Orbitz 2012 Annual Report Download - page 61

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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recorded deferred tax assets will not be realized in future periods. The realization of the deferred tax assets, net of a valuation
allowance, is primarily dependent on estimated future taxable income. A change in our estimate of future taxable income may
require an increase or decrease to the valuation allowance.
Derivative Financial Instruments
We measure derivatives at fair value and 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, if any, 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 swaps to achieve a desired mix of fixed and variable rate debt.
As of December 31, 2012 we had one interest rate swap that effectively converted $100.0 million of the term loan facility from
a variable to a fixed interest rate (see Note 12 - Derivative Financial Instruments). We determined that the interest rate swaps
outstanding during the year ended December 31, 2012 qualified for hedge accounting and were highly effective as hedges.
Accordingly, we have recorded the change in fair value of our interest rate swaps in accumulated other comprehensive income/
(loss).
We have entered into foreign currency contracts to manage exposure to changes in foreign currencies associated with
receivables, payables and intercompany transactions. These foreign currency contracts did not qualify for hedge accounting
treatment. As a result, the changes in fair values of the foreign currency contracts were recorded in selling, general and
administrative expense 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.
Hedges that qualify for hedge accounting 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 and cash equivalents are potentially subject to concentration of credit risk. We maintain cash and cash
equivalent balances with financial institutions that, in some cases, are in excess of Federal Deposit Insurance Corporation
insurance limits or that are deposited in foreign institutions.
Cash and Cash Equivalents
We consider cash and highly liquid investments, such as money market funds, with an original maturity of three months
or less to be cash and cash equivalents. Cash and cash equivalents are stated at cost, which approximates or equals fair value
due to their short-term nature.
Allowance for Doubtful Accounts
Our accounts receivable are reflected in our consolidated balance sheets net of an allowance for doubtful accounts. We
provide for estimated bad debts based on our assessment of our ability to realize receivables, considering historical collection
experience, the general economic environment and specific customer information. When we determine that a receivable is not
collectable, the account is charged to expense in our consolidated statements of operations. Bad debt expense is recorded in
selling, general and administrative expense in our consolidated statements of operations. Bad debt expense was not significant
for the years ended December 31, 2012 and 2010, and we recorded bad debt expense of $0.3 million for the year ended
December 31, 2011.