Starwood 2005 Annual Report Download - page 29

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CRITICAL ACCOUNTING POLICIES
We believe the following to be our critical accounting policies:
Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and
resort revenues at our owned, leased and consolidated joint venture properties; (2) management and franchise
fees; (3) vacation ownership and residential revenues; (4) revenues from managed and franchised properties;
and (5) other revenues which are ancillary to our operations. Generally, revenues are recognized when the
services have been rendered. The following is a description of the composition of our revenues:
¬Owned, Leased and Consolidated Joint Ventures Ì Represents revenue primarily derived from hotel
operations, including the rental of rooms and food and beverage sales from owned, leased or
consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and
services have been rendered. These revenues are impacted by global economic conditions aÅecting the
travel and hospitality industry as well as relative market share of the local competitive set of hotels.
REVPAR is a leading indicator of revenue trends at owned, leased and consolidated joint venture
hotels as it measures the period-over-period growth in rooms revenue for comparable properties.
¬Management and Franchise Fees Ì Represents fees earned on hotels managed worldwide, usually
under long-term contracts, franchise fees received in connection with the franchise of the our Sheraton,
Westin, Four Points by Sheraton, Le Mπeridien, St. Regis, W and Luxury Collection brand names and
termination fees, oÅset by payments by us under performance and other guarantees. Management fees
are comprised of a base fee, which is generally based on a percentage of gross revenues, and an
incentive fee, which is generally based on the property's proÑtability. For any time during the year,
when the provisions of our management contracts allow receipt of incentive fees upon termination,
incentive fees are recognized for the fees due and earned as if the contract was terminated at that date,
exclusive of any termination fees due or payable. Therefore, during periods prior to year-end, the
incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at
year-end as conditions and incentive hurdle calculations may not be Ñnal. Franchise fees are generally
based on a percentage of hotel room revenues. As with hotel revenues discussed above, these revenue
sources are aÅected by conditions impacting the travel and hospitality industry as well as competition
from other hotel management and franchise companies.
¬Vacation Ownership and Residential Ì We recognize revenue from VOI sales and Ñnancings and the
sales of residential units which are typically a component of mixed use projects that include a hotel.
Such revenues are impacted by the state of the global economies and, in particular, the U.S. economy,
as well as interest rate and other economic conditions aÅecting the lending market. We determine the
portion of revenues to recognize for sales accounted for under the percentage of completion method
based on judgments and estimates including total project costs to complete. Additionally, we record
reserves against these revenues based on expected default levels. Changes in costs could lead to
adjustments to the percentage of completion status of a project, which may result in diÅerences in the
timing and amount of revenues recognized from the projects. We anticipate developing future high end
VOI projects adjacent to or as part of our luxury resorts, resulting in cross-selling opportunities and an
audience of higher-end purchasers, yielding both higher revenues and reduced risks associated with
Ñnancing these VOI sales. We have also entered into licensing agreements with third-party developers
to oÅer consumers branded condominiums or residences. Our fees from these agreements are generally
based on the gross sales revenue of units sold.
¬Revenues from Managed and Franchised Properties Ì These revenues represent reimbursements of
costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to
payroll costs at managed properties where we are the employer. Since the reimbursements are made
based upon the costs incurred with no added margin, these revenues and corresponding expenses have
no eÅect on our operating income and our net income.
Frequent Guest Program. SPG is our frequent guest incentive marketing program. SPG members earn
points based on spending at our properties, as incentives to Ñrst time buyers of VOIs and residences and, to a
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