Starwood 2005 Annual Report Download - page 81

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
payroll costs at managed properties where the Company is 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 the Company's operating income and net income.
Insurance Retention. Through its captive insurance company, the Company provides insurance cover-
age for workers' compensation, property and general liability claims arising at hotel properties owned or
managed by the Company through policies written directly and through reinsurance arrangements. Estimated
insurance claims payable represent expected settlement of outstanding claims and a provision for claims that
have been incurred but not reported. These estimates are based on our assessment of potential liability using
an analysis of available information including pending claims, historical experience and current cost trends.
The amount of the ultimate liability may vary from these estimates. Estimated costs of these self-insurance
programs are accrued, based on the analysis of third-party actuaries.
Costs Incurred to Sell VOIs. The Company capitalizes direct costs attributable to the sale of VOIs until
the sales are recognized. Selling and marketing costs capitalized under this methodology were approximately
$28 million and $23 million as of December 31, 2005 and 2004, respectively, and all such capitalized costs are
included in prepaid expenses and other assets in the accompanying consolidated balance sheets. Costs eligible
for capitalization follow the guidelines of SFAS No. 67, ""Accounting for Costs and Initial Rental Operation of
Real Estate Projects.'' If a contract is cancelled, the Company charges the unrecoverable direct selling and
marketing costs to expense and records forfeited deposits as income.
VOI and Residential Inventory Costs. Real estate and development costs are valued at the lower of cost
or net realizable value. Development costs include both hard and soft construction costs and together with real
estate costs are allocated to VOIs and residential units on the relative sales value method. Interest, property
taxes and certain other carrying costs incurred during the construction process are capitalized as incurred.
Such costs associated with completed VOI and residential units are expensed as incurred.
Advertising Costs. Starwood and its brand marketing co-ops enter into multi-media ad campaigns,
including television, radio, internet and print advertisements. Costs associated with these campaigns, including
communication and production costs, are aggregated and expensed the Ñrst time that the advertising takes
place in accordance with the American Institute of CertiÑed Public Accountants (""AICPA'') Statement of
Position (""SOP'') No. 93-7 ""Reporting on Advertising Costs.'' If it becomes apparent that the media
campaign will not take place, all costs are expensed at that time. During the years ended December 31, 2005,
2004 and 2003, the Company incurred approximately $117 million, $120 million and $110 million of
advertising expense, respectively, a signiÑcant portion of which was reimbursed by managed and franchised
hotels.
Retained Interests. The Company periodically sells notes receivable originated by our vacation owner-
ship business in connection with the sale of VOIs. The Company retains interests in the assets transferred to
qualiÑed and non-qualiÑed special purpose entities which are accounted for as over-collateralizations and
interest only strips. These Retained Interests are treated as ""trading'' for transactions prior to 2002 and
""available-for-sale'' for transactions thereafter under the provisions of SFAS No. 115, ""Accounting for
Certain Investments in Debt and Equity Securities.'' The Company reports changes in the fair values of these
Retained Interests through the accompanying consolidated statement of income for trading securities and
through the accompanying consolidated statement of comprehensive income for available-for-sale securities.
The Company had Retained Interests of $68 million and $58 million at December 31, 2005 and 2004,
respectively.
Use of Estimates. The preparation of Ñnancial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that aÅect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
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