Starwood 2006 Annual Report Download - page 34

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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) vacation ownership and residential
revenues; (3) management and franchise 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:
kOwned, Leased and Consolidated Joint Ventures — 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 affecting 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.
kVacation Ownership and Residential — We recognize revenue from VOI sales and financings 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 affecting the lending market. Revenue is generally recognized
upon the buyer demonstrating a sufficient level of initial and continuing involvement. 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 differences in the timing and amount of
revenues recognized from the projects. We have also entered into licensing agreements with third-party
developers to offer consumers branded condominiums or residences. Our fees from these agreements are
generally based on the gross sales revenue of units sold.
kManagement and Franchise Revenues — 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 Méridien, St. Regis, W and Luxury Collection brand names,
termination fees and the amortization of deferred gains related to sold properties for which we have
significant continuing involvement, offset 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 profitability. 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 final. Franchise fees are generally based on a percentage of hotel
room revenues. As with hotel revenues discussed above, these revenue sources are affected by conditions
impacting the travel and hospitality industry as well as competition from other hotel management and
franchise companies.
kRevenues from Managed and Franchised Properties — 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 effect 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 first time buyers of VOIs and residences and through
participation in affiliated programs. Points can be redeemed at substantially all of our owned, leased, managed and
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