Etsy 2015 Annual Report Download - page 84

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
Etsy, Inc.
Notes to Consolidated Financial Statements
Business Combinations
The Company has completed a number of acquisitions of other businesses in the past and may acquire additional businesses or technologies in the future.
The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of acquisition.
The Company allocates the purchase price, which is the sum of the consideration provided and may consist of cash, equity or a combination of the two, in a
business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price
over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities
assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and
cash flows, discount rates and selection of comparable companies.
When the Company issues stock-based or cash awards to an acquired company’s stockholders, the Company evaluates whether the awards are contingent
consideration or compensation for post-acquisition services. The evaluation includes, among other things, whether the vesting of the awards is contingent on
the continued employment of the acquired company’s stockholder beyond the acquisition date. If continued employment is required for vesting, the awards
are treated as compensation for post-acquisition services and recognized as expense over the requisite service period.
The Company carries intangible assets at cost, and it amortizes them on a straight-line basis over their estimated useful lives, typically three years. When
circumstances indicate that the carrying value of these assets may not be recoverable, the Company reviews its identifiable amortizable intangible assets for
impairment.
To date, the assets acquired and liabilities assumed in the Company’s business combinations have primarily consisted of goodwill and finite-lived intangible
assets, consisting primarily of developed technologies, customer relationships and trademarks. The estimated fair values and useful lives of identifiable
intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, the
nature of the business acquired, and the specific characteristics of the identified intangible assets. The estimates and assumptions used to determine the fair
values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments,
economic conditions and competition. In connection with determination of fair values, the Company may engage independent appraisal firms to assist with
the valuation of intangible and certain tangible assets acquired and certain assumed obligations.
Acquisition-related transaction costs incurred by the Company are not included as a component of consideration transferred, but are accounted for as an
expense in the period in which the costs are incurred.
Goodwill
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the assets acquired,
net of liabilities assumed. Goodwill is not amortized, but is subject to an annual impairment test. Management has determined that the Company has a single
reporting unit and performs its annual goodwill impairment test during the fourth quarter or more frequently if events or changes in circumstances indicate
that the goodwill may be impaired.
Events or changes in circumstances which could trigger an impairment review include significant changes in the manner of the Company’s use of the
acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, significant underperformance relative to
historical or projected future results of operations, a significant adverse change in the business climate, an adverse action or assessment by a regulator,
unanticipated competition or a loss of key personnel.
The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity
determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then additional impairment testing is not
required. However, if an entity concludes otherwise, then it is required to perform the first of a two-step impairment test.
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