Expedia 2008 Annual Report Download - page 85

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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 or have levied assessments 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.
Presentation of Taxes in the Income Statement
We present taxes that we collect from customers and remit to government authorities on a net basis in our
consolidated statements of operations.
Derivative Instruments
Derivative instruments are carried at fair value on our consolidated balance sheets.
We had 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 were determined to be highly effective, at designation and up until settlement during the
third quarter of 2008. As such, we recorded 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, which primarily consist of foreign
currency forward contracts as of December 31, 2008, that do not qualify for hedge accounting treatment in
Other, net. We do not hold or issue financial instruments for speculative or trading purposes.
For additional information about derivative instruments, see Note 7 — Derivative Instruments.
Foreign Currency Translation and Transaction Gains and Losses
Certain of 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 operations
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. Additionally, during the
third and fourth quarter of 2008, we began using foreign currency forward contracts to economically hedge
certain merchant revenue exposures and in lieu of holding certain foreign currency cash for the purpose of
economically hedging our foreign currency-denominated merchant accounts payable and deferred merchant
bookings balances. These instruments are typically short-term and are recorded at fair value with gains and
F-13
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)