Expedia 2006 Annual Report Download - page 76

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income. In 2006, we recorded tax deficiencies of $11.6 million against the APIC pool; as a result, such
deficiencies did not affect our results of operations. Excess tax benefits or tax deficiencies are a factor in the
calculation of diluted shares used in computing dilutive earnings per share. The adoption of SFAS 123(R) did
not have a material impact on our dilutive shares.
Prior to our adoption of SFAS 123(R), we recorded cash retained as a result of tax benefit deductions
relating to stock-based compensation in operating activities in our consolidated statements of cash flows, along
with other tax cash flows, in accordance with the provisions of the EITF No. 00-15, Classification in the
Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified
Employee Stock Option. SFAS 123(R) supersedes EITF 00-15, amends SFAS No. 95, Statement of Cash
Flows, and requires that, upon adoption, we present the tax benefit deductions relating to excess stock-based
compensation deductions as a financing activity in our consolidated statements of cash flows. In 2006, we
reported $1.3 million of tax benefit deductions as a financing activity that previously would have been reported
as an operating activity.
Earnings Per Share
We compute basic earnings per share by taking net income available to common shareholders divided by
the weighted average number of common and Class B common shares outstanding during the period excluding
restricted stock and stock held in escrow. Diluted earnings per share include the potential dilution that could
occur from stock-based awards and other stock-based commitments using the treasury stock or the as if
converted methods, as applicable. For additional information on how we compute earnings per share, see
Note 12 — Earnings Per Share.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reported on
our consolidated balance sheets approximate fair value as we maintain them with various high-quality financial
institutions or in short-term duration high-quality debt securities. The accounts and notes receivable are short-
term in nature and are generally settled shortly after the sale. We maintain the carrying amounts of the
derivative liabilities created in the Spin-Off at fair value, which is based upon appropriate valuation
methodologies.
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on relationships with
travel suppliers, primarily airlines and hotels, dependence on third-party technology providers, exposure to
risks associated with online commerce security and credit card fraud. We are highly dependent on our
relationships with six major airlines in the United States. We also depend on global distribution system
partners and third-party service providers for certain fulfillment services.
Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of
cash and cash equivalents. We maintain some cash and cash equivalents balances with financial institutions
that are in excess of Federal Deposit Insurance Corporation insurance limits.
Contingent Liabilities
We have a number of regulatory and legal matters outstanding, as discussed further in Note 14 —
Commitments and Contingencies. Periodically, we review the status of all significant outstanding matters to
assess the potential financial exposure. When (i) it is probable that an asset has been impaired or a liability
has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss in
our consolidated statements of income. We provide disclosure in the notes to the consolidated financial
statements for loss contingencies that do not meet both these conditions if there is a reasonable possibility that
F-16
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)