Expedia 2007 Annual Report Download - page 75

the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or
fee” is a matter of judgment that depends on the relevant facts and circumstances. In making an evaluation of
this issue, some of the factors that should be considered are: whether we are the primary obligor in the
arrangement (strong indicator); whether we have general inventory risk (before customer order is placed or
upon customer return) (strong indicator); and whether we have latitude in establishing price. The guidance
clearly indicates that the evaluations of these factors, which at times can be contradictory, are subject to
significant judgment and subjectivity. If the conclusion drawn is that we perform as an agent or a broker
without assuming the risks and rewards of ownership of goods, revenue should be reported on a net basis. For
our primary revenue models, discussed below, we have determined net presentation is appropriate for the
majority of revenue transactions.
We offer travel products and services on a stand-alone and package basis primarily through two business
models: the merchant model and the agency model.
Under the merchant model, we facilitate the booking of hotel rooms, airline seats, car rentals and
destination services from our travel suppliers and we are the merchant of record for such bookings.
Under the agency model, we act as the agent in the transaction, passing reservations booked by the
traveler to the relevant travel provider. We receive commissions or ticketing fees from the travel supplier
and/or traveler. For agency airline, hotel and car transactions, we also receive fees from global distribution
systems partners that control the computer systems through which these reservations are booked.
Merchant Hotel. Our travelers pay us for merchant hotel transactions prior to departing on their trip,
generally when they book the reservation. We record the payment in deferred merchant bookings until the stay
occurs, at which point we record the revenue. In certain nonrefundable, nonchangeable transactions where we
have no significant post-delivery obligations, we record revenue when the traveler completes the transaction on
our website, less a reserve for chargebacks and cancellations based on historical experience. Amounts received
from customers are presented net of amounts paid to suppliers. In certain instances when a supplier invoices
us for less than the cost we accrued, we generally 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 and contract terms.
We generally contract in advance with lodging providers to obtain access to room allotments at wholesale
rates. Certain contracts specifically identify the number of potential rooms and the negotiated rate of the rooms
to which we may have access over the terms of the contracts, which generally range from one to three years.
Other contracts are not specific with respect to the number of rooms and the rates of the rooms to which we
may have access over the terms of the contracts. In either case we may return unbooked hotel room allotments
with no obligation to the lodging providers within a period specified in each contract. For hotel rooms that are
cancelled by the traveler after the specified period of time, we charge the traveler a cancellation fee or penalty
that is at least equal to the amount a hotel may invoice us for the cancellation.
Merchant Air. Generally, we determine the ticket price for merchant air transactions. We pay the cost of
the airline ticket generally within two weeks after booking. We record cash paid by the traveler as deferred
merchant bookings and the cost of the airline ticket as prepaid merchant bookings. When the flight occurs, we
record the difference between the deferred merchant bookings and the prepaid merchant bookings as revenue
on a net basis.
When we have nonrefundable and generally noncancelable merchant air transactions, with no significant
post-delivery obligations, we record revenue upon booking. We record a reserve for chargebacks and
cancellations at the time of the transaction based on historical experience.
Agency Air, Hotel, Car and Cruise. Our agency revenue comes from airline ticket transactions, certain
hotel transactions as well as cruise and car rental reservations. We record agency revenue on air transactions
when the traveler books the transaction, as we have no significant post-delivery obligations. We record agency
F-9
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)