Expedia 2005 Annual Report Download - page 67

Expedia, Inc.
Notes to Consolidated Financial Statements Ì (Continued)
Accounting Estimates
We use estimates and assumptions in the preparation of our consolidated financial statements in
accordance with accounting principles generally accepted in the United States (""GAAP''). Our estimates
and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of our consolidated financial statements. These estimates and assumptions also
affect the reported amount of net income during any period. Our actual financial results could differ
significantly from these estimates. Our significant estimates underlying our consolidated financial
statements include revenue recognition, accounting for merchant payables, recoverability of long-lived and
intangible assets and goodwill, income taxes, occupancy tax, stock-based compensation and accounting for
derivative instruments.
Revenue Recognition
We offer travel products and services on a stand-alone and package basis primarily through two
business models: the merchant model and the agency model.
Under the merchant model, we facilitate the booking of hotel rooms, airline seats, car rentals and
destination services from our travel suppliers and we are the merchant of record for such bookings.
Under the agency model, we act as the agent in the transaction, passing reservations booked by the
traveler to the relevant travel provider. We receive commissions or ticketing fees from the travel supplier
and/or traveler. For agency airline, hotel and car transactions, we also receive fees from global distribution
systems partners that control the computer systems through which these reservations are booked.
We record revenue based principally on Staff Accounting Bulletin (""SAB'') No. 104 ""Revenue
Recognition.'' We recognize revenue when it is earned and realizable based on the following criteria:
persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or
determinable and collectibility is reasonably assured.
The prevailing accounting guidance with respect to the presentation of revenue on a gross versus a net
basis is contained in Emerging Issues Task Force No. 99-19, ""Reporting Revenue Gross as a Principal
versus Net as an Agent (""EITF 99-19'').'' The consensus of this literature is that the presentation of
revenue as ""the gross amount billed to a customer because it has earned revenue from the sale of goods or
services or the net amount retained (that is, the amount billed to a customer less the amount paid to a
supplier) because it has earned a commission or fee'' is a matter of judgment that depends on the relevant
facts and circumstances. If the conclusion drawn is that we perform as an agent or a broker without
assuming the risks and rewards of ownership of goods, revenue should be reported on a net basis.
In making an evaluation of this issue, some of the factors that should be considered are: whether we
are the primary obligor in the arrangement (strong indicator); whether we have general inventory risk
(before customer order is placed or upon customer return) (strong indicator); and whether we have
latitude in establishing price. EITF 99-19 clearly indicates that the evaluations of these factors, which at
times can be contradictory, are subject to significant judgment and subjectivity.
Merchant Hotel
Our travelers pay us for merchant hotel transactions prior to departing on their trip, generally when
they book the reservation. We record the payment in deferred merchant bookings until the stay occurs, at
which point we record the revenue. In certain non-refundable, non-changeable transactions where we have
no significant post-delivery obligations, we record revenue when the traveler completes the transaction on
our website, less a reserve for chargebacks and cancellations based on historical experience. In certain
instances when a supplier invoices us for less than the cost we accrued, we recognize those amounts as
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