Starwood 2011 Annual Report Download - page 132

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
occurred, the fee to the owner is deemed fixed and determinable and collectability of the fees is
reasonably assured. Residential revenue on whole ownership units is generally recorded using the
completed contract method, whereby revenue is recognized only when a sales contract is completed or
substantially completed. During the performance period, costs and deposits are recorded on the balance
sheet.
• Management and Franchise Fees — 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. 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 as the fees are earned and
become due from the franchisee.
• Other 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 $4
million and $3 million as of December 31, 2011 and 2010, 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 ASC 978, Real Estate – Time Sharing Activities. 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 advertising 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. If it becomes
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