eBay 2007 Annual Report Download - page 75

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Based on our results for the year ended December 31, 2007, a one-percentage point change in our provision for
income taxes as a percentage of income before taxes would have resulted in an increase or decrease in the provision
of approximately $7.5 million. The following analysis demonstrates, for illustrative purposes only, the potential
effect such a one-percentage point deviation change would have upon our consolidated financial statements and is
not intended to provide a range of exposure or expected deviation (in thousands, except per share data):
⫺100 Basis
Points 2007
+100 Basis
Points
Provision for income taxes ............................ $395,091 $402,600 $410,109
Net income ....................................... 355,760 348,251 340,742
Diluted earnings per share ............................ $ 0.26 $ 0.25 $ 0.25
We adopted the provisions of FIN 48 as of the beginning of 2007. Prior to adoption, our policy was to establish
reserves that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were
recognized as changes to the effective income tax rate in the period of resolution. FIN 48 requires application of a
more likely than not threshold to the recognition and derecognition of uncertain tax positions. If the recognition
threshold is met, FIN 48 permits us to recognize a tax benefit measured at the largest amount of the tax benefit that,
in our judgement, is more than 50 percent likely to be realized upon settlement. It further requires that a change in
judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the
quarter of such change.
We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may
elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final
outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income
taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, in light of changing
facts and circumstances. Settlement of any particular position could require the use of cash.
Advertising and Other Revenues
A portion of our net revenues result from fees associated with advertising and other services. Net revenues
from advertising are derived principally from the sale of online advertisements for cash and through barter
arrangements. Other net revenues are derived principally from contractual arrangements with third parties that
provide transaction services to eBay and PayPal users and interest earned from banks on certain PayPal customer
account balances. Advertising and other net revenues, including barter transactions, totaled 4% of our consolidated
net revenues for 2007 and 3% in 2005 and 2006, and were primarily generated by our Marketplaces segment.
Revenue from barter arrangements totaled $1.4 million in 2006 and $6.7 million in 2005. Revenue from barter
arrangements was not significant in 2007. Certain judgments are involved in the determination of the appropriate
revenue recognition, including, but not limited to, the assessment and allocation of fair values in multiple element
arrangements, the appropriateness of gross or net revenue recognition and, for barter transactions, the existence of
comparable cash transactions to establish fair values. We evaluate whether payments made to customers or revenues
earned from vendors have a separate identifiable benefit and whether they are fairly valued in determining the
appropriate classification of the related revenues and expense.
Goodwill and Intangible Assets
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of
the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of
the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not
limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost
of capital.
At December 31, 2007, our goodwill totaled $6.3 billion and our identifiable intangible assets totaled
$596.0 million. We assess the impairment of goodwill of our reportable units annually, or more often if events or
changes in circumstances indicate that the carrying value may not be recoverable. This assessment is based upon a
discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow is based upon,
among other things, certain assumptions about expected future operating performance and an appropriate discount
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