TripAdvisor 2013 Annual Report Download - page 91

Foreign Currency Translation and Transaction Gains and Losses
Our consolidated and combined financial statements are reported in U.S. dollars. Certain of our subsidiaries
outside of the United States use the related local currency as their functional currency and not the U.S. dollar.
Therefore assets and liabilities of our foreign subsidiaries are translated at the spot rate in effect at the applicable
reporting date, and the consolidated and combined statements of operations are translated at the average
exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment,
net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in
stockholders’ equity.
Due to the nature of our operations and our corporate structure, we also have subsidiaries that have
transactions in foreign currencies other than their functional currency. Transactions denominated in currencies
other than the functional currency are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the
accompanying consolidated and combined statements of operations as unrealized (based on the applicable
period-end exchange rate) or realized upon settlement of the transactions.
Accordingly, we have recorded foreign exchange losses of $0.2 million, 3.2 million and $1.0 million for the
years ended December 31, 2013, 2012 and 2011, respectively, in Other, net. These losses are net of those realized
and unrealized on foreign currency forward contracts.
Advertising Expense
We incur advertising expense consisting of traffic generation costs from search engines and Internet portals,
other online and offline (including television) advertising expense, promotions and public relations to promote
our brands. We expense the costs associated with communicating the advertisements in the period in which the
advertisement takes place. We expense the production costs associated with advertisements in the period in
which the advertisement first takes place. For the years ended December 31, 2013, 2012 and 2011, our
advertising expense was $236.5 million, $175.0 million, and $135.6 million, respectively. As of December 31,
2013 and 2012, we had $1.3 million and $1.4 million of prepaid marketing expenses included in prepaid
expenses and other current assets.
Stock-Based Compensation
Stock Options. The exercise price for all stock options granted by us to date has been equal to the market
price of the underlying shares of common stock at the date of grant. In this regard, when making stock option
awards, our practice is to determine the applicable grant date and to specify that the exercise price shall be the
closing price of our common stock on the date of grant.
The estimated fair value of stock options is calculated using a Black-Scholes Merton option-pricing model
(“Black-Scholes model”). The Black-Scholes model incorporates assumptions to value stock-based awards,
which includes the risk-free rate of return, expected volatility, expected term and expected dividend yield.
Our risk-free interest rate is based on the rates currently available on zero-coupon U.S. Treasury issues, in
effect at the time of the grant, whose remaining maturity period most closely approximates the stock option’s
expected term assumption. We estimate volatility of our common stock by using an average of our historical
stock price volatility and of publicly traded companies that we consider peers based on daily price observations
over a period equivalent to or approximate to the expected term of the stock option grants. The decision to use a
weighted average volatility factor with a peer group was based upon the relatively short period of availability of
data on our common stock. We estimate our expected term using the simplified method for all stock options as
we do not have sufficient historical exercise data on our common stock. Our expected dividend yield is zero, as
we have not paid any dividends on our common stock to date and do not expect to pay any cash dividends for the
foreseeable future.
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