Expedia 2014 Annual Report Download - page 98

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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, 2014 and 2013, our derivative instruments primarily consisted of foreign currency forward
contracts. We use 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 operating liabilities. Our goal in managing our foreign exchange risk is to reduce, to the
extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash
flows and financial position. Our foreign currency forward contracts 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.
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 other comprehensive income (“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, as discussed
above, we use 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 operating liabilities.
Debt Issuance Costs
We defer costs we incur to issue debt and amortize these costs to interest expense over the term of the debt
or, when the debt can be redeemed at the option of the holders, over the term of the redemption option.
Marketing Promotions
We periodically provide incentive offers to our customers to encourage booking of travel products and
services. Generally, our incentive offers are as follows:
Current Discount Offers. These promotions include dollar off discounts to be applied against current
purchases. We record the discounts as reduction in revenue at the date we record the corresponding revenue
transaction.
Inducement Offers. These promotions include discounts granted at the time of a current purchase to be
applied against a future qualifying purchase. We treat inducement offers as a reduction to revenue based on
estimated future redemption rates. We allocate the discount amount at the time of the offer between the current
purchase and the potential future purchase based on our expected relative value of the transactions. We estimate
our redemption rates using our historical experience for similar inducement offers.
Concession Offers. These promotions include discounts to be applied against a future purchase to maintain
customer satisfaction. Upon issuance, we record these concession offers as a reduction to revenue based on
estimated future redemption rates. We estimate our redemption rates using our historical experience for
concession offers.
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