Orbitz 2008 Annual Report Download - page 84

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
connection with the Orbitz initial public offering in December 2003 ("Orbitz IPO"). As a result of this exchange, the Founding Airlines incurred a taxable gain
when they sold their Orbitz common stock at the time of the Orbitz IPO. The taxable exchange also caused Orbitz to have additional future tax deductions for
depreciation and amortization due to the increased tax basis of its assets. The additional 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.
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. The amount
of equity-based compensation expense recorded each period is net of estimated forfeitures. We estimate forfeitures based on historical employee turnover rates,
the terms of the award issued, and assumptions regarding future employee turnover.
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Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008