Expedia 2005 Annual Report Download - page 71

Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
the jurisdictions, we generally believe that we are not required to collect and remit such occupancy taxes.
We are engaged in discussions with tax authorities in various jurisdictions to resolve this issue, but the
ultimate resolution in all jurisdictions cannot be determined at this time. We have established a reserve
with respect to potential occupancy tax liability and we do not believe, however, that the amount of
liability on account of this issue, if any, will have a material adverse effect on our past or future financial
results.
Derivative Instruments
We record the fair value of derivative instruments on our consolidated balance sheets in accordance
with SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities'' (""SFAS 133''), as
amended. We use derivative instruments to manage certain foreign currency risks. We record the changes
in the fair value of a derivative that qualifies as and that we designate as a cash flow hedge, to the extent
that the hedge is effective, in other comprehensive income, until earnings are affected by the variability of
cash flows of the hedged transaction. We reclassify amounts recorded in other comprehensive income to
other income or expense during the period in which the hedged transaction affects earnings. We report the
ineffective portion of a derivative instruments change in fair value immediately in other income or expense
in our consolidated statements of income. We report the change in the fair value of derivative instruments
that do not qualify for hedge accounting treatment in other income or expense in our consolidated
statements of income. We do not hold or issue financial instruments for speculative or trading purposes.
For additional information about derivative instruments, see Note 10, Derivative Instruments.
Foreign Currency Translation and Transaction Gains and Losses
We record foreign currency transactions in accordance with SFAS No. 52, ""Foreign Currency
Translation.'' Our operations outside of the United States use the related local currency as their functional
currency. We translate revenue and expense at average rates of exchange during the period. We translate
assets and liabilities at the rates of exchange as of the consolidated balance sheet dates and include foreign
currency translation gains and losses as a component of accumulated other comprehensive income. We
record transaction gains and losses in our consolidated statements of income.
Advertising Expense
We incur advertising expense consisting of offline costs, including television and radio advertising, and
online advertising expense to promote our brands. We expense the production costs associated with
advertisements in the period in which the advertisement first takes place. We expense the costs of
communicating the advertisement (e.g. television airtime) as incurred each time that the advertisement is
shown. For the years ended December 31, 2005, 2004 and 2003, our advertising expense was
$425.2 million, $452.9 million and $389.6 million.
Stock-Based Compensation
On January 1, 2003, we adopted the expense provisions of SFAS No. 123, ""Accounting for Stock-
Based Compensation'', (""SFAS 123''), and we record expense for stock-based compensation in accordance
with SFAS No. 123 and SFAS No. 148, ""Accounting for Stock-Based Compensation Ì Transition and
Disclosure'', for all periods presented in our consolidated statements of income.
We measure the value of RSUs issued at the grant date at fair value and amortize the value, net of
forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis. The terms
of our RSU awards vary, but generally provide for the underlying shares to vest over a period of 5 years.
We measure the value of stock options and warrants issued since January 1, 2003, including unvested
options assumed in acquisitions, on the grant date (or acquisition dates, if applicable) at fair value, using
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