Orbitz 2011 Annual Report Download - page 63

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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Income Taxes
Our provision for income taxes is determined using the asset and liability method. Under this method, deferred tax assets
and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of
assets and liabilities using the combined federal and state or foreign effective tax rates that are applicable to us in a given year.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or settled. The deferred tax assets are recorded net of a valuation
allowance when, based on the weight of available evidence, we believe it is more likely than not that some portion or all of the
recorded deferred tax assets will not be realized in future periods. Increases to the valuation allowance are recorded as increases
to the provision for income taxes. To the extent that any valuation allowances established by us in purchase accounting are
reduced, these reductions are recorded through our consolidated statements of operations. These reductions were previously
recorded through goodwill. The realization of the deferred tax assets, net of a valuation allowance, is primarily dependent on
estimated future taxable income. A change in our estimate of future taxable income may require an increase or decrease to the
valuation allowance.
Derivative Financial Instruments
We measure derivatives at fair value and recognize them in our consolidated balance sheets as assets or liabilities,
depending on our rights or obligations under the applicable derivative contract. For our derivatives designated as fair value
hedges, if any, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For
our derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in
other comprehensive income and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in
fair value of derivative instruments not designated as hedging instruments, and ineffective portions of hedges, are recognized in
earnings in the current period.
We manage interest rate exposure by utilizing interest rate swaps to achieve a desired mix of fixed and variable rate debt.
As of December 31, 2011, we had three interest rate swaps that effectively converted $300.0 million of the term loan facility
from a variable to a fixed interest rate (see Note 12 - Derivative Financial Instruments). We determined that our interest rate
swaps qualified for hedge accounting and were highly effective as hedges. Accordingly, we have recorded the change in fair
value of our interest rate swaps in accumulated other comprehensive income (loss).
We have entered into foreign currency contracts to manage exposure to changes in foreign currencies associated with
receivables, payables and intercompany transactions. These foreign currency contracts did not qualify for hedge accounting
treatment. As a result, the changes in fair values of the foreign currency contracts were recorded in selling, general and
administrative expense in our consolidated statements of operations.
We do not enter into derivative instruments for speculative purposes. We require that the hedges or derivative financial
instruments be effective in managing the interest rate risk or foreign currency risk exposure that they are designated to hedge.
Hedges that qualify for hedge accounting are formally designated as such at the inception of the contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the
change in the fair value of the derivative instrument will be included in earnings. Additionally, any derivative instrument used
for risk management that becomes ineffective is marked-to-market each period. We believe that our credit risk has been
mitigated by entering into these agreements with major financial institutions. Net interest differentials to be paid or received
under our interest rate swaps are included in interest expense as incurred or earned.
Concentration of Credit Risk
Our cash and cash equivalents are potentially subject to concentration of credit risk. We maintain cash and cash
equivalent balances with financial institutions that, in some cases, are in excess of Federal Deposit Insurance Corporation
insurance limits or that are deposited in foreign institutions.
Cash and Cash Equivalents
We consider cash and highly liquid investments, such as money market funds, with an original maturity of three months
or less to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value
due to their short-term nature.