Priceline 2010 Annual Report Download - page 119

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quarterly results to become increasingly impacted by these seasonal factors.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon
the Consolidated Financial Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. Our significant accounting policies and estimates are more fully
described in Note 2 to the Consolidated Financial Statements. Certain of our accounting policies and estimates are
particularly important to our financial position and results of operations and require us to make difficult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. In
applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in
the determination of certain estimates. On an on-going basis, we evaluate our estimates, including those related to
the items described below. Those estimates are based on, among other things, historical experience, terms of
existing contracts, our observance of trends in the travel industry and on various other assumptions that we believe
to be reasonable under the circumstances. Our actual results may differ from these estimates under different
assumptions or conditions. Our significant accounting policies that involve significant estimates and judgments of
management include the following:
x Deferred Tax Valuation Allowance. We periodically evaluate the likelihood of the realization of
deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation
allowance to the extent we believe a portion will not be realized. We consider many factors when
assessing the likelihood of future realization of our deferred tax assets, including our recent
cumulative earnings experience by taxing jurisdiction, expectations of future income, the
carryforward periods available to us for tax reporting purposes, and other relevant factors. Based
on management’s assessment of positive and negative evidence, we recorded non-cash tax benefits
in 2009 of $183.3 million, resulting from the reversal of a portion of our valuation allowance on
deferred tax assets. The net deferred tax asset at December 31, 2010 amounted to $222.0 million.
The valuation allowance may need to be adjusted in the future if facts and circumstances change,
causing a reassessment of the amount of deferred tax assets more likely than not to be realized.
x Accounting for State and Local “Hotel Occupancy” Taxes. As discussed in Note 16 to the
Consolidated Financial Statements, we are currently involved in over fifty lawsuits brought by or
against states, cities and counties over issues involving the payment of hotel occupancy and other
taxes (i.e., state and local sales tax) and our “merchant” hotel business. We are also involved in
one consumer lawsuit relating to, among other things, the payment of hotel occupancy taxes and
service fees. In addition, over fifty municipalities or counties, and at least nine states, have
initiated audit proceedings (including proceedings initiated by more than forty municipalities in
California), issued proposed tax assessments or started inquiries relating to the payment of hotel
occupancy and other taxes (i.e., state and local sales tax). Additional state and local jurisdictions
are likely to assert that we are subject to, among other things, hotel occupancy and other taxes
(i.e., state and local sales tax) and could seek to collect such taxes, retroactively and/or
prospectively. Historically, we have not collected hotel occupancy or other taxes on the gross
profit earned from “merchant” hotel transactions; however, in a handful of jurisdictions, we have
been recently required by passage of a new statute or court order, to start collecting and remitting
certain taxes (local occupancy and/or sales tax) imposed upon our margin and/or service fee. The
ultimate resolution of these matters in all jurisdictions cannot be determined at this time. We have
established a reserve for potential resolution of issues related to hotel occupancy and other taxes
for prior and current periods, consistent with applicable accounting principles and in light of all
current facts and circumstances. We accrue for legal contingencies where it is probable that a loss
has occurred and the amount can be reasonably estimated; our legal expenses for these matters are
expensed as incurred and are not reflected in the amount of the reserve. A variety of factors could
affect the amount of the liability (both past and future), which factors include, but are not limited
to, the number of, and amount of gross profit represented by, jurisdictions that ultimately assert a
claim and prevail in assessing such additional tax or negotiate a settlement and changes in relevant
statutes. The ultimate resolution of these matters may be greater or less than the liabilities
recorded.
x Stock-Based Compensation. We record stock-based compensation expense for equity-based
awards over the recipient’s service period based upon the grant date fair value of the award. A