Expedia 2006 Annual Report Download - page 38

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Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and services. For
example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan
and book their spring, summer and holiday travel. The number of bookings decreases in the fourth quarter.
Because revenue in the merchant business is generally recognized when the travel takes place rather than when
it is booked, revenue typically lags bookings by several weeks or longer. As a result, revenue is typically the
lowest in the first quarter and highest in the third quarter. The continued growth of our international operations
or a change in our product mix may influence the typical trend of our seasonality in the future.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the preparation of
our consolidated financial statements because they require that we use judgment and estimates in applying
those policies. We prepare our consolidated financial statements and accompanying notes in accordance with
generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated
financial statements and accompanying notes requires that we make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements as well as revenue and expenses during the periods reported. We base
our estimates on historical experience, where applicable, and other assumption that we believe are reasonable
under the circumstances. Actual results may differ from our estimates under different assumptions or
conditions.
There are certain critical estimates that we believe require significant judgment in the preparation of our
consolidated financial statements. We consider an accounting estimate to be critical if:
• It requires us to make assumption because information was not available at the time or it included
matters that were highly uncertain at the time we were making the estimate; and
• Changes in the estimate or different estimates that we could have selected may have had a material
impact on our financial condition or results of operations.
For more information on each of these policies, see Note 2 — Significant Accounting Policies, in the
notes to consolidated financial statements. We discuss information about the nature and rationale for our
critical accounting estimates below.
Accounting for Certain Merchant Revenue
We accrue the cost of certain merchant revenue based on the amount we expect from suppliers’ invoices.
In certain instances when a supplier invoices us for less than the cost we accrued, we generally recognize
those amounts as revenue six months in arrears, net of an allowance, when we determine it is not probable
that we will be required to pay the supplier, based on historical experience and contract terms. Actual revenue
could be greater or lower than the amounts estimated due to changes in hotel billing practices or changes in
traveler behavior.
Marketing Promotions
We periodically provide incentive offers to our customers to encourage booking of travel products and
services, which include inducement offers. Inducement offers include discounts granted at the time of a current
purchase to be applied against a future qualifying purchase. We treat inducement offers as a reduction to
revenue based on estimated future redemption rates. We allocate the discount amount between the current
purchase and the potential future purchase based on our expected relative value of the transactions. We
estimate our redemption rates using our historical experience for similar inducement offers, and the amounts
we record as a reduction to revenue on current purchases could vary significantly based on the redemption
estimates used.
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