eBay 2007 Annual Report Download - page 100

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Goodwill
Goodwill information for each segment is as follows (in thousands):
December 31,
2006
Goodwill
Acquired
Earn Out
Settlement
Impairment
of Goodwill Adjustments
December 31,
2007
Reportable segments:
Marketplaces...... $2,648,027 $285,508 $ — $ — $ 83,264 $3,016,799
Payments ........ 1,348,633 — — — (260) 1,348,373
Communications . . . 2,574,979 — 530,334 (1,390,938) 204,966 1,919,341
$6,571,639 $285,508 $530,334 $(1,390,938) $287,970 $6,284,513
Investments accounted for under the equity method of accounting are classified on our balance sheet as long-
term investments. Such investments include identifiable intangible assets, deferred tax liabilities and goodwill.
Goodwill related to our equity method investments, included above, was approximately $27.4 million as of
December 31, 2006 and 2007.
The changes in goodwill during the year ended December 31, 2007 were substantially due to the recording of
goodwill for completed acquisitions, the earn out settlement with certain former shareholders of Skype, impairment
charges related to Skype and foreign currency translation adjustments.
We conducted our annual impairment test of goodwill as of August 31, 2007 in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets.” As a result of this test, we concluded that the carrying amount of our
Communications reporting unit exceeded its fair value and recorded an impairment charge of approximately
$1.4 billion during the year ended December 31, 2007. The impairment charge includes the impact of the earn out
settlement payment described below and was determined by comparing the carrying value of goodwill in our
Communications reporting unit with the implied fair value of the goodwill. We determined the fair value of the
Communications reporting unit using the income approach, which requires estimates of future operating results and
cash flows discounted using an estimated discount rate. Our estimates resulted from an updated long-term financial
outlook developed as part of our strategic planning cycle conducted annually during our third quarter. Our estimates
of future operating results for our Communications reporting unit are for an early stage business with limited
financial history, as well as developing revenue models. These factors increase the risk of differences between
projected and actual performance that could impact future estimates of fair value of the Communications reporting
unit.
In conjunction with our acquisition of Skype in 2005, we agreed to certain performance-based earn out
payments. During the year ended December 31, 2007, we entered into an earn out settlement agreement with each of
the former shareholders of Skype who had elected the earn out alternative at the time of the acquisition, under which
we were relieved of all obligations under the original earn out agreement in exchange for an aggregate cash payment
of A375.1 million, or approximately $530.3 million. Goodwill was recorded because the earn out settlement amount
was considered additional purchase price.
90
eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)