Starwood 2007 Annual Report Download - page 131

Legal Contingencies. The Company is subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated
loss from a loss contingency be accrued with a corresponding 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
financial 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 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
fluctuations. 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 classified in the same manner as the classification of the
changes in the underlying assets or liabilities due to fluctuations in foreign currency exchange rates.
The Company does not enter into derivative financial instruments for trading or speculative purposes and
monitors the financial stability and credit standing of its counterparties.
Foreign Currency Translation. Balance sheet accounts are translated at the exchange rates in effect 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 effect 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 loss of $11 million in 2007 and net gains of $8 million and
$2 million in 2006 and 2005, 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 insignificant in 2007 and 2006.
Income Taxes. The Company provides for income taxes in accordance with SFAS No. 109, “Accounting 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 financial statements or tax returns.
Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect 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.
Revenue Recognition. The Company’s revenues are primarily derived from the following sources: (1) hotel
and resort revenues at the Company’s 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 the Company’s operations. Generally, revenues
are recognized when the services have been rendered. Taxes collected from customers and submitted to taxing
authorities are not recorded in revenue. The following is a description of the composition of revenues for the
Company:
• Owned, 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
F-11
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)