Starwood 2005 Annual Report Download - page 77

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
The liability for the SPG program is included in other long-term liabilities and accrued expenses in the
accompanying consolidated balance sheets. The total actuarially determined liability as of December 31, 2005
and 2004 is $314 million and $255 million, respectively.
Legal Contingencies. The Company is 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.
Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.
The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the
ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact
the Company's Ñnancial position or its results of operations.
Derivative Financial Instruments. The Company enters into interest rate swap agreements to manage
interest rate exposure. The net settlements paid or received under these agreements are accrued consistent
with the terms of the agreements and are recognized in interest expense over the term of the related debt. The
related fair value of the swaps is included in other liabilities or assets.
The Company enters into foreign currency hedging contracts to manage exposure to foreign currency
Öuctuations. All foreign currency hedging instruments have an inverse correlation to the hedged assets or
liabilities. Changes in the fair value of the derivative instruments are classiÑed in the same manner as the
classiÑcation of the changes in the underlying assets or liabilities due to Öuctuations in foreign currency
exchange rates.
The Company does not enter into derivative Ñnancial instruments for trading or speculative purposes and
monitors the Ñnancial stability and credit standing of its counterparties.
Foreign Currency Translation. Balance sheet accounts are translated at the exchange rates in eÅect at
each period end and income and expense accounts are translated at the average rates of exchange prevailing
during the year. The national currencies of foreign operations are generally the functional currencies. Gains
and losses from foreign exchange and the eÅect of exchange rate changes on intercompany transactions of a
long-term investment nature are generally included in other comprehensive income. Gains and losses from
foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term
investment nature are reported currently in costs and expenses and amounted to a net gain of $2 million,
$9 million and $4 million in 2005, 2004 and 2003, respectively. Gains and losses from foreign currency
transactions are reported currently in costs and expenses and amounted to a net loss of $4 million in 2005.
Gains and losses from foreign currency transactions were insigniÑcant in 2004 and 2003.
Income Taxes. The Company provides for income taxes in accordance with SFAS No. 109, ""Account-
ing 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.
Deferred tax assets and liabilities are measured using enacted tax rates in eÅect for the year in which
those temporary diÅerences are expected to be recovered or settled. The eÅect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted.
The Trust has elected to be treated as a REIT under the provisions of the Code. As a result, the Trust is
not subject to federal income tax on its taxable income at corporate rates provided it distributes annually all of
its taxable income to its shareholders and complies with certain other requirements.
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