Priceline 2011 Annual Report Download - page 76

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Income Taxes — The Company accounts for income taxes under the asset and liability method. The Company records
the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported on
the Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. Deferred taxes are classified as current
or noncurrent based on the balance sheet classification of the related assets and liabilities.
The Company records deferred tax assets to the extent it believes these assets will more likely than not be realized.
The Company regularly reviews its deferred tax assets for recoverability considering historical profitability, projected future
taxable income, the expected timing of the reversals of existing temporary differences, the carryforward periods available for
tax reporting purposes, and tax planning strategies. A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the
generation of future taxable income during the period in which related temporary differences become deductible. In
determining the future tax consequences of events that have been recognized in the financial statements or tax returns,
significant judgments, estimates, and interpretation of statutes are required.
Deferred taxes are measured using the enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date of such change.
Income taxes are not accrued for unremitted earnings of international operations that have been or are intended to be
reinvested indefinitely.
The Company recognizes liabilities when it believes that uncertain positions may not be fully sustained upon review
by the tax authorities. Liabilities recognized for uncertain tax positions are based on a two step approach for recognition and
measurement. First, the Company evaluates the tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on audit based on its technical merits. Secondly, the
Company measures the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate
settlement. Interest and penalties attributable to uncertain tax positions, if any, are recognized as a component of income tax
expense. See Note 15 for further details on income taxes.
Segment Reporting — The Company operates and manages its business as a single reportable unit. Operating
segments that have similar economic characteristics are aggregated. For geographic related information, see Note 18 to the
Company’s Consolidated Financial Statements.
Foreign Currency Translation — The functional currency of the Company’s foreign subsidiaries is generally their
respective local currency. Assets and liabilities are translated into U.S. dollars at the rate of exchange existing at the balance
sheet date. Income statement amounts are translated at average monthly exchange rates applicable for the period. Translation
gains and losses are included as a component of "Accumulated other comprehensive loss" on the Company’s Consolidated
Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the
Company’s Consolidated Statements of Operations.
Derivative Financial Instruments — As a result of the Company’s international operations, it is exposed to various
market risks that may affect its consolidated results of operations, cash flow and financial position. These market risks include,
but are not limited to, fluctuations in currency exchange rates. The Company’s primary foreign currency exposures are in
Euros and British Pound Sterling, in which it conducts a significant portion of its business activities. As a result, the Company
faces exposure to adverse movements in currency exchange rates as the financial results of its international operations are
translated from local currency into U.S. Dollars upon consolidation. Additionally, foreign exchange rate fluctuations on
transactions denominated in currencies other than the functional currency result in gains and losses that are reflected in income.
The Company may enter into derivative instruments to hedge certain net exposures of nonfunctional currency
denominated assets and liabilities and the volatility associated with translating foreign earnings into U.S. Dollars, even though
it does not elect to apply hedge accounting or hedge accounting does not apply. Gains and losses resulting from a change in
fair value for these derivatives are reflected in income in the period in which the change occurs and are recognized on the
Consolidated Statements of Operations in "Foreign currency transactions and other." Cash flows related to these contracts are
classified within "Net cash provided by operating activities" on the cash flow statement.
The Company also utilizes derivative instruments to hedge the impact of changes in currency exchange rates on the
net assets of its foreign subsidiaries. These instruments are designated as net investment hedges. Hedge ineffectiveness is
assessed and measured based on changes in forward exchange rates. The Company records gains and losses on these derivative
instruments as currency translation adjustments, which offset a portion of the translation adjustments related to the foreign