Orbitz 2011 Annual Report Download - page 50

50
Revenue Recognition
Merchant revenues are from transactions where we are the merchant of record and have the ability to determine the price
charged to the customer. We have agreements with suppliers that provide our customers the ability to book their supply through
our sites (for example, air tickets or hotel rooms) that we sell. We present merchant revenues on a net basis in accordance with
Accounting Standards Codification 605-45, Revenue Recognition - Principal Agent Considerations. Based upon evaluation of
our merchant transactions and in accordance with the various indicators identified in the ASC, we concluded that our suppliers
assume the majority of the business risks, including the risk of unsold air tickets or hotel rooms. As such, we recognize
revenues for merchant transactions at the net amount, which is the amount charged to the customer less the amount to be paid
to the supplier.
We accrue for the cost of merchant hotel and merchant car transactions based on amounts we expect to be invoiced by
suppliers. Based on our historical experience and contract terms, we reverse a portion of the accrued cost, which increases net
revenue, when we determine it is not probable that we will be required to pay the supplier. Actual amounts could be greater or
less than the amounts estimated due to changes in hotel billing practices or changes in traveler behavior.
Impairment of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible Assets
Long-Lived Assets
We evaluate the recoverability of our long-lived assets, including property and equipment and finite-lived intangible
assets, when circumstances indicate that the carrying value of those assets may not be recoverable. This analysis is performed
by comparing the carrying values of the assets to the current and expected future cash flows to be generated from these assets,
on an undiscounted basis. If this analysis indicates that the carrying value of an asset is not recoverable, the carrying value is
reduced to fair value through an impairment charge in our consolidated statements of operations. The evaluation of long-lived
assets for impairment requires assumptions about operating strategies and estimates of future cash flows. An estimate of future
cash flows requires us to assess current and projected market conditions as well as operating performance. A variation of the
assumptions used could lead to a different conclusion regarding the recoverability of an asset and could have a significant effect
on our consolidated financial statements. For example, as a result of our decision in the fourth quarter of 2010 to migrate
HotelClub to the global technology platform, we recorded a $4.5 million non-cash charge during the year ended December 31,
2010 to impair capitalized software for HotelClub. This charge was included in the impairment of property and equipment and
other assets expense line item in our consolidated statement of operations. The remaining capitalized software balance at
HotelClub following this charge was not material.
Goodwill and Indefinite-Lived Intangible Assets
We assess the carrying value of goodwill and other indefinite-lived intangible assets for impairment annually or more
frequently whenever events occur and circumstances change indicating potential impairment. We perform our annual
impairment testing of goodwill and other indefinite-lived intangible assets in the fourth quarter of each year.
We assess goodwill for possible impairment using a two-step process. The first step identifies if there is potential
goodwill impairment. If the step one analysis indicates that impairment may exist, a step two analysis is performed to measure
the amount of the goodwill impairment, if any. Application of the goodwill impairment test requires management's judgment,
including identifying reporting units, assigning assets and liabilities to reporting units and determining the fair value of each
reporting unit. We estimate the fair value of our reporting units to which goodwill is allocated using generally accepted
valuation methodologies, including market and income based approaches, and relevant data available through and as of the
testing date. The market approach is a valuation method in which fair value is estimated based on observed prices in actual
transactions and on asking prices for similar assets. Under the market approach, the valuation process is essentially that of
comparison and correlation between the subject asset and other similar assets. The income approach is a method in which fair
value is estimated based on the cash flows that an asset could be expected to generate over its useful life, including residual
value cash flows. These cash flows are then discounted to their present value equivalents using a rate of return that accounts for
the relative risk of not realizing the estimated annual cash flows and for the time value of money. Variations of the income
approach are used to estimate certain of the intangible asset fair values.
Our trademarks and trade names are indefinite-lived intangible assets. We test these assets for impairment by comparing
their carrying values to their estimated fair values. If the estimated fair values are less than the carrying amounts of the
intangible assets, then the carrying values are reduced to fair value through an impairment charge recorded in our consolidated
statements of operations. We use a market or income valuation approach, or a combination of both, to estimate fair values of
the relevant trademarks and trade names.