eBay 2005 Annual Report Download - page 72

The following table illustrates the effective tax rates for 2003, 2004, and 2005 (in thousands, except
percentages):
Years Ended December 31,
2003 2004 2005
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $206,738 $343,885 $467,285
As a % of income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32% 30% 30%
Historically, these provisions have adequately provided for our actual income tax liabilities. Our future
effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we
have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by
changes in the valuations of our deferred tax assets or liabilities, or by changes or interpretations in tax laws,
regulations or accounting principles.
Based on our results for the year ended December 31, 2005, 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 $15.5 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 °100 Basis
Points 2005 Points
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 451,791 $ 467,285 $ 482,779
Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,441,707 1,441,707 1,441.707
Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,097,537 1,082,043 1,066,549
Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 0.79 $ 0.78 $ 0.77
Advertising and Other Non-Transaction Revenues
A portion of our net revenues result from fees associated with advertising and other non-transaction
services in our U.S. Marketplaces, International Marketplaces and Payments segments. Net revenues from
advertising are derived principally from the sale of online banner and sponsorship advertisements for cash and
through barter arrangements. Other non-transaction net revenues are derived principally from contractual
arrangements with third parties that provide transaction services to eBay users and from offline services
provided by wholly-owned subsidiaries that were divested in the second half of 2002. Advertising and other
non-transaction net revenues, including barter transactions, totaled 2%, 3% and 3% of our consolidated net
revenues for the years ended December 31, 2003, 2004 and 2005, respectively, and were primarily generated
by our U.S. Marketplaces segment. Revenue from barter arrangements totaled $10.1 million in 2003,
$13.3 million in 2004 and $6.7 million in 2005. 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. Our advertising and other
non-transaction net revenues may be affected by the financial condition of the parties with whom we have
these relationships and by the success of online services and promotions in general. Unlike our transaction
revenues, advertising and other non-transaction net revenues are derived from a relatively concentrated
customer base.
Business Combinations
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.
68