Starwood 2010 Annual Report Download - page 124

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying consolidated financial statements represent the consolidated financial position and
consolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the
“Company”). Starwood is one of the world’s largest hotel and leisure companies. The Company’s principal
business is hotels and leisure, which is comprised of a worldwide hospitality network of almost 1,000 full-service
hotels, vacation ownership resorts and residential developments primarily serving two markets: luxury and upscale.
The principal operations of Starwood Vacation Ownership, Inc. (“SVO”) include the acquisition, development and
operation of vacation ownership resorts; marketing and selling vacation ownership interests (“VOIs”) in the resorts;
and providing financing to customers who purchase such interests.
The consolidated financial statements include the accounts of the Company and all of its controlled
subsidiaries and partnerships. In consolidating, all material intercompany transactions are eliminated. We have
evaluated all subsequent events through the date the consolidated financial statements were filed.
Note 2. Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements of the Company and its
subsidiaries include the assets, liabilities, revenues and expenses of majority-owned subsidiaries over which the
Company exercises control. Intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash. Restricted cash primarily consists of deposits received on sales of VOIs and residential
properties that are held in escrow until a certificate of occupancy is obtained, the legal rescission period has expired
and the deed of trust has been recorded in governmental property ownership records. At December 31, 2010 and
2009, the Company had short-term restricted cash balances of $53 million and $47 million, respectively.
Inventories. Inventories are comprised principally of VOIs of $307 million and $434 million as of
December 31, 2010 and 2009, respectively, residential inventory of $462 million and $315 million at December 31,
2010 and 2009, respectively, and hotel inventory. VOI and residential inventory is carried at the lower of cost or net
realizable value and includes $29 million, $31 million and $25 million of capitalized interest incurred in 2010, 2009
and 2008, respectively. Hotel inventory includes operating supplies and food and beverage inventory items which
are generally valued at the lower of FIFO cost (first-in, first-out) or market. Hotel inventory also includes linens,
china, glass, silver, uniforms, utensils and guest room items. Significant purchases of these items with a useful life
of greater than one year are recorded at purchased cost and amortized over their useful life. Normal replacement
purchases are expensed as incurred.
Loan Loss Reserves. For the vacation ownership and residential segment, the Company records an estimate
of expected uncollectibility on its VOI notes receivable as a reduction of revenue at the time it recognizes a
timeshare sale. The Company holds large amounts of homogeneous VOI notes receivable and therefore assesses
uncollectibility based on pools of receivables. In estimating loan loss reserves, the Company uses a technique
referred to as static pool analysis, which tracks defaults for each year’s mortgage originations over the life of the
respective notes and projects an estimated default rate. As of December 31, 2010, the average estimated default rate
for the Company’s pools of receivables was 10%.
The primary credit quality indicator used by the Company to calculate the loan loss reserve for the vacation
ownership notes is the origination of the notes by brand (Sheraton, Westin, and Other) as the Company believes
there is a relationship between the default behavior of borrowers and the brand associated with the vacation
ownership property they have acquired. In addition to quantitatively calculating the loan loss reserve based on its
static pool analysis, the Company supplements the process by evaluating certain qualitative data, including the
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