Expedia 2006 Annual Report Download - page 73

We periodically evaluate the recoverability of investments and record a write-down if a decline in value is
determined to be other-than-temporary. This evaluation resulted in the write-off of an investment in 2005. See
Note 13 — Other Income (Expense).
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes, we record income taxes under the
liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We
determine deferred income taxes based on the differences in accounting methods and timing between financial
statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each
temporary difference based on the tax rates that we expect will be in effect when we realize the underlying
items of income and expense. We consider many factors when assessing the likelihood of future realization of
our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable
income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant
factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is
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.
Occupancy Tax
Some states and localities impose a transient occupancy or accommodation tax, or a form of sales tax, on
the use or occupancy of hotel accommodations. Generally, hotels charge taxes based on the room rate paid to
the hotel and remit these taxes to the various tax authorities. When a customer books a room through one of
our travel services, we collect a tax recovery charge from the customer which we pay to the hotel. We do not
collect or remit occupancy taxes, nor do we pay occupancy taxes to the hotel operator on the portion of the
customer payment we retain. Some jurisdictions have questioned our practice in this regard. While the
applicable tax provisions vary among the jurisdictions, we generally believe that we are not required to collect
and remit such occupancy taxes. We are engaged in discussions with tax authorities in various jurisdictions to
resolve this issue. Some tax authorities have brought lawsuits asserting that we are required to collect and
remit occupancy tax. The ultimate resolution in all jurisdictions cannot be determined at this time. We have
established a reserve for the potential settlement of issues related to hotel occupancy taxes.
Derivative Instruments
Derivative instruments are carried at fair value on our consolidated balance sheets.
We have designated cross currency swap agreements as cash flow hedges of certain inter-company loan
agreements denominated in currencies other than the lending subsidiaries’ functional currency (the “hedged
items”). The hedges have been determined to be highly effective, at designation and on an ongoing basis. As
such, we record the total change in the fair value of the hedges in other comprehensive income (“OCI”) each
period, and concurrently reclassify a portion of the gain or loss to other, net to perfectly offset gains or losses
related to transactional remeasurement of the hedged items.
We report the change in the fair value of derivative instruments that do not qualify for hedge accounting
treatment in other, net in our consolidated statements of income. We do not hold or issue financial instruments
for speculative or trading purposes. For additional information about derivative instruments, see Note 7 —
Derivative Instruments.
F-13
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)