On October 14, 2005, eBay acquired all of the outstanding securities of Skype Technologies S.A. (Skype), for
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The initial consideration of approximately $2.6 billion was comprised of approximately
$1.3 billion in cash and 32.8 million shares of eBay's common stock. For accounting purposes, the stock portion of the initial consideration was valued at approximately $1.3 billion based on the average closing price of eBay's common stock surrounding the acquisition announcement date of September 12, 2005. The acquisition was treated as a non-taxable purchase transaction, and the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the acquisition date.
Conditions of the earnout: The maximum amount potentially payable under the performance based earnout is approximately 1.1 billion euro, or approximately $1.5 billion (based on a U.S. dollar-to-euro exchange rate of $1.32), and would be payable in cash or common stock. The earn-out payments are contingent upon Skype achieving certain net revenue, gross profit margin based, and active user targets. Base earnout payments of up to anaggre gate of approximately 877 million euro, or approximately $1.2 billion, weighted equally among the three targets, would be payable if the targets are achieved over any four-quarter period commencing on January 1, 2006 through June 30, 2009. Additional bonus earnout payments of up to an aggregate of approximately 292 million euro, or approximately
$386 million, weighted equally among the three targets, would be payable if Skype exceeds the targets during calendar year 2008. Any contingent earnout payments made would be accounted for as additional purchase price and would increase goodwill. As of December 31, 2006, the targets had not been met and accordingly, no payments had been made.
From eBay's 2007 annual report: In conjunction with the acquisition of Skype in 2005, eBay agreed to certain performance-based earnout payments. During the year ended December 31, 2007, eBay entered into an earnout settlement agreement with each of the former share holders of Skype who had elected the earnout alternative at the time of the acquisition, under which eBay was relieved of all obligations under the original earnout agreement in exchange for an aggregate cash payment of 375.1 million euro, or approximately $530.3 million.
Goodwill was recorded because the earnout settlement amount was considered additional purchase price. In addition, eBay recorded a charge for impairment of goodwill for $1.39 billion from the Skype acquisition.
Required:
A. Compute the amount of goodwill acquired when eBay acquired Skype.
B. Whenever contingent payments are used in an acquisition, it is important to identify the amounts that are part of the business combination or whether the transaction is separate from the business combination. FASB ASC paragraphs 805-10-55-18 through 25 identify factors that help to determine whether a transaction is part of the exchange for the ac quiree or not. What are some of these conditions?
C. Skype's earnings performance in the years following the acquisition never qualified for additional consideration. In 2007, eBay entered into a cash settlement with all former shareholders of Skype with earnout provisions. EBay paid $530.3 million to be relieved of all obligations under the earnout provisions. Why would they want to do this?
Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of... Intangible Assets
An intangible asset is a resource controlled by an entity without physical substance. Unlike other assets, an intangible asset has no physical existence and you cannot touch it.Types of Intangible Assets and ExamplesSome examples are patented... Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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