Starwood 2005 Annual Report Download - page 75

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
Inventories. Inventories are comprised principally of VOIs of $168 million and $187 million as of
December 31, 2005 and 2004, respectively, and residential of $36 million and $108 million at December 31,
2005 and 2004, respectively, and hotel operating supplies. VOI and residential inventory is carried at the lower
of cost or net realizable value and includes $15 million, $13 million and $7 million of capitalized interest
incurred in 2005, 2004 and 2003, respectively. Hotel operating supplies are generally valued at the lower of
cost (Ñrst-in, Ñrst-out) or market. Inventory also includes food and beverage stock items as well as linens,
china, glass, silver, uniforms, utensils and guest room items. The food and beverage inventory items are
recorded at the lower of FIFO cost (Ñrst-in, Ñrst-out) or market. SigniÑcant purchases of linens, china, glass,
silver, uniforms, utensils and guest room items are recorded at purchased cost and amortized to 50% of their
cost over 36 months. Normal replacement purchases are expensed as incurred.
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 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, the Company records 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 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 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 the Company will have continuing involvement (such as through a
management or franchise agreement) after the sale.
Investments. Investments in joint ventures are accounted for using the guidance of the revised Financial
Accounting Standards Board (""FASB'') Interpretation No. (""FIN'') 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
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