Orbitz 2012 Annual Report Download - page 63

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
63
of operations. We use a market or income based valuation approach, or a combination of both, to estimate fair values of the
relevant trademarks and trade names.
Restricted Cash
In order to collateralize the multi-currency letter of credit facility secured in 2012 and bank guarantees, as well as for other
general business purposes, we have funds deposited as restricted cash.
Tax Sharing Liability
We have a liability included in our consolidated balance sheets that relates to a tax sharing agreement between Orbitz
and the Founding Airlines. The agreement governs the allocation of tax benefits resulting from a taxable exchange that took
place in connection with the Orbitz initial public offering in December 2003 (“Orbitz IPO”). As a result of this taxable
exchange, the Founding Airlines incurred a taxable gain. The taxable exchange caused Orbitz to have additional future tax
deductions for depreciation and amortization due to the increased tax basis of its assets. The additional tax deductions for
depreciation and amortization may reduce the amount of taxes we are required to pay in future years. For each tax period
during the term of the tax sharing agreement, we are obligated to pay the Founding Airlines a significant percentage of the
amount of the tax benefit realized as a result of the taxable exchange. The tax sharing agreement commenced upon
consummation of the Orbitz IPO and continues until all tax benefits have been utilized.
We use discounted cash flows in calculating and recognizing the tax sharing liability. We review the calculation of the
tax sharing liability on a quarterly basis and make revisions to our estimated timing of payments when appropriate. We also
assess whether there are any significant changes, such as changes in the amount of payments and tax rates that could materially
affect the present value of the tax sharing liability. Although the expected gross remaining payments that may be due under this
agreement were $123.9 million as of December 31, 2012, the timing and amount of payments may change. Any changes in
timing of payments are recognized prospectively as accretions to the tax sharing liability in our consolidated balance sheets and
non-cash interest expense in our consolidated statements of operations. Any changes in the amount of payments are recognized
in selling, general and administrative expense in our consolidated statements of operations.
At the time of the Blackstone Acquisition, Cendant (now Avis Budget Group, Inc.) indemnified Travelport and us for a
portion of the amounts due under the tax sharing agreement. As a result, we recorded a $37.0 million long-term asset, which
was included in other non-current assets in our consolidated balance sheets at December 31, 2010. During 2011, we wrote off
this asset and the corresponding portion of the tax sharing liability (see Note 7 - Tax Sharing Liability for further details).
Equity-Based Compensation
We measure equity-based compensation cost at fair value and recognize the corresponding compensation expense over
the service period during which awards are expected to vest. We include equity-based compensation in selling, general and
administrative expense in 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. The amount of equity-based compensation
expense recorded each period is net of estimated forfeitures based on historical forfeiture rates.
Hotel Occupancy Taxes
Some states and localities impose a tax on the use or occupancy of hotel accommodations (“hotel occupancy tax”).
Generally, hotels collect hotel occupancy tax based on the amount of money they receive for renting their hotel rooms and
remit the tax to the appropriate taxing authorities. Using the travel services our websites offer, customers are able to make hotel
room reservations. While applicable tax laws vary among different taxing jurisdictions, we generally believe that these laws do
not require us to collect and remit hotel occupancy tax on the compensation that we receive for our travel services. Some tax
authorities have initiated lawsuits or administrative proceedings asserting that we are required to collect and remit hotel
occupancy tax on the amount of money we receive from customers for facilitating their reservations. The ultimate resolution of
these lawsuits and proceedings in all jurisdictions cannot be determined at this time. We establish an accrual for legal
proceedings (tax or otherwise) when we determine that a loss is both probable and can be reasonably estimated. See Note 9 -
Commitments and Contingencies.