Expedia 2007 Annual Report Download - page 81

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income. In 2007 and 2006, we recorded tax deficiencies of $3.9 million and $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 2007 and
2006, we reported $95.7 million and $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. The accounts 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
fluctuates primarily based on changes in the price of our common stock. The fair values of our cross-currency
swaps are determined based on the present value of net future cash payments and receipts, and fluctuate based
on changes in market interest rates and the Euro/U.S. dollar exchange rate.
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 also rely on global distribution
system partners and third-party service providers for certain fulfillment services, including one third-party
service provider for which we accounted for approximately 47% of its total revenue for the year ended
December 31, 2006 and approximately 40% of its total revenue for the nine months ended September 30,
2007.
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. Our cash and cash equivalents
are primarily composed of interest bearing bank account balances and AAA/Aaa-rated money market funds
denominated in U.S. dollars, Euros and British Pound Sterling.
F-15
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)