eBay 2004 Annual Report Download - page 32

In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities.'' In accordance
with the provisions of this standard, we have included our San Jose headquarters lease arrangement in our
consolidated Ñnancial statements eÅective July 1, 2003. Beginning July 1, 2003, our consolidated statement of
income reÖects the reclassiÑcation of lease payments on our San Jose headquarters oÇce facilities from
operating expense to interest expense. The increase in interest expense during 2003, compared to the prior
year, was primarily the result of the inclusion of interest payments on our San Jose headquarters oÇce
facilities. The increase in interest expense during 2004 is primarily the result of the inclusion of these interest
payments for a full year in 2004. We expect our interest expense will decrease both in total and as a percentage
of net revenue during 2005 due to the acquisition of the San Jose headquarters oÇce facilities at the expiration
of the lease arrangement on March 1, 2005.
Impairment of Certain Equity Investments
Percent Percent
2002 Change 2003 Change 2004
(In thousands, except percentages)
Impairment of certain equity investments ÏÏÏÏÏÏÏ $3,781 (67)% $1,230 N/A $ Ì
As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.3% 0.1% N/A
During 2003 and 2002, we recorded impairment charges totaling $1.2 million and $3.8 million,
respectively, as a result of the deterioration of the Ñnancial condition of certain of our private and public equity
investees. We identiÑed these impairment losses as part of our normal process of assessing the quality of our
investment portfolio. The impairment loss reÖects a decline in fair value and other market conditions that we
believe are other than temporary. We expect that the fair value of our equity investments will Öuctuate from
time to time and future impairment assessments may result in additional charges to our operating results. We
did not record any impairment of our equity investments during 2004.
Provision for Income Taxes
Percent Percent
2002 Change 2003 Change 2004
(In thousands, except percentages)
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏ $145,946 42% $206,738 66% $343,885
As a percentage of net revenuesÏÏÏÏÏÏÏÏÏ 12.0% 9.5% 10.5%
EÅective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 37% 32% 30%
The provision for income taxes diÅers from the amount computed by applying the statutory U.S. federal
rate principally due to non-deductible expenses related to acquisitions, state taxes, subsidiary losses for which
we have not provided a beneÑt and other factors that increase the eÅective tax rate. These expenses are
partially oÅset by decreases resulting from foreign income with lower eÅective tax rates, tax credits, and tax-
exempt interest income.
The lower eÅective tax rates in 2004 and 2003 as compared to the respective prior years reÖect the
increasing proÑt contribution from our international operations that are subject to lower tax rates.
We receive tax deductions from the gains realized by employees on the exercise of certain non-qualiÑed
stock options for which the beneÑt is recognized as a component of stockholders' equity. We have evaluated
our deferred tax assets relating to these stock option deductions along with our other deferred tax assets and
concluded that a valuation allowance is required for that portion of the total deferred tax assets that is not
considered more likely than not to be realized in future periods. To the extent that the deferred tax assets with
a full valuation allowance become realizable in future periods, we will have the ability, subject to carryforward
limitations, to use up to $158.6 million of deferred tax assets to reduce future income tax liabilities. Should a
valuation allowance no longer be required, the reversal of the valuation allowance will be reÖected as an
increase in additional paid-in capital rather than a reduction of the income tax provision.
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