Expedia 2014 Annual Report Download - page 56

amounts as revenue six months in arrears, net of an allowance, when we determine it is not probable that we will
be required to pay the supplier, based on historical experience and contract terms. Actual revenue could be
greater or less than the amounts estimated due to changes in hotel billing practices or changes in traveler
behavior.
Loyalty Program Accruals
We offer certain internally administered traveler loyalty programs to our customers, such as our Hotels.com
Welcome Rewards program and our Brand Expedia Expedia+ rewards program. Welcome Rewards offers
travelers one free night at any Hotels.com partner property after that traveler stays 10 nights, subject to certain
restrictions. Expedia+ rewards enables participating travelers to earn points on all hotel, flight, package and
activities made on Expedia.com and Expedia.ca. 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. In the evaluation of goodwill for impairment, we first
perform a qualitative assessment to determine whether it is more likely than not that the fair value of the
reporting unit is less than the carrying amount. If so, we perform a quantitative assessment and compare the fair
value of the reporting unit to the carrying value. 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.
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