Starwood 2008 Annual Report Download - page 128

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.
Stock-Based Compensation.
On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-
Based Payment, a revision of the FASB Statement No. 123, Accounting for Stock-Based Compensation”
(“SFAS 123(R)”). SFAS 123(R) requires the measurement and recognition of compensation expense for all
share-based awards to be based on estimated fair values of the share award on the date of grant. Under the modified
prospective method of adoption selected by the Company, compensation cost recognized is the same that would
have been recognized had the recognition provisions of SFAS No. 123(R) been applied from its original effective
date.
SFAS No. 123(R) requires the Company to calculate the fair value of share-based awards on the date of grant.
The Company has determined that a lattice valuation model would provide a better estimate of the fair value of
options granted under its long-term incentive plans than a Black-Scholes model and therefore, for all options
granted subsequent to January 1, 2005 the lattice valuation model was utilized. The lattice valuation option pricing
model requires the Company to estimate key assumptions such as expected life, volatility, risk-free interest rates and
dividend yield to determine the fair value of share-based awards, based on both historical information and
management judgment regarding market factors and trends. The Company amortizes the share-based compensation
expense over the period that the awards are expected to vest, net of estimated forfeitures. If the actual forfeitures
differ from management estimates, additional adjustments to compensation expense are recorded. Please refer to
Note 21, Stock-Based Compensation. The Company’s policy is to issue new shares upon exercise.
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
joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been
rendered.
• Vacation Ownership and Residential — The Company recognizes revenue from VOI and residential sales in
accordance with SFAS No. 152, “Accounting for Real Estate Time Sharing Transactions,” and SFAS No. 66,
“Accounting for Sales of Real Estate,” as amended. The Company recognizes sales when the buyer has
demonstrated a sufficient level of initial and continuing investment, the period of cancellation with refund
has expired and receivables are deemed collectible. For sales that do not qualify for full revenue recognition
as the project has progressed beyond the preliminary stages but has not yet reached completion, all revenue
and profit are initially deferred and recognized in earnings through the percentage-of-completion method.
Interest income associated with timeshare notes receivable is also included in vacation ownership and
residential sales and services revenue and totaled $57 million, $40 million and $30 million in 2008, 2007 and
2006, respectively. The Company has also entered into licensing agreements with third-party developers to
offer consumers branded condominiums or residences. The fees from these arrangements are generally
based on the gross sales revenue of the units sold. Residential fee revenue is recorded in the period that a
purchase and sales agreement exists, delivery of services and obligations has occurred, the fee to the owner is
deemed fixed and determinable and collectibility of the fees is reasonably assured.
F-12
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)