Orbitz 2013 Annual Report Download - page 61

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
61
Income Taxes
Our provision for income taxes is determined using the asset and liability method. Under this method, deferred tax assets
and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of
assets and liabilities using the combined federal and state or foreign effective tax rates that are applicable to us in a given year.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or settled. The deferred tax assets are recorded net of a valuation
allowance when, based on the weight of available evidence, we believe it is more likely than not that some portion or all of the
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, 2013 we had two interest rate swaps outstanding that will substantially convert $200.0 million of the term
loan facility from a variable to a fixed interest rate once they become effective (see Note 12 - Derivative Financial
Instruments). We will pay a fixed interest rate on the notional amount and in exchange receive a variable interest rate based on
the one-month LIBOR rate.
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 or trading 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 and foreign exchange contracts are potentially subject to concentration of credit risk. We
maintain cash and cash equivalent balances with financial institutions that are in excess of Federal Deposit Insurance
Corporation insurance limits or that are deposited in foreign institutions.
Additionally, we employ forward foreign exchange contracts to hedge our exposure to foreign currency fluctuations. At
the maturity of these forward contracts, the counterparties are obligated to pay settlement values.
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.