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PayPal: SEC Requests Clarification about TIO Intangibles

In August 2018, the SEC issued comments to PayPal Holdings Inc. [PYPL] requesting clarification about the value of intangible assets recorded during the acquisition of TIO Networks.

In July 2017, PayPal acquired Canadian payment-processing company TIO Networks for $238 million. The purchase price consisted of $66 million of technology and customer-related intangible assets, net assets of approximately $2 million, and initial goodwill of approximately $170 million.

A few months later, in November 2017, PayPal said the company dissolved its TIO operations after discovering “security vulnerabilities on the TIO platform and issues with TIO’s data security program that do not adhere to PayPal’s information security standards.” Following the shutdown of TIO operations, PayPal wrote-off $30 million of customer-related intangible assets.

In an August 24 comment letter, the SEC asked why the remaining $206 million in intangible assets were not impaired:

In its response, the company confirmed that there was no need to write down goodwill, as the fair value of the larger reporting unit to which TIO was assigned upon acquisition was reportedly above the book value:

Back in July, we discussed the accounting rules that allowed PayPal to avoid writing down $170 million of goodwill recorded during the acquisition of TIO. But perhaps an even more intriguing question is why the remaining $36 million in intangible assets were not impaired.

In its response to the SEC, PayPal further clarified the accounting rules it relied upon. The company also explained that, in addition to the impairment testing, the useful life of the TIO intangibles was revised downwards:

Shorter useful life of intangibles means that the assets will be depreciated over a shorter period and derecognized sooner, increasing depreciation expenses in the short-term. Yet, the incremental increase in depreciation on the remaining $17 million is unlikely to be material to PayPal’s bottom line.

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