Expedia 2005 Annual Report Download - page 37

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rather than when it is booked, revenue typically lags bookings by a month or longer. As a result, revenue is
typically the lowest in the first quarter and highest in the third quarter.
Critical Accounting Policies and Estimates
To understand our financial position and results of operations, it is important to understand our
critical accounting policies and estimates and the extent to which we use judgment and estimates in
applying those policies. We prepared our consolidated financial statements and accompanying notes in
accordance with generally accepted accounting principles in the United States. Preparation of the
consolidated financial statements and accompanying notes requires that we make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities as of the date of the consolidated financial statements and revenue and expenses
during the periods reported. We base our estimates on historical experience, where applicable, and other
assumption that we believe are reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions.
There are certain critical estimates that we believe require significant judgment in the preparation of
our consolidated financial statements. We consider an accounting estimate to be critical if:
‚ It requires us to make assumption because information was not available at the time or it included
matters that were highly uncertain at the time we were making the estimate, and
‚ Changes in the estimate or different estimates that we could have selected may have had a material
impact on our financial condition or results of operations.
For more information on each of these policies, see the notes to consolidated financial statements. We
discuss information about the nature and rationale for our critical accounting estimates below.
Accounting for Certain Merchant Revenue
We accrue the cost of certain merchant revenue based on the amount we expect from suppliers'
invoices. In certain instances when a supplier invoices us for less than the cost we accrued, we recognize
those amounts as revenue six months in arrears, net of an allowance, when we determine it is not probable
that we will be required to pay the supplier, based on historical experience. Actual revenue could be
greater or lower than the amounts estimated due to changes in hotel billing practices or changes in traveler
behavior. Historically adjustments related to this account have not been material.
Recoverability of Goodwill and Indefinite and Definite Long-Lived Intangible Assets
Goodwill. In accordance with SFAS No. 142, ""Goodwill and Other Intangible Assets,''
(""SFAS 142''), we assess goodwill for impairment annually at the beginning of the fourth quarter, or more
frequently, if an event occurs or circumstances change that more likely than not reduce the fair values of
our reporting units below their carrying values. The impairment test requires us to estimate the fair value
of our reporting units. If the carrying value of the reporting unit exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of
the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting
unit's goodwill over its implied fair value should such a circumstance arise.
We generally base our measurement of fair value of reporting units on a blended analysis of the
present value of future discounted cash flows and market valuation approach weighted at 75% and 25% of
the indicated fair value, respectively. The discounted cash flows model indicates the fair value of the
reporting units based on the present value of the cash flows that we expect the reporting units to generate
in the future. Our significant estimate in the discounted cash flows model include: our weighted average
cost of capital; long-term rate of growth and profitability of our business; and effective income tax rate.
The market valuation approach indicates the fair value of the business based on a comparison of the
company to comparable firms in similar lines of business that are publicly traded. Our significant estimates
in the market approach model include identifying similar companies with comparable business factors such
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