Orbitz 2008 Annual Report Download - page 67

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tax deductions for depreciation and amortization may reduce the amount of taxes we are required to pay in future years. For each tax period during the term of
the tax sharing agreement, we are obligated to pay the Founding Airlines a significant percentage of the amount of the tax benefit realized as a result of the
taxable exchange. The tax sharing agreement commenced upon consummation of the Orbitz IPO and continues until all tax benefits have been utilized.
We use discounted cash flows in calculating and recognizing the tax sharing liability. We review the calculation of the tax sharing liability on a quarterly
basis and make revisions to our estimated timing of payments when appropriate. We also assess whether there are any significant changes that could materially
affect the present value of the tax sharing liability. Although the expected gross payment amount is $277 million, our quarterly reviews could indicate that the
timing of payments has changed. Any changes in timing of payments are recognized prospectively as accretions to the tax sharing liability in our consolidated
balance sheets and interest expense in our consolidated statements of operations.
The valuation of the tax sharing liability requires us to make certain estimates in projecting the quarterly depreciation and amortization benefit we expect to
receive, as well as the associated effective income tax rates. The estimates require certain assumptions as to our operating performance and taxable income, the
tax rate, timing of tax payments as well as current and projected market conditions. We must also make estimates and judgments in the selection of a discount
rate. A variation of the assumptions used could lead to a different conclusion regarding the carrying value of the tax sharing liability and could have a significant
effect on our consolidated financial statements.
Equity-Based Compensation
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payments" ("SFAS No. 123(R)"), which eliminates the alternative to measuring
stock-based compensation awards using the intrinsic value approach permitted by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." We adopted SFAS No. 123(R) on January 1, 2006, as required, under the modified prospective application method. The adoption of SFAS
No. 123(R) did not have a significant impact on our results of operations.
Our consolidated financial statements as of and for the year ended December 31, 2007 and the period from August 23, 2006 to December 31, 2006 and the
period from January 1, 2006 to August 22, 2006 reflect the impact of adopting SFAS No. 123(R). In accordance with the modified prospective method, our
consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).
We measure equity-based compensation cost at fair value and recognize the corresponding compensation expense on a straight-line basis over the service
period during which awards are expected to vest. We include equity-based compensation expense in the selling, general and administrative line of our
consolidated statements of operations. The fair value of restricted stock and restricted stock units is determined based on the average of the high and low price of
our common stock on the date of grant. The fair value of stock options is determined on the date of grant using the Black-Scholes valuation model, which
incorporates a number of variables, some of which are based on estimates and assumptions. These variables include stock price, exercise price, expected life,
expected volatility, dividend yield, and the risk-free rate. Stock price and exercise price are set at fair value on the date of grant. Expected volatility is based on
implied volatilities for publicly traded options and historical volatility for comparable companies over the estimated expected life of the stock options. The
expected life represents the period of time the stock options are expected to be outstanding and is based on the "simplified method," as defined in the SEC Staff
Accounting Bulletin No. 107, "Shared-Based Payments." The risk-free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the
estimated expected life of the stock options.
60
Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008