Starwood 2008 Annual Report Download - page 129

• Management 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 Company’s
Sheraton, Westin, Four Points by Sheraton, Le Méridien, St. Regis, W, Luxury Collection, Aloft and Element
brand names, termination fees and the amortization of deferred gains related to sold properties for which the
Company has significant continuing involvement, offset by payments by the Company 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.
Base fee revenues are recognized when earned in accordance with the terms of the contract. For any time
during the year, when the provisions of the 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. Franchise fees are generally based on a percentage of
hotel room revenues and are recognized in accordance with SFAS No. 45, “Accounting for Franchise Fee
Revenue,” as the fees are earned and become due from the franchisee.
• Revenues 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 the Company is 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 the
Company’s operating income or net income.
Insurance Retention. Through its captive insurance company, the Company provides insurance coverage for
workers’ compensation, property and general liability claims arising at hotel properties owned or managed by the
Company through policies written directly and through reinsurance arrangements. Estimated insurance claims
payable represent expected settlement of outstanding claims and a provision for claims that have been incurred but
not reported. These estimates are based on the Company’s assessment of potential liability using an analysis of
available information including pending claims, historical experience and current cost trends. The amount of the
ultimate 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 $7 million
and $6 million as of December 31, 2008 and 2007, 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, 2008, 2007 and 2006, the Company incurred approximately $146 million,
$116 million and $135 million of advertising expense, respectively, a significant portion of which was reimbursed
by managed and franchised hotels.
F-13
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)