Expedia 2009 Annual Report Download - page 50

Loyalty Program Accruals
We offer certain internally administered traveler loyalty programs to our customers, such as our hotels.com
welcomerewards program. Welcomerewards offers travelers one free night at any hotels.com partner property
after that traveler stays 10 nights, subject to certain restrictions. As travelers accumulate points towards free
travel products, we record a liability for the estimated future cost of redemptions. We determine the future
redemption obligation based on judgment factors including: (i) the estimated cost of travel products to be
redeemed, and (ii) an estimated redemption rate based on the overall accumulation and usage of points towards
free travel products, which is determined through current and historical trends as well as statistical modeling
techniques. The actual future cost and rate of redemptions could differ materially from our estimates.
Recoverability of Goodwill and Indefinite and Definite-Lived Intangible Assets
Goodwill. We assess goodwill for impairment annually as of October 1, or more frequently, if events and
circumstances indicate impairment may have occurred. The impairment test requires us to estimate the fair value
of our reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that
reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the
analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting unit’s
goodwill over its implied fair value should such a circumstance arise.
We generally base our measurement of fair value of reporting units on a blended analysis of the present
value of future discounted cash flows and market valuation approach. The discounted cash flows model indicates
the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units
to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted
average cost of capital; long-term rate of growth and profitability of our business; and working capital effects.
The market valuation approach indicates the fair value of the business based on a comparison of the Company to
comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach
model include identifying similar companies with comparable business factors such as size, growth, profitability,
risk and return on investment and assessing comparable revenue and operating income multiples in estimating
the fair value of the reporting units.
We believe the weighted use of discounted cash flows and market approach is the best method for
determining the fair value of our reporting units because these are the most common valuation methodologies
used within the travel and internet industries; and the blended use of both models compensates for the inherent
risks associated with either model if used on a stand-alone basis.
In addition to measuring the fair value of our reporting units as described above, we consider the combined
carrying and fair values of our reporting units in relation to the Company’s total fair value of equity plus debt as
of the assessment date. Our equity value assumes our fully diluted market capitalization, using either the stock
price on the valuation date or the average stock price over a range of dates around the valuation date, plus an
estimated acquisition premium which is based on observable transactions of comparable companies. The debt
value is based on the highest value expected to be paid to repurchase the debt, which can be fair value, principal
or principal plus a premium depending on the terms of each debt instrument.
Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived intangible
assets, which primarily consist of trade name and trademarks, using the relief-from-royalty method. This method
assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation
to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for
the related brands, the appropriate royalty rate and the weighted average cost of capital.
Definite-Lived Intangible Assets. We review the carrying value of long-lived assets or asset groups to be
used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets
might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse
change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the
business climate that could affect the value of the asset, or a significant decline in the observable market value of
an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an
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