Orbitz 2008 Annual Report Download - page 78

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ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
criteria established in Emerging Issues Task Force ("EITF") No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent."
We offer customers the ability to book airline, hotel, car rental and other travel reservations through our various brands, including Orbitz, CheapTickets,
ebookers, HotelClub and RatesToGo. These products and services are made available to our customers for booking on a stand-alone basis or as part of a dynamic
vacation package. We have two primary types of contractual arrangements with our vendors, which we refer to herein as the "retail" and "merchant" models.
Under the retail model, we pass reservations booked by our customers to the travel supplier for a fee or commission. We also charge our customers a service
fee for booking the travel reservation. Under this model, we do not take on credit risk with travelers; we are not the primary obligor with the customer; we have
no latitude in determining pricing; we take no inventory risk; we have no ability to determine or change the products or services delivered; and we have no
discretion in the selection of the service supplier.
We recognize net revenue under the retail model when the reservation is made, secured by a customer with a credit card and we have no further obligations
to our customers. For air transactions, this is at the time of booking. For hotel transactions and car transactions, net revenue is recognized at the time of check-in
or customer pick-up, respectively, net of an allowance for cancelled reservations. This timing is different than for retail air travel because unlike air travel where
the reservation is secured by a customer's credit card at booking, car rental bookings and hotel bookings are not secured by a customer's credit card until the
pick-up date and check-in date, respectively. Allowances for cancelled reservations primarily relate to cancellations that do not occur through our website, but
instead occur directly through the supplier of the travel product. The amount of the allowance is determined based on our historical experience. The majority of
fees or commissions earned under the retail model are based upon contractual agreements.
Under the merchant model, we provide customers the ability book the travel reservation, and we contract with various suppliers that provide the travel
products needed to fulfill the reservation. We generate revenue for our services based on the difference between the total amount the customer pays for the travel
product and the negotiated net rate as well as estimated taxes that the supplier charges for that travel product. We also charge our customers a service fee for
booking the travel reservation. Customers generally pay for reservations in advance, at the time of booking. Initially, we record these advance payments as
deferred net revenue and accrued merchant payables. In this model, we do not take on credit risk with travelers, however we are subject to fraud risk; we have
some pricing flexibility; we are not responsible for the actual delivery of the flight, hotel room, or car rental; we take no inventory risk; we have no ability to
determine or change the products or services delivered; and we have no discretion in the selection of the service supplier.
We recognize net revenue under the merchant model when customers use the reservations. For air transactions, this is the departure date. We recognize net
revenue for car transactions at the pick-up date. For hotel transactions, net revenue is recognized at the check-in date. We accrue for the cost of merchant hotel
transactions based on amounts we expect to be invoiced by suppliers. If we do not receive an invoice within a certain period of time, generally within six months,
or the invoice received is less than the accrued amount, we may reverse a portion of the accrued cost when we determine it is not probable that we will be
required to pay the supplier, based on our historical experience and contract terms. This would result in an increase in net revenue.
71
Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008