Starwood 2003 Annual Report Download - page 83

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
and franchise fees are recognized in other hotel and leisure revenues in the consolidated statements of
income.
¬Vacation Ownership Ì The Company recognizes revenue from VOI sales in accordance with SFAS
No. 66, ""Accounting for Sales of Real Estate.'' The Company recognizes sales when a minimum of
10% of the purchase price for the VOI has been received in cash, the period of cancellation with refund
has expired and receivables are deemed collectible. For sales that do not qualify for full revenue
recognition as the project has progressed beyond the preliminary stages but has not yet reached
completion, all revenue and proÑt are initially deferred and recognized in earnings through the
percentage-of-completion method. Vacation ownership revenues are recognized in other hotel and
leisure revenues in the consolidated statements of income.
Insurance Retention. Through its captive insurance company, the Company provides insurance cover-
age for workers' compensation, property and general liability claims arising at hotel properties owned or
managed by the Company through policies written directly and through assumed reinsurance arrangements.
Estimated insurance claims payable represent outstanding claims and those estimated to have been incurred
but not reported based upon historical loss experience. Actual costs may vary from estimates based on trends
of losses for Ñled claims and claims estimated to be incurred but not yet Ñled. Estimated costs of these self-
insurance programs are accrued, based on the analysis of third-party actuaries.
Costs Incurred to Sell VOIs. The Company capitalizes direct costs attributable to the sale of VOIs until
the sales are recognized. Selling and marketing costs capitalized under this methodology were approximately
$17 million and $9 million as of December 31, 2003 and 2002, respectively, and all such capitalized costs are
included in other assets in the accompanying consolidated balance sheets. Costs eligible for capitalization
follow the guidelines of SFAS No. 67 ""Accounting for Costs and Initial Rental Operation of Real Estate
Projects.'' If a contract is cancelled, the Company charges the unrecoverable direct selling and marketing
costs to expense, and records forfeited deposits as income.
VOI Inventory Costs. Real estate and development costs are valued at the lower of cost or net realizable
value. Development costs include both hard and soft construction costs and together with real estate costs are
allocated to VOIs on the relative sales value method. Interest, property taxes and certain other carrying costs
incurred during the construction process are capitalized as incurred. Such costs associated with completed
VOI units are expensed as incurred.
Advertising Costs. Starwood and its brand marketing co-ops enter into multi-media ad campaigns,
including television, radio, internet and print advertisements. Costs associated with these campaigns, including
communication and production costs, are aggregated and expensed the Ñrst time that the advertising takes
place in accordance with the American Institute of CertiÑed Public Accountants Statement of Position
No. 93-7 ""Reporting on Advertising Costs.'' If it becomes apparent that the media campaign will not take
place, all costs are expensed at that time. During the years ended December 31, 2003, 2002 and 2001, the
Company incurred approximately $110 million, $105 million and $70 million of advertising expense,
respectively, a signiÑcant portion of which was reimbursed by managed and franchised hotels.
BeneÑcial and Retained Interests. The Company periodically sells notes receivable originated by our
vacation ownership business in connection with the sale of VOIs. The Company retains interests in the assets
transferred to qualiÑed and non-qualiÑed special purpose entities which are accounted for as over-collateral-
izations and interest only strips. These BeneÑcial or Retained Interests are treated as ""trading'' for transactions
prior to 2002 and ""available-for-sale'' for transactions thereafter under the provisions of SFAS No. 115
""Accounting for Certain Investments in Debt and Equity Securities.'' The Company reports changes in the
fair values of these BeneÑcial or Retained Interests through the accompanying consolidated statement of
income for trading securities and through the accompanying consolidated statement of comprehensive income
F-17