Priceline 2011 Annual Report Download - page 74

73
the assets or, when applicable, the life of the lease, whichever is shorter.
Goodwill — The Company accounts for acquired businesses using the purchase method of accounting which requires
that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess
of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The Company’s
Consolidated Financial Statements reflect an acquired business starting at the date of the acquisition.
Goodwill is not subject to amortization and is reviewed at least annually for impairment, or earlier if an event occurs
or circumstances change and there is an indication of impairment. The Company tests goodwill at a reporting unit level. The
fair value of the reporting unit is compared to its carrying value, including goodwill. Fair values are determined based on
discounted cash flows, market multiples or appraised values and are based on market participant assumptions. An impairment
is recorded to the extent that the implied fair value of goodwill is less than the carrying value of goodwill. See Note 9 for
further information.
Impairment of Long-Lived Assets and Intangible Assets — The Company reviews long-lived assets and amortizable
intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. The assessment of possible impairment is based upon the Company’s ability to recover the carrying
value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related operations.
The amount of impairment loss, if any, is measured as the excess of the carrying value of the asset over the present value of
estimated future cash flows, using a discount rate commensurate with the risks involved and based on assumptions
representative of market participants.
Software Capitalization — Certain direct development costs associated with internal-use software are capitalized and
include external direct costs of services and payroll costs for employees devoting time to the software projects principally
related to software coding, designing system interfaces and installation and testing of the software. These costs are recorded as
property and equipment and are generally amortized over a period of three to five years beginning when the asset is
substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are
expensed as incurred.
Merchant Revenues and Cost of Merchant Revenues
Name Your Own Price® Services: Merchant revenues for Name Your Own Price® services and related cost of
revenues are derived from transactions where the Company is the merchant of record and, among other things, selects suppliers
and determines the price it will accept from the customer. The Company recognizes such revenues and costs if and when it
fulfills the customer’s non-refundable offer. Merchant revenues and cost of merchant revenues include the selling price and
cost, respectively, of the travel services and are reported on a gross basis. In very limited circumstances, the Company makes
certain customer accommodations to satisfy disputes and complaints. The Company accrues for such estimated losses and
classifies the resulting expense as adjustments to merchant revenue and cost of merchant revenues. Pursuant to the terms of the
Company’s hotel service, its hotel suppliers are permitted to bill the Company for the underlying cost of the service during a
specified period of time. In the event that the Company is not billed by its hotel supplier within the specified time period, the
Company reduces its cost of revenues by the unbilled amounts.
Merchant Price-Disclosed Services: Merchant revenues for the Company’s merchant price-disclosed services are
derived from transactions where its customers purchase hotel room reservations or rental car reservations from suppliers at
disclosed rates which are subject to contractual arrangements. Charges are billed to customers at the time of booking and are
included in deferred merchant bookings until the customer completes the hotel stay or returns the rental car. Such amounts are
generally refundable upon cancellation, subject to cancellation penalties in certain cases. Merchant revenues and accounts
payable to the supplier are recognized at the conclusion of the customer’s stay at the hotel or return of the rental car. The
Company records the difference between the customer selling price and the supplier cost of its merchant price-disclosed
reservation services on a net basis in merchant revenue.
Agency Revenues
Agency revenues are derived from travel related transactions where the Company is not the merchant of record and
where the prices of the services sold are determined by third parties. Agency revenues include travel commissions, global
distribution system ("GDS") reservation booking fees and customer processing fees, and are reported at the net amounts
received, without any associated cost of revenue. Such revenues are generally recognized by the Company when the customers
complete their travel.