Orbitz 2009 Annual Report Download - page 64

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prospectively as accretions to the tax sharing liability in our consolidated balance sheets and interest expense
in our consolidated statements of operations.
The valuation of the tax sharing liability requires us to make certain estimates in projecting the quarterly
depreciation and amortization benefit we expect to receive, as well as the associated effective income tax rates.
The estimates require certain assumptions as to our future operating performance and taxable income, the tax
rate, the timing of tax payments, current and projected market conditions, and the applicable discount rate.
The discount rate assumption is based on our weighted average cost of capital at the time of the Blackstone
Acquisition, which was approximately 12%. A variation of the assumptions used could lead to a different
conclusion regarding the carrying value of the tax sharing liability and could have a significant effect on our
consolidated financial statements.
Equity-Based Compensation
In accordance with SFAS No. 123(R), “Share-Based Payments” (“SFAS No. 123(R)”), we measure
equity-based compensation cost at fair value and recognize the corresponding compensation expense on a
straight-line basis over the service period during which awards are expected to vest. We include equity-based
compensation expense in the selling, general and administrative line of our consolidated statements of
operations. The fair value of restricted stock and restricted stock units is determined based on the average of
the high and low price of our common stock on the date of grant. The fair value of stock options is determined
on the date of grant using the Black-Scholes valuation model, which incorporates a number of variables, some
of which are based on estimates and assumptions. These variables include stock price, exercise price, expected
life, expected volatility, dividend yield, and the risk-free rate. Stock price and exercise price are set at fair
value on the date of grant. Expected volatility is based on implied volatilities for publicly traded options and
historical volatility for comparable companies over the estimated expected life of the stock options. The
expected life represents the period of time the stock options are expected to be outstanding and is based on the
“simplified method,” as defined in the SEC Staff Accounting Bulletin No. 110, “Shared-Based Payments.” The
risk-free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated
expected life of the stock options.
The amount of equity-based compensation expense recorded each period is net of estimated forfeitures.
We estimate forfeitures based on historical employee turnover rates, the terms of the award issued and
assumptions regarding future employee turnover. We periodically perform an analysis to determine if estimated
forfeitures are reasonable based on actual facts and circumstances, and adjustments are made as necessary. If
our estimates differ significantly from actual results, our consolidated financial statements could be materially
affected.
Internal Use Software
We capitalize the costs of software developed for internal use in accordance with Statement of Position
(“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”
(“SOP 98-1”) and EITF Issue No. 00-2, “Accounting for Website Development Costs.” Capitalization
commences when the preliminary project stage of the application has been completed and it is probable that
the project will be completed and used to perform the function intended. Amortization commences when the
software is placed into service. We also capitalize interest on internal software development projects in
accordance with SFAS No. 34, “Capitalization of Interest Cost,” and SOP 98-1. The amount of interest
capitalized is computed by applying our weighted average borrowing rate to the average amount of
accumulated expenditures in the period. The determination of costs to be capitalized as well as the useful life
of the software requires us to make estimates and judgments.
Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial
Statements for information regarding recently issued accounting pronouncements.
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