2006 Annual Report

21 | VARIABLE INTEREST ENTITIES
FIN 46,“Consolidation of Variable Interest Entities” (“the
Interpretation”), was effective for all enterprises with variable
interests in variable interest entities created after January 31,
2003. FIN 46(R), which was revised in December 2003, was effective
for all entities to which the provisions of FIN 46 were not
applied as of December 24, 2003. We applied the provisions
of FIN 46(R) to all entities subject to the Interpretation as of
March 26, 2004. Under FIN 46(R), if an entity is determined to be
a variable interest entity, it must be consolidated by the enterprise
that absorbs the majority of the entity’s expected losses,
receives a majority of the entity’s expected residual returns, or
both, the “primary beneficiary.”
We currently consolidate four entities that are variable interest
entities under FIN 46(R). These entities were established with
the same partner to lease four Marriott-branded hotels. The
combined capital in the four variable interest entities is less than
$1 million, which is used primarily to fund hotel working capital.
Our equity at risk is $2 million and we hold 55 percent of the
common equity shares.
We have one other significant interest in an entity that is a
variable interest entity under FIN 46(R). In February 2001, we
entered into a shareholders’ agreement with an unrelated third
party to form a joint venture to own and lease luxury hotels to
be managed by us. In February 2002, the joint venture signed
its first lease with a third-party landlord. We hold 35 percent of
the equity and 65 percent of the debt. In addition, each equity
partner entered into various guarantees with the landlord to
guarantee lease payments. Our maximum exposure to loss is
$17 million. We do not consolidate the joint venture since we
do not bear the majority of the expected losses or expected
residual returns.
In conjunction with the transaction with CTF described more
fully in Footnote No. 8,“Acquisitions and Dispositions,” under the
caption “2005 Acquisitions” we manage 15 hotels on behalf of
four tenant entities 100 percent owned by CTF, which lease the
15 hotels from third-party owners. The entities have minimal
equity and minimal assets comprised of hotel working capital.
CTF has placed money in a trust account to cover cash flow
shortfalls and to meet rent payments. At year-end 2006, the trust
account held approximately $46 million. The entities are variable
interest entities under FIN 46(R). We do not consolidate the entities,
as we do not bear the majority of the expected losses. We
are secondarily liable for rent payments for nine of the 15 hotels
in the event that there are cash flow shortfalls and there is no
money left in the trust. Future minimum lease payments
through the end of the lease term for these nine hotels total
approximately $141 million. In addition, we are also secondarily
liable for rent payments of up to $39 million for the six other
hotels in the event that there are cash flow shortfalls.
We also manage one hotel on behalf of a tenant entity
100 percent owned by CTF, which leases the hotel from a thirdparty
owner. The entity has minimal equity and minimal assets
comprised of hotel working capital. CTF has placed money in a
trust account to cover cash flow shortfalls and to meet rent payments.
At year-end 2006, there was approximately $23 million in
the trust. The entity is a variable interest entity under FIN 46(R).
We consolidate the entity as we bear the majority of the
expected losses. We are secondarily liable for rent payments for
this hotel in the event that there is a cash flow shortfall and
there is not money left in the trust. Future minimum lease payments
through the end of the lease term total $208 million.
62 | MARRIOTT INTERNATIONAL, INC. 2006
22 | RELATED PARTY TRANSACTIONS
Equity Method Investments
We have equity method investments in entities that own properties
where we provide management and/or franchise services
and receive a fee. In addition, in some cases we provide loans,
preferred equity or guarantees to these entities. Our ownership
interest in these equity method investments generally varies
from 10 to 50 percent.
The following tables present financial data resulting from
transactions with these related parties:
Income Statement Data
($ in millions) 2006 2005 2004
Base management fees $ 62 $ 83 $ 72
Incentive management fees 22 14 8
Cost reimbursements 649 936 802
Owned, leased, corporate housing
and other revenue 3 22 29
Total revenue $ 736 $1,055 $ 911
General, administrative and other $ (1) $ (19) $ (33)
Reimbursed costs (649) (936) (802)
Gains and other income 28 54 19
Interest income 4 31 74
Reversal of provision for loan losses 1 — 3
Equity in losses—Synthetic fuel — — (28)
Equity in earnings (losses)—Other 3 36 (14)
Balance Sheet Data
($ in millions) 2006 2005
Current assets-accounts and
notes receivable $ 76 $ 47
Contract acquisition costs 34 26
Cost method investments 45 166
Equity method investments 332 349
Loans to equity method investees 27 36
Long-term deferred tax assets, net 4 19
Current liabilities:
Accounts payable — (2)
Other payables and accruals (2) (43)
Other long-term liabilities (13) (19)
Summarized information relating to the entities in which we
have equity method investments is as follows:
Income Statement Summary
($ in millions) 2006 2005 2004
Sales $1,479 $1,975 $1,617
Net income (loss) $ 169 $ 259 $ (69)
Balance Sheet Summary
($ in millions) 2006 2005
Assets (primarily comprised of hotel
real estate managed by us) $4,348 $5,589
Liabilities $2,837 $3,654