TripAdvisor 2014 Annual Report Download - page 81

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more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income
tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and
estimates. Therefore, actual income taxes could materially vary from these estimates.
We recognize in our consolidated financial statements the impact of a tax position, if that position is more likely than not to be
sustained upon an examination, based on the technical merits of the position.
Foreign Currency Translation and Transaction Gains and Losses
Our consolidated 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 statements of operations are
translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation
adjustment is recorded as a component of accumulated other comprehensive income(loss) in stockholders’ equity on our consolidated
balance sheet.
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 our consolidated statements of
operations as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions, in other,
net.
Accordingly, we have recorded foreign exchange losses of $10 million, $0 million and $3 million for the years ended
December 31, 2014, 2013 and 2012, respectively, in other, net on our consolidated statement of operations. These amounts include
gains and losses, realized and unrealized, on foreign currency forward contracts.
Advertising Expense
We incur advertising expense, which includes 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 initially capitalize and
then expense the production costs associated with advertisements in the period in which the advertisement first takes place. For the
years ended December 31, 2014, 2013 and 2012, our advertising expense was $341 million, $237 million, and $175 million,
respectively. As of December 31, 2014 and 2013, we had $5 million and $1 million of prepaid marketing expenses included in prepaid
expenses and other current assets. We expect to fully expense our prepaid marketing asset of $5 million as of December 31, 2014 to
the consolidated statement of operations during 2015.
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 grant-date 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 have
estimated, to date, the 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. We have estimated our expected term, to date, using the
simplified method, as we have not had sufficient historical exercise data on our common stock to date. 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.