eBay 2008 Annual Report Download - page 73

reimbursement of costs incurred. Changes in judgments on these assumptions and estimates could impact the timing
or amount of revenue recognition.
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, 2008, our goodwill totaled $7.0 billion and our identifiable intangible assets totaled
$736.1 million. We assess the impairment of goodwill of our reporting 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 our business model or changes in operating performance.
Additionally, certain estimates of discounted cash flows involve businesses with limited financial history and
developing revenue models, which increase the risk of differences between the projected and actual performance.
Significant differences between these estimates and actual cash flows could materially affect our future financial
results. These factors increase the risk of differences between projected and actual performance that could impact
future estimates of fair value of all reporting units, particularly our Communications reporting unit. We conducted
our annual impairment test of goodwill as of August 31, 2008 in accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets.” As a result of this test we determined that no adjustment to the carrying value of goodwill
for any reportable units was required. As a result our annual impairment test of goodwill as of August 31, 2007, we
concluded that the carrying amount of our Communications reporting unit exceeded its fair value and recorded an
impairment loss of approximately $1.4 billion during the year ended December 31, 2007. The impairment charge
includes the impact of the earn out settlement payment with certain former shareholders of Skype and was
determined by comparing the carrying value of goodwill in our Communications reporting unit with the implied fair
value of the goodwill. See “Note 3 — Business Combinations, Goodwill and Intangible Assets” to the consolidated
financial statements included in this report. There was no impairment of goodwill or identifiable intangible assets in
2006. As of December 31, 2008, we determined that no events or circumstances from August 31, 2008 through
December 31, 2008 indicate that a further assessment was necessary.
Stock-Based Compensation
On January 1, 2006, we adopted FAS 123(R), which requires a fair value measurement and recognition of
compensation expense for all share-based payment awards made to our employees and directors, including
employee stock options, employee stock purchases and restricted stock awards over the service period for awards
expected to vest. Stock-based compensation expense recognized for 2006, 2007 and 2008 was $317.4 million,
$301.8 million and $353.3 million, respectively. See “Note 15 — Benefit Plans” to the consolidated financial
statements included in this report.
We calculated the fair value of each restricted stock award based on our stock price on the date of grant. We
calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model.
The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is
affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables.
The use of a Black-Scholes model requires extensive actual employee exercise behavior data and a number of
complex assumptions including expected life, expected volatility, risk-free interest rate and dividend yield. As a
result, the future stock-based compensation expense may differ from our historical amounts. The weighted-average
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