Starwood 2012 Annual Report Download - page 124

CRITICAL ACCOUNTING POLICIES
We believe the following to be our critical accounting policies:
Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resort
revenues at our owned, leased and consolidated joint venture properties; (2) management fees and franchise fees;
(3) vacation ownership and residential sales; (4) other revenues from managed and franchised properties.
Generally, revenues are recognized when the services have been rendered. The following is a description of the
composition of our revenues:
• Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel
operations, including the rental of rooms and food and beverage sales from owned, leased or consolidated
joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been
rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality
industry as well as relative market share of the local competitive set of hotels. Revenue per available
room (“REVPAR”) is a leading indicator of revenue trends at owned, leased and consolidated joint
venture hotels as it measures the period-over-period growth in rooms revenue for comparable properties.
• Management Fees and Franchise Fees — Represents fees earned on hotels and resorts managed
worldwide, usually under long-term contracts, franchise fees received in connection with the franchise of
our Luxury Collection, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft and Element brand
names, termination fees and the amortization of deferred gains related to sold properties for which we
have significant continuing involvement. Management fees are comprised of a base fee, which is
generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the
property’s profitability. For any time during the year, when the provisions of our management contracts
allow receipt of incentive fees upon termination, incentive fees are recognized for the fees due and earned
as if the contract was terminated at that date, exclusive of any termination fees due or payable. Therefore,
during periods prior to year-end, the incentive fees recorded may not be indicative of the eventual
incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not
be final. Franchise fees are generally based on a percentage of hotel room revenues. As with our owned,
leased and consolidated joint venture hotel revenues discussed above, these revenue sources are affected
by conditions impacting the travel and hospitality industry as well as competition from other hotel
management and franchise companies.
• Vacation Ownership and Residential Sales — We recognize revenue from VOI sales and financings and
the sales of residential units which are typically a component of mixed use projects that include a hotel.
Such revenues are impacted by the state of the global economy and, in particular, the U.S. economy, as
well as interest rates and other economic conditions affecting the lending market. Revenue is generally
recognized upon the buyer demonstrating a sufficient level of initial and continuing investment, when the
period of cancellation with refund has expired and receivables are deemed collectible. We determine the
portion of revenues to recognize for sales accounted for under the percentage of completion method based
on judgments and estimates including total project costs to complete. Additionally, we record reserves
against these revenues based on expected default levels. Changes in costs could lead to adjustments to the
percentage of completion status of a project, which may result in differences in the timing and amount of
revenues recognized from the projects. We have also entered into licensing agreements with third-party
developers to offer consumers branded condominiums or residences. Our fees from these agreements are
generally based on the gross sales revenue of units sold. Residential fee revenue is recorded in the period
that a purchase and sales agreement exists, delivery of services and obligations has occurred, the fee to
the owner is deemed fixed and determinable and collectability of the fees is reasonably assured.
Residential revenue on whole ownership units is generally recorded using the completed contract method,
whereby revenue is recognized only when a sales contract is completed or substantially completed.
During the performance period, costs and deposits are recorded on the balance sheet.
• Other Revenues from Managed and Franchised Properties – These revenues represent reimbursements of
costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to
payroll costs at managed properties where we are the employer. Since the reimbursements are made based
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