Expedia 2013 Annual Report Download - page 99

nights, subject to certain restrictions. Expedia Rewards enables participating travelers to earn points on all hotel,
flight, package and activities made on Expedia.com. 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 factors that require significant judgment 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.
Advertising Expense
We incur advertising expense consisting of offline costs, including television and radio advertising, and
online advertising expense to promote our brands. We expense the production costs associated with
advertisements in the period in which the advertisement first takes place. We expense the costs of
communicating the advertisement (e.g., television airtime) as incurred each time the advertisement is shown. For
the years ended December 31, 2013, 2012 and 2011, our advertising expense was $1.2 billion, $890 million, and
$797 million. As of December 31, 2013 and 2012, we had $16 million and $9 million of prepaid marketing
expenses included in prepaid expenses and other current assets.
Stock-Based Compensation
We measure and amortize the fair value of stock options and restricted stock units (“RSUs”) as follows:
Stock Options. We measure the value of stock options issued or modified, including unvested options
assumed in acquisitions, on the grant date (or modification or acquisition dates, if applicable) at fair value, using
the Black-Scholes option valuation model. The Black-Scholes model incorporates various assumptions including
expected volatility, expected term and risk-free interest rates. The expected volatility is based on historical
volatility of our common stock and other relevant factors. We base our expected term assumptions on our
historical experience and on the terms and conditions of the stock awards granted to employees. We amortize the
fair value, net of estimated forfeitures, over the remaining vesting term on a straight-line basis. The majority of
our stock options vest over four years.
Restricted Stock Units. RSUs are stock awards that are granted to employees entitling the holder to shares of
common stock as the award vests, typically over a three or four-year period. We measure the value of RSUs at
fair value based on the number of shares granted and the quoted price of our common stock at the date of grant.
We amortize the fair value, net of estimated forfeitures, as stock-based compensation expense over the vesting
term on a straight-line basis. We record RSUs that may be settled by the holder in cash, rather than shares, as a
liability and we remeasure these instruments at fair value at the end of each reporting period. Upon settlement of
these awards, our total compensation expense recorded over the vesting period of the awards will equal the
settlement amount, which is based on our stock price on the settlement date. Performance-based RSUs vest upon
achievement of certain company-based performance conditions. On the date of grant, we determine the fair value
of the performance-based award based on the fair value of our common stock at that time and we assess whether
it is probable that the performance targets will be achieved. If assessed as probable, we record compensation
expense for these awards over the estimated performance period using the accelerated method. At each reporting
period, we reassess the probability of achieving the performance targets and the performance period required to
meet those targets. The estimation of whether the performance targets will be achieved and of the performance
period required to achieve the targets requires judgment, and to the extent actual results or updated estimates
differ from our current estimates, the cumulative effect on current and prior periods of those changes will be
recorded in the period estimates are revised, or the change in estimate will be applied prospectively depending on
whether the change affects the estimate of total compensation cost to be recognized or merely affects the period
over which compensation cost is to be recognized. The ultimate number of shares issued and the related
compensation expense recognized will be based on a comparison of the final performance metrics to the
specified targets.
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