Orbitz 2014 Annual Report Download - page 57

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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Use of Estimates
The preparation of our consolidated financial statements and related notes in conformity with GAAP requires us to make
certain estimates and assumptions. Our estimates and assumptions affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to matters that require a significant level of judgment or are otherwise subject to an inherent degree of
uncertainty.
Our significant estimates include elements of revenue recognition, the realization of deferred tax assets, amounts that
may be due under the tax sharing agreement, impairment of long-lived assets, goodwill and indefinite-lived intangible assets,
costs to be capitalized as well as the useful life of capitalized software, and contingent liabilities, including taxes related to
hotel occupancy. Actual amounts may differ from these estimates.
Foreign Currency Translation
Balance sheet accounts of our operations outside of the United States are translated from foreign currencies into
U.S. dollars at the exchange rates as of the Consolidated Balance Sheet dates. Revenues and expenses are translated at average
exchange rates during the period. Foreign currency translation gains or losses are included in accumulated other comprehensive
income (loss) in shareholders’ equity. Gains and losses resulting from foreign currency transactions, which are denominated in
currencies other than the entity’s functional currency, are included in our Consolidated Statements of Operations.
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 have two primary types of
contractual arrangements with our vendors, which we refer to herein as the “merchant” and “retail” models. Under both the
merchant and retail models, we record revenue earned net of all amounts paid to our suppliers.
We provide customers the ability to book air travel, hotels, car rentals and other travel products and services through our
various websites. These travel products and services are made available to our customers for booking on a stand-alone basis or
as part of a vacation package.
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 us for that
product. Customers generally pay us for reservations at the time of booking. Initially, we record these customer receipts 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 since we are paid via a credit card, debit card or certain other electronic
payment processors (collectively “Payment Processors”), while the cardholder’s Payment Processors collects funds from the
customer. However we are subject to charge-backs and fraud risk, which we monitor closely; 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. Transaction
related taxes are recorded net of any amounts received from customers.
Under the merchant model we receive payment for a reservation from a customer via the Payment Processors. The
Payment Processors transmit payment for the reservation within one to two days of the booking date. The Payment Processors
take on the risk of collecting funds from the customer. We are subject to fraud because we may be charged by the Payment
Processors for fraudulent charges after we remit funds to the supplier. In other instances, the customer may be dissatisfied with
some aspect of their travel and contest the charges with the Payment Processors, which could result in a charge-back.
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