Directors' Report - Alibaba

NOTES TO THE FINANCIAL STATEMENTS
For the year ended December 31, 2010
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2.2 Consolidation (Continued)
(a) Subsidiaries (Continued)
(i) Acquisition method of accounting (Continued)
Alibaba.com Limited Annual Report 2010
The excess of the consideration transferred over the fair value of the Group’s share of the identifiable net assets
acquired is recorded as goodwill (Note 2.7). If this is less than the fair value of the net assets of the subsidiary
acquired in the case of a bargain purchase, the difference is recognized directly in the consolidated statement
of comprehensive income.
The Group treats transactions with non-controlling interests as transactions with equity owners of the
Company. For purchases from non-controlling interests, the difference between any consideration paid and the
relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses
on disposals to non-controlling interests are also recorded in equity.
(ii) Business combinations under common control
The consolidated financial statements incorporate the financial statement items of the combining entities or
businesses in which the common control combination occurs as if they had been consolidated from the date
when the combining entities or businesses first came under the control of the controlling party. The net assets
of the combining entities or businesses are consolidated using the existing book values from the controlling
parties’ perspective. All differences between the cost of acquisition (fair value of consideration paid) and the
amounts at which the assets and liabilities are recorded have been recognized directly in equity as part of
the capital reserve. The comparative amounts in the consolidated financial statements are presented as if the
entities or businesses had been consolidated at the earliest balance sheet date presented or when they first
came under common control, whichever is the later.
To comply with laws and regulations of the People’s Republic of China (the “PRC”) that restrict foreign
ownership of companies that operate Internet information services and other restricted businesses, the Group
operates its websites and provides such restricted services in the PRC through PRC domestic companies
whose equity interests are held by a director and a former director of the Company and certain employees
of the Group. The paid-in capital of these entities was funded by the Group through loans extended to these
shareholders of the PRC domestic companies. In addition, these domestic companies have entered into certain
business cooperation and technical service agreements with the Group, which make it obligatory for the Group
to absorb a substantial majority of the risk of losses from their activities and entitle the Group to receive a
substantial majority of their residual returns.
Further, the Group has entered into certain agreements with the shareholders of these domestic companies,
including loan agreements for them to contribute paid-in capital to the domestic companies, option
agreements for the Group to acquire the equity in the PRC domestic companies subject to compliance with PRC
laws, pledge agreements over the equity interests of these PRC domestic companies held by them, and proxy
agreements irrevocably authorizing individuals designated by the Group to exercise equity owner’s rights over
these PRC domestic companies, whichever is applicable. Based on these contractual agreements, the Group
believes that, notwithstanding the lack of equity ownership, the contractual arrangements described above
give the Group control over the PRC domestic companies in substance. Accordingly, the financial position and
operating results of these entities are included in the Group’s consolidated financial statements.
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