Starwood 2004 Annual Report Download - page 78

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
hotels fell below a speciÑed level due to the war in Iraq and the worldwide economic downturn. Once
aggregate hotel operations meet the speciÑed levels over the required time period, the additional cash reserves,
plus accrued interest, will be released to the Company.
Inventories. Inventories are comprised principally of VOIs of $187 million and $162 million as of
December 31, 2004 and 2003, respectively, and residential of $108 million and $0 at December 31, 2004 and
2003, respectively, and hotel operating supplies. VOI and residential inventory is carried at the lower of cost or
net realizable value and includes $13 million, $7 million and $4 million of capitalized interest incurred in 2004,
2003 and 2002, respectively. Operating supplies are generally valued at the lower of cost (Ñrst-in, Ñrst-out) or
market.
Loan Loss Reserves. For the hotel segment, the Company measures loan impairment based on the
present value of expected future cash Öows discounted at the loan's original eÅective interest rate or the
estimated fair value of the collateral. For impaired loans, the Company establishes a speciÑc impairment
reserve for the diÅerence between the recorded investment in the loan and the present value of the expected
future cash Öows or the estimated fair value of the collateral. The Company applies the loan impairment
policy individually to all loans in the portfolio and does not aggregate loans for the purpose of applying such
policy. For loans that the Company has determined to be impaired, the Company recognizes interest income
on a cash basis.
For the vacation ownership segment, the Company provides for estimated mortgages receivable
cancellations and defaults at the time the VOI sales are recorded with a charge to vacation ownership and
residential expenses. The Company performs an analysis of factors such as economic condition and industry
trends, defaults, past due aging and historical write-oÅs of mortgages and contracts receivable to evaluate the
adequacy of the allowance.
Assets Held for Sale. The Company considers properties to be assets held for sale when management
approves and commits to a formal plan to actively market a property for sale, a signed sales contract and a
non-refundable deposit exists. Upon designation as an asset held for sale, the Company records the carrying
value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell,
and the Company stops recording depreciation expense. Any gain realized in connection with the sale of
properties for which the Company has signiÑcant continuing involvement (such as through a long-term
management or franchise agreement) is deferred and recognized over the life of the associated involvement
(e.g., the initial term of the related agreement).
Investments. Investments in joint ventures are accounted for using the guidance of the revised Financial
Accounting Standards Board (""FASB'') Interpretation (""FIN'') No. 46 ""Consolidation of Variable Interest
Entities'' (""FIN 46(R)'') for all ventures deemed to be variable interest entities. See additional discussion in
the ""Impact of Recently Issued Accounting Standards'' section to this footnote. All other joint venture
investments are accounted for under the equity method of accounting when the Company has a 20% to 50%
ownership interest or exercises signiÑcant inÖuence over the venture. If the Company's interest exceeds 50% or
in certain cases, if the Company exercises control over the venture, the results of the joint venture are
consolidated herein. All other investments are generally accounted for under the cost method.
The fair market value of investments is based on the market prices for the last day of the period if the
investment trades on quoted exchanges. For non-traded investments, fair value is estimated based on the
underlying value of the investment, which is dependent on the performance of the investment as well as the
volatility inherent in external markets for these types of investments. In assessing potential impairment for
these investments, the Company will consider these factors as well as forecasted Ñnancial performance of its
investment. If these forecasts are not met, the Company may have to record impairment charges.
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