Starwood 2010 Annual Report Download - page 92

CRITICAL ACCOUNTING POLICIES
We believe the following to be our critical accounting policies:
Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resort
revenues at our 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 our operations. Generally, revenues are recognized when the services have
been rendered. The following is a description of the composition of our revenues:
• 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. These revenues are impacted by global economic conditions affecting the travel and hospitality
industry as well as relative market share of the local competitive set of hotels. REVPAR is a leading indicator
of revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-per-
iod growth in rooms revenue for comparable properties.
• Vacation Ownership and Residential — We recognize revenue from VOI sales and financings and the sales
of residential units which are typically a component of mixed use projects that include a hotel. Such revenues
are impacted by the state of the global economies and, in particular, the U.S. economy, as well as interest rate
and other economic conditions affecting the lending market. Revenue is generally recognized upon the buyer
demonstrating a sufficient level of initial and continuing investment, the period of cancellation with refund
has expired and receivables are deemed collectible. We determine the portion of revenues to recognize for
sales accounted for under the percentage of completion method based on judgments and estimates including
total project costs to complete. Additionally, we record reserves against these revenues based on expected
default levels. Changes in costs could lead to adjustments to the percentage of completion status of a project,
which may result in differences in the timing and amount of revenues recognized from the projects. We have
also entered into licensing agreements with third-party developers to offer consumers branded condomin-
iums or residences. Our fees from these agreements are generally based on the gross sales revenue of 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
collectability of the fees is reasonably assured.
• 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 our Sheraton, Westin,
Four Points by Sheraton, Le Méridien and Luxury Collection brand names, termination fees and the
amortization of deferred gains related to sold properties for which we have significant continuing
involvement. 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. For any time
during the year, when the provisions of our 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. Therefore, during periods prior to year-end, the
incentive fees recorded may not be indicative of the eventual incentive fees that will be recognized at year-
end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a
percentage of hotel room revenues. As with hotel revenues discussed above, these revenue sources are
affected by conditions impacting the travel and hospitality industry as well as competition from other hotel
management and franchise companies.
• 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 we are 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 our operating
income and our net income.
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