eBay 2005 Annual Report Download - page 73

At December 31, 2005 our goodwill totaled $6.1 billion and our identifiable intangible assets totaled
$823.3 million. We assess the impairment of goodwill and identifiable intangible assets 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 rate determined by our management. Our
estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic
conditions, changes to its business model or changes in operating performance. Significant differences between
these estimates and actual cash flows could materially affect our future financial results. We completed our
annual goodwill impairment test as of August 31, 2005 and determined that no adjustment to the carrying
value of goodwill for any of our reportable units was required. We have determined that no events or
circumstances from that date through December 31, 2005 indicate that a further assessment was necessary.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of
cash equivalents and short-term and long-term investments in a variety of securities, including government
and corporate securities and money market funds. These securities are generally classified as available for sale
and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss), net of estimated tax.
Investments in both fixed-rate and floating-rate interest-earning instruments carry varying degrees of
interest rate risk. The fair market value of our fixed-rate securities may be adversely impacted due to a rise in
interest rates. In general, securities with longer maturities are subject to greater interest-rate risk than those
with shorter maturities. While floating rate securities generally are subject to less interest-rate risk than fixed-
rate securities, floating-rate securities may produce less income than expected if interest rates decrease. Due
in part to these factors, our investment income may fall short of expectations or we may suffer losses in
principal if securities are sold that have declined in market value due to changes in interest rates. As of
December 31, 2005, our fixed-income investments earned a pretax yield of approximately 3.3%, with a
weighted average maturity of three months. If interest rates were to instantaneously increase (decrease) by
100 basis points, the fair market value of our total investment portfolio could decrease (increase) by
approximately $6.3 million.
Equity Price Risk
We are exposed to equity price risk on the marketable portion of equity instruments and equity method
investments we hold, typically as the result of strategic investments in third parties that are subject to
considerable market risk due to their volatility. We typically do not attempt to reduce or eliminate our market
exposure in these equity investments. We did not record an impairment charge during either of the years
ended December 31, 2005 or 2004 relating to the other-than-temporary impairment in the fair value of equity
investments. At December 31, 2005, the total carrying value of our equity instruments and equity method
investments was $51.9 million.
Foreign Currency Risk
International net revenues result from transactions by our foreign operations and are typically denomi-
nated in the local currency of each country. These operations also incur most of their expenses in the local
currency. Accordingly, our foreign operations use the local currency, which is primarily the Euro, and to a
lesser extent, the British pound, as their functional currency. Our international operations are subject to risks
typical of international operations, including, but not limited to, differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other
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