TripAdvisor 2012 Annual Report Download - page 84

than temporary, an impairment charge is recorded and a new cost basis in the investment is established. If we do
not intend to sell the debt security, but it is probable that we will not collect all amounts due, then only the
impairment due to the credit risk would be recognized in earnings and the remaining amount of the impairment
would be recognized in accumulated other comprehensive loss within stockholders’ equity.
Cash consists of cash deposits held in global financial institutions. Prior to Spin-Off, our domestic cash
receipts had been transferred to Expedia, which had historically funded our domestic disbursement accounts as
required. Transfers of cash between TripAdvisor and Expedia resulted in increases or decreases to our net
related-party receivable. In connection with the Spin-Off any subsequent cash transfers related to business
operations between TripAdvisor and Expedia ceased.
Fair Value Measurements
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a recurring basis. We measure assets
and liabilities at fair value based on the expected exit price, which is the amount that would be received on the
sale of an asset or amount paid to transfer a liability, as the case may be, in an orderly transaction between
market participants in the principal or most advantageous market in which we would transact. As such, fair value
may be based on assumptions that market participants would use in pricing an asset or liability at the
measurement date. The authoritative guidance on fair value measurements establishes a consistent framework for
measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are
assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:
Level 1—Valuations are based on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations are based on observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated
by observable market data.
Level 3—Valuations are based on unobservable inputs reflecting our own assumptions, consistent with
reasonably available assumptions made by other market participants. These valuations require significant
judgment.
Derivative Financial Instruments
Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential
exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. We
account for our derivative instruments as either assets or liabilities and carry them at fair value.
For derivative instruments that hedge the exposure to variability in expected future cash flows that are
designated as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated other comprehensive income (loss) in shareholders’ equity and reclassified into
income in the same period or periods during which the hedged transaction affects earnings. The ineffective
portion of the gain or loss on the derivative instrument, if any, is recognized in current income. To receive hedge
accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash
flows on hedged transactions. For options designated as cash flow hedges, changes in the time value are excluded
from the assessment of hedge effectiveness and are recognized in income. For derivative instruments that hedge
the exposure to changes in the fair value of an asset or a liability and that are designated as fair value hedges,
both the net gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item
attributable to the hedged risk are recognized in earnings in the current period. The net gain or loss on the
effective portion of a derivative instrument that is designated as an economic hedge of the foreign currency
translation exposure of the net investment in a foreign operation is reported in the same manner as a foreign
currency translation adjustment. For forward exchange contracts designated as net investment hedges, we
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