Expedia 2009 Annual Report Download - page 86

Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)
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. The fair values of the
derivative financial instruments generally represent the estimated amounts we would expect to receive or pay
upon termination of the contracts as of the reporting date.
At December 31, 2009 and 2008, our derivative instruments primarily consisted of foreign currency forward
contracts. These instruments are typically short-term and, as they do not qualify for hedge accounting treatment,
we classify the changes in their fair value in other, net. We do not hold or issue financial instruments for
speculative or trading purposes.
Through the third quarter of 2008, 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”). During the third quarter of 2008, we terminated our cross-currency
swap agreements for a cost of $17 million and concurrently capitalized the underlying intercompany loans. As a
result of these transactions, we recognized a net gain of less than $1 million. The fair values of our cross-
currency swaps were determined using Level 2 valuation techniques and were based on the present value of net
future cash payments and receipts, which fluctuated based on changes in market interest rates and the euro/
U.S. dollar exchange rate, and 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 reclassified a portion of the gain or loss to
other, net to perfectly offset gains or losses related to transactional remeasurement of the hedged items.
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 2008, we
began using foreign currency forward contracts to economically hedge certain merchant revenue exposures and
in lieu of holding certain foreign currency cash and accounts receivable for the purpose of economically hedging
our foreign currency-denominated operating liabilities. Valuation of the foreign currency forward contracts is
based on foreign currency exchange rates in active markets (a Level 2 input). As of December 31, 2009 and
2008, we had a net forward asset of less than $1 million recorded in prepaid expenses and other current assets
and a net forward liability of $1 million recorded in accrued expenses and other current liabilities. We recorded
$32 million in net gains and $56 million in net losses from foreign currency forward contracts during 2009 and
2008.
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