Orbitz 2008 Annual Report Download - page 81

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ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
accounting standards require us to measure derivatives, including certain derivatives embedded in other contracts, at fair value and to recognize them in our
consolidated balance sheets as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. For our derivatives designated
as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For our derivatives designated
as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified
into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging instruments, and ineffective
portions of hedges, are recognized in earnings in the current period.
We manage interest rate exposure by utilizing interest rate swap agreements to achieve a desired mix of fixed and variable rate debt. We have two interest
rate swaps that effectively convert $300 million of the $600 million term loan facility from a variable to a fixed interest rate (see Note 13—Derivative Financial
Instruments). We determined that the derivative qualified for hedge accounting and was highly effective as a hedge. Accordingly, we have recorded the change in
fair value in accumulated other comprehensive income (loss).
We have entered into foreign currency forward contracts to manage exposure to changes in foreign currencies associated with receivables, payables, and
forecasted earnings. These forward contracts did not qualify for hedge accounting treatment under SFAS No. 133. As a result, the changes in fair values of the
foreign currency forward contracts were recorded in our consolidated statements of operations.
We do not enter into derivative instruments for speculative purposes. We require that the hedges or derivative financial instruments be effective in managing
the interest rate risk or foreign currency risk exposure that they are designated to hedge. This effectiveness is essential to qualify for hedge accounting. Hedges
that meet these hedging criteria are formally designated as such at the inception of the contract. When the terms of an underlying transaction are modified, or
when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the change in the fair value of the derivative instrument will be included in
earnings. Additionally, any derivative instrument used for risk management that becomes ineffective is marked-to-market each period. We believe that our credit
risk has been mitigated by entering into these agreements with major financial institutions. Net interest differentials to be paid or received under our interest rate
swaps are included in interest expense as incurred or earned.
Concentration of Credit Risk
Our cash, cash equivalents, and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with
financial institutions that management believes are of high credit quality. Our accounts receivable are derived from revenue earned from customers located in the
U.S. and internationally. Accounts receivable balances are settled through customer credit cards and debit cards with the majority of accounts receivable
collected upon processing of credit card transactions. See Note 16—Related Party Transactions for customers that accounted for more than 10% of net revenues.
Cash and Cash Equivalents
We consider highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. These short-term investments are
stated at cost, which approximates market value. Our cash and cash equivalents are invested in various investment grade institutional money market accounts,
bank term deposits and commercial paper.
74
Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008