Starwood 2005 Annual Report Download - page 30

lesser degree, through participation in aÇliated partners' programs. Points can be redeemed at most of our
owned, leased, managed and franchised properties as well as through other redemption opportunities with
third parties, such as conversion to airline miles. Properties are charged based on hotel guests' expenditures.
Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.
We, through the services of third-party actuarial analysts, determine the fair value of the future
redemption obligation based on statistical formulas which project the timing of future point redemption based
on historical experience, including an estimate of the ""breakage'' for points that will never be redeemed, and
an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other
third parties in respect of other redemption opportunities for point redemptions. Actual expenditures for SPG
may diÅer from the actuarially determined liability. The total actuarially determined liability as of Decem-
ber 31, 2005 and 2004 is $314 million and $255 million, respectively. A 10% reduction in the ""breakage'' of
points would result in an increase of $47 million to the liability at December 31, 2005.
Long-Lived Assets. We evaluate the carrying value of our long-lived assets for impairment by
comparing the expected undiscounted future cash Öows of the assets to the net book value of the assets if
certain trigger events occur. If the expected undiscounted future cash Öows are less than the net book value of
the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair
value is based upon discounted cash Öows of the assets at a rate deemed reasonable for the type of asset and
prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending
oÅers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets
and such qualitative factors as future development in the surrounding area, status of expected local
competition and projected incremental income from renovations. Changes to our plans, including a decision to
dispose of or change the intended use of an asset, can have a material impact on the carrying value of the
asset.
Assets Held for Sale. We consider properties to be assets held for sale when management approves and
commits to a formal plan to actively market a property or group of properties for sale and a signed sales
contract and signiÑcant non-refundable deposit or contract break-up fee exist. Upon designation as an asset
held for sale, we record the carrying value of each property or group of properties at the lower of its carrying
value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, and we
stop recording depreciation expense. Any gain realized in connection with the sale of properties for which we
have signiÑcant continuing involvement (such as through a long-term management agreement) is deferred
and recognized over the life of the associated involvement (e.g., the initial term of the related agreement).
The operations of the properties held for sale prior to the sale date are recorded in discontinued operations
unless we will have continuing involvement (such as through a management or franchise agreement) after the
sale.
Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which are
subject to signiÑcant uncertainty. SFAS No. 5, ""Accounting for Contingencies,'' requires that an estimated
loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been
impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate,
among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss and changes in these factors could materially impact our Ñnancial position or
our results of operations.
Income Taxes. We provide for income taxes in accordance with SFAS No. 109, ""Accounting for
Income Taxes.'' The objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity's Ñnancial statements or tax returns. Judgment is required in assessing
the future tax consequences of events that have been recognized in our Ñnancial statements or tax returns.
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