Orbitz 2010 Annual Report Download - page 61

Presented below are those accounting policies that we believe require subjective and complex judgments
that could potentially affect our reported results. Although we believe these policies to be the most critical,
other accounting policies also have a significant effect on our consolidated financial statements and certain of
these policies may also require the use of estimates and assumptions (see Note 2 — Summary of Significant
Accounting Policies of the Notes to Consolidated Financial Statements).
Revenue Recognition
We recognize revenue when it is earned and realizable, when persuasive evidence of an arrangement
exists, services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.
We record revenue earned net of all amounts paid to our suppliers under both our retail and merchant models.
We offer customers the ability to book airline, hotel, car rental and other travel reservations through our
various brands, including Orbitz, CheapTickets, ebookers and HotelClub. These products and services are
made available to our customers for booking on a stand-alone basis or as part of a dynamic vacation package.
We have two primary types of contractual arrangements with our vendors, which we refer to herein as the
“merchant” and “retail” models.
Under the merchant model, we generate revenue for our services based on the difference between the
total amount the customer pays for the travel product and the negotiated net rate plus estimated taxes that the
supplier charges for that travel product. Customers generally pay for reservations in advance, at the time of
booking. Initially, we record these advance payments as accrued merchant payables and either deferred income
or net revenue, depending on the travel product. In the merchant model, we do not take on credit risk with the
customer, however we are subject to fraud risk; we have the ability to determine the price; we are not
responsible for the actual delivery of the flight, hotel room or car rental; we take no inventory risk; we have
no ability to determine or change the products or services delivered; and the customer chooses the supplier.
We recognize net revenue under the merchant model when we have no further obligations to the
customer. For merchant air transactions, this is at the time of booking. For merchant hotel transactions and
merchant car transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively.
The timing of revenue recognition is different for merchant air travel because our primary service to the
customer is fulfilled at the time of booking.
We accrue for the cost of merchant hotel and merchant car transactions based on amounts we expect to
be invoiced by suppliers. If we do not receive an invoice within a certain period of time, generally within six
months, or the invoice received is less than the accrued amount, we reverse a portion of the accrued cost when
we determine it is not probable that we will be required to pay the supplier, based on our historical experience
and contract terms. This would result in an increase in net revenue and a decrease to the accrued merchant
payable.
Under the retail model, we pass reservations booked by our customers to the travel supplier for a
commission. Under this model, we do not take on credit risk with the customer; we are not the primary
obligor with the customer; we have no latitude in determining pricing; we take no inventory risk; we have no
ability to determine or change the products or services delivered; and the customer chooses the supplier.
We recognize net revenue under the retail model when the reservation is made, secured by a customer
with a credit card and we have no further obligations to the customer. For air transactions, this is at the time
of booking. For hotel transactions and car transactions, net revenue is recognized at the time of check-in or
customer pick-up, respectively, net of an allowance for cancelled reservations. The timing of recognition is
different for retail hotel and retail car transactions than for retail air travel because unlike air travel where the
reservation is secured by a customer’s credit card at booking, car rental bookings and hotel bookings are not
secured by a customer’s credit card until the pick-up date and check-in date, respectively. Allowances for
cancelled reservations primarily relate to cancellations that do not occur through our website, but instead occur
directly through the supplier of the travel product. The amount of the allowance is determined based on our
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