payments (“Liquidity Event Payment”) upon a liquidity event related to Alipay, such as an initial public
offering or sale of Alipay; (2) Alibaba Group received a non-interest bearing promissory note in the principal
amount of $500 million with a seven year maturity, subject to earlier prepayment or acceleration (the “IPCo
Promissory Note”); (3) upon payment in full of the Liquidity Event Payment certain assets used in the Alipay
business that were retained by Alibaba Group will be transferred to Alipay; (4) Alibaba Group and Alipay
entered into a long-term agreement pursuant to which Alibaba Group will receive payment processing services
on preferential terms from Alipay and its subsidiaries; and (5) Alibaba Group licensed to Alipay certain
intellectual property and technology and performs certain software technology services for Alipay and in return
Alipay pays to Alibaba Group a royalty and software technology services fee.
The royalty and software technology services fee and the payment processing services fees discussed above
approximate the estimated fair values of such services and are recognized in Alibaba Group’s financial
statements as income or expense, as applicable, as the services are rendered. The Company will record its share,
if any, of the results of these transactions as they are recorded by Alibaba Group within Yahoo’s earnings in
equity interests in the consolidated statements of income. Alibaba Group will recognize the Liquidity Event
Payment, the payment of the IPCo Promissory Note, and any impact from the transfer of assets, described above,
if and when such payments or transfers occur. The Company will record its share, if any, of the results of these
transactions as they are recorded by Alibaba Group within the Company’s earnings in equity interests in the
consolidated statements of income.
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