Avis 2007 Annual Report Download - page 79

Table of Contents
DERIVATIVE INSTRUMENTS
Derivative instruments are used as part of the Company’s overall strategy to manage exposure to market risks associated with fluctuations
in foreign currency exchange rates, interest rates and gasoline costs. As a matter of policy, derivatives are not used for trading or
speculative purposes.
All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging
instruments are recognized currently in earnings within the same line item as the hedged item (principally vehicle interest, net). The
effective portion of changes in fair value of derivatives designated as cash flow hedging instruments is recorded as a component of other
comprehensive income. The ineffective portion is recognized currently in earnings within the same line item as the hedged item, including
vehicle interest, net or interest related to corporate debt, net, based upon the nature of the hedged item. Amounts included in other
comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings.
During 2006, the Company utilized certain derivatives designated as fair value hedges. Changes in the fair value of such instruments were
recognized in earnings as a component of interest related to corporate debt, net. The Company did not utilize fair value hedges during
2007.
INVESTMENTS
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and
reevaluates such determination at each balance sheet date. The Company’s non-
marketable preferred stock investments are accounted for at
cost plus accretion. Common stock investments in affiliates over which the Company has the ability to exercise significant influence but
not a controlling interest are carried on the equity method of accounting. Available-for-sale securities are carried at current fair value with
unrealized gains or losses reported net of taxes as a separate component of stockholders’ equity. Trading securities are recorded at fair
value with realized and unrealized gains and losses reported currently in earnings.
Aggregate realized gains and losses on investments and preferred dividend income are recorded within other revenues on the Consolidated
Statements of Operations. There were no net realized gains or losses in continuing operations in 2007. Gains amounted to $11 million and
$21 million in 2006 and 2005, respectively. Gains and losses on securities sold are based on the specific identification method.
Affinion Group Holdings, Inc. The Company’s former investment in Affinion Group Holdings, Inc. (“Affinion”) was received in
connection with the October 2005 sale of its former Marketing Services division, along with cash proceeds approximating $1.7 billion.
This investment represented preferred stock with a carrying value of $95 million, including accrued dividends (face value of $125 million)
maturing in October 2017, and warrants with a carrying value of $3 million that were exercisable into 7.5% of the common equity of
Affinion upon the earlier of four years or the achievement of specified investment hurdles.
Pursuant to the Separation Agreement, the Company was obligated to distribute all proceeds received on the sale of its investments in
Affinion to Realogy and Wyndham. Accordingly, following the spin-offs of Realogy and Wyndham on July 31, 2006, the Company began
to recognize a charge on its Consolidated Statement of Operations equal to the dividend and accretion income on the preferred stock of
Affinion. From January 1, 2006 to July 31, 2006, the Company recorded $6 million of dividend and accretion income related to its
preferred stock investment in Affinion. During 2007, the Company sold the majority of its preferred stock investment in Affinion and
distributed the proceeds and the remaining investment to Realogy and Wyndham.
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