Orbitz 2011 Annual Report Download - page 65

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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significant estimates and assumptions without the use of hindsight.
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. Goodwill impairment exists when the estimated fair value of goodwill is less
than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment
charge in our consolidated statements of operations.
For purposes of goodwill impairment testing, 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.
We assess our trademarks and trade names for impairment by comparing their carrying values to their estimated fair
values. Impairment exists when the estimated fair value of the trademark or trade name is less than its carrying value. If
impairment exists, then the carrying value is reduced to fair value through an impairment charge in our consolidated statements
of operations. We use a market or income based valuation approach, or a combination of both, to estimate fair values of the
relevant trademarks and trade names.
Tax Sharing Liability
We have a liability included in our consolidated balance sheets that relates to a tax sharing agreement between Orbitz
and the Founding Airlines. The agreement governs the allocation of tax benefits resulting from a taxable exchange that took
place in connection with the Orbitz initial public offering in December 2003 (“Orbitz IPO”). As a result of this taxable
exchange, the Founding Airlines incurred a taxable gain. The taxable exchange 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, such as changes in the amount of payments and tax rates, that could materially
affect the present value of the tax sharing liability. Although the expected gross remaining payments that may be due under this
agreement were $139.3 million as of December 31, 2011, the timing and amount of payments may change. Any changes in
timing of payments are recognized prospectively as accretions to the tax sharing liability in our consolidated balance sheets and
non-cash interest expense in our consolidated statements of operations. Any changes in the amount of payments are recognized
in selling, general and administrative expense in our consolidated statements of operations.
At the time of the Blackstone Acquisition, Cendant (now Avis Budget Group, Inc.) indemnified Travelport and us for a
portion of the amounts due under the tax sharing agreement. As a result, we recorded a $37.0 million long-term asset, which
was included in other non-current assets in our consolidated balance sheets at December 31, 2010. During 2011, we wrote off
this asset and the corresponding portion of the tax sharing liability (see Note 7 - Tax Sharing Liability for further details).
Equity-Based Compensation
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 in
selling, general and administrative expense in 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