Starwood 2008 Annual Report Download - page 127

including marketing, promotion, communications with, and performing member services for the SPG members.
Actual expenditures for SPG may differ from the actuarially determined liability.
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, 2008 and
2007 is $662 million and $536 million, respectively, of which $232 million and $182 million, respectively, is
included in accrued expenses.
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 periodically enters into interest rate swap agreements,
based on market conditions, 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 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. These forward
contracts do not qualify as hedges under the provisions of SFAS No. 133.
The Company periodically enters into forward contracts to manage foreign exchange risk based on market
conditions. Beginning in January 2008, the Company entered into forward contracts to hedge fluctuations in
forecasted transactions based on foreign currencies that are billed in United States dollars. These forward contracts
have been designated as cash flow hedges under the provisions of SFAS No. 133, and their change in fair value is
recorded as a component of other comprehensive income. As a forecasted transaction occurs, the gain or loss is
reclassified from other comprehensive income to management fees, franchise fees and other income.
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 gain of $5 million in 2008, net loss of $11 million in 2007 and
a net gain of $8 million in 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.
F-11
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)