Starwood 2006 Annual Report Download - page 75

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
$21 million and $28 million as of December 31, 2006 and 2005, 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. 152. 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. The Company enters 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 first time that the advertising takes place in accordance with the American Institute
of Certified 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, 2006, 2005 and 2004, the Company incurred approximately $135 million,
$117 million and $120 million of advertising expense, respectively, a significant portion of which was reimbursed
by managed and franchised hotels.
Retained Interests. The Company periodically sells notes receivable originated by our vacation ownership
business in connection with the sale of VOIs. The Company retains interests in the assets transferred to qualified and
non-qualified special purpose entities which are accounted for as over-collateralizations and interest only strips.
These retained interests are treated as “available-for-sale” for transactions 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 comprehensive income. The
Company had Retained Interests of $51 million and $68 million at December 31, 2006 and 2005, respectively.
Use of Estimates. The preparation of financial statements in conformity with accounting principles gen-
erally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications. Certain reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation.
Impact of Recently Issued Accounting Standards. In November 2006, the Emerging Issues Task Force of
the FASB (“EITF”) reached a consensus on EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s
Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of
Condominiums” (“EITF 06-8”). EITF 06-8 will require condominium sales to meet the continuing involvement
criterion of SFAS No. 66 in order for profit to be recognized under the percentage of completion method. EITF 06-8
will be effective for annual reporting periods beginning after March 15, 2007. The cumulative effect of applying
EITF 06-8, if any, is to be reported as an adjustment to the opening balance of retained earnings in the year of
adoption. The Company is currently evaluating the impact, if any, the adoption of EITF 06-8 will have on the
consolidated financial statements.
F-14
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)