ANSWERS TO BUSINESS ETHICS CASE a and b. The board has responsibility to look into anything that might suggest malfeasance or Thappropriate conduct. Such incidents might suggest broader problems with integrity, honesty, and judgment. In other words, can you trust any reports from the CEO? If the CEO is not fired, does this send a message to other employees that ethical lapses are okay? Employees might feel that top executives are treated differently. ANSWERS TO ANALYZING FINANCIAL STATEMENTS EXERCISES AFS2-1 eBay acquires Skype (A) Goodwill computation Acquisition price Net tangible and intangible assets Goodwill $2,593 million 262 million $ 2,331 million (B) Factors used to determine in the contingent consideration is part of the exchange or not. (FASB ASC paragraphs 805-10-55-24 and 25) The acquirer should consider the following if the contingent payments are made to employees or selling shareholders. 1. Is the selling shareholder a continuing employee? If the contingent payment is canceled if the employee's employment is terminated, then the consideration might be post-acquisition compensation for services. 2. If the selling shareholder is a continuing employee and the period of required continuing employment is longer than the contingent payment period, the contingent payments might, in substance, be compensation. 3. If the selling shareholder is a continuing employee and the employee's compensation is reasonable in comparison to other key employees, the contingent payment may indicate additional consideration rather than compensation. 4. If the contingent payment for non-employees is less than the contingent payments for continuing employees, the additional contingent payments for employees may indicated compensation rather than additional consideration. (C) It is not clear why eBay would settle the earnout for $530.3 million when the conditions for having to make the additional contingent payments (up to $1.3 billion) were probably not going to be met. Under current GAAP, if the amount of the contingent payment exceeded the previously expected amount, the difference is reflected in earnings. Under the rules in effect for the Skype transaction the contingent payment was simply an adjustment of goodwill. Because eBay was settling the earnout for approximately a third of the total potential payments indicates that Skype was not performing well. Notice that eBay wrote down$1.39 billion in goodwill at the same time. One potential reason that eBay might have agreed to the payment is that the forrmer CEO of Skype was stepping down and the contingent payment may have been incentive for him to step down. In addition, the earmout may have prevented eBay from selling Skype. 2-2