Expedia 2006 Annual Report Download - page 74

Foreign Currency Translation and Transaction Gains and Losses
Our operations outside of the United States use the related local currency as their functional currency. We
translate revenue and expense at average rates of exchange during the period. We translate assets and liabilities
at the rates of exchange as of the consolidated balance sheet dates and include foreign currency translation
gains and losses as a component of accumulated OCI. Due to the nature of our operations and our corporate
structure, we also have subsidiaries that have significant transactions in foreign currencies other than their
functional currency. We record transaction gains and losses in our consolidated statements of income related to
the recurring remeasurement and settlement of such transactions. To the extent practicable, we attempt to
minimize this exposure by maintaining natural hedges between our current assets and current liabilities of
similarly denominated foreign currencies.
Debt Issuance Costs
We defer costs we incur to issue debt and amortize these costs to interest expense over the term of the
debt or, when the debt can be redeemed at the option of the holders, over the term of the redemption option.
Marketing Promotions
We periodically provide incentive offers to our customers to encourage booking of travel products and
services. Generally, our incentive offers are as follows:
Current Discount Offers. These promotions include dollar off discounts to be applied against current
purchases. We record the discounts as reduction in revenue at the date we record the corresponding revenue
transaction.
Inducement Offers. These promotions 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.
Concession Offers. These promotions include discounts to be applied against a future purchase to
maintain customer satisfaction. Upon issuance, we record these concession offers as a reduction to revenue
based on estimated future redemption rates. We estimate our redemption rates using our historical experience
for concession offers.
Advertising Expense
We incur advertising expense consisting of offline costs, including television and radio advertising, and
online advertising expense to promote our brands. We expense the production costs associated with advertise-
ments in the period in which the advertisement first takes place. We expense the costs of communicating the
advertisement (e.g., television airtime) as incurred each time the advertisement is shown. For the years ended
December 31, 2006, 2005, and 2004, our advertising expense was $427.2 million, $425.2 million and
$452.9 million. As of December 31, 2006 and 2005, we had $12.6 million and $19.3 million of prepaid
marketing expenses included in prepaid expenses and other current assets on our consolidated balance sheets.
Stock-Based Compensation
Effective January 1, 2006, we began accounting for stock-based compensation under the modified
prospective method provisions of SFAS No. 123(R), Share-Based Payment, and related guidance. Under
SFAS 123(R), we continue to measure and amortize the fair value for all share-based payments consistent with
our past practice under SFAS 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting
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Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)