Host Marriott 2004 Annual Report - Host Hotels & Resorts, Inc

cash flows for the hotel would be less than the net book value
of the hotel. For impaired assets, we record an impairment
charge when a property’s fair value less selling costs is less
than its net book value. We test for impairment in several
situations, including when current or projected cash flows
are less than historical cash flows, when it becomes more
likely than not that a hotel will be sold before the end of its
previously estimated useful life, as well as whenever an asset
is classified as “held for sale” or events or changes in circumstances
indicate that a hotel’s net book value may not be
recoverable. In the evaluation of the impairment of our
hotels, we make many assumptions and estimates, including:
■ projected cash flows;
■ holding period;
■ expected useful life;
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future capital expenditures; and
fair values, including consideration of capitalization
rates, discount rates and comparable selling prices.
Changes in these estimates, assumptions, future changes in
economic conditions, or property-level results could require us
to record additional impairment charges, which would be
reflected in operations in the future.
• Classification of Assets as “Held for Sale.” We classify properties
that we are actively marketing as held for sale when all of the
following conditions are met:
■ our Board of Directors has approved the sale (to the extent
the dollar magnitude of the sale requires Board approval);
■ a binding agreement to purchase the property has
been signed;
■ the buyer has committed a significant amount of
non-refundable cash; and
■ no significant financing contingencies exist which
could cause the transaction not to be completed in
a timely manner.
To the extent a property is classified as held for sale and its
fair value less selling costs is lower than the net book value of
the property, we will record an impairment loss. See the discussion
above concerning the use of estimates and judgments in
determining fair values for impairment tests.
• Depreciation and Amortization Expense. Depreciation expense
is based on the estimated useful life of our assets and amortization
expense for leasehold improvements is the shorter
of the lease term or the estimated useful life of the related
assets. The lives of the assets are based on a number of
assumptions including cost and timing of capital expenditures
to maintain and refurbish the assets, as well as specific
market and economic conditions. While management
believes its estimates are reasonable, a change in the estimated
lives could affect depreciation expense and net income
(loss) or the gain or loss on the sale of any of our hotels.
• Valuation of Deferred Tax Assets. We have approximately
$111 million, net of a valuation allowance of $14 million,
in consolidated deferred tax assets as of December 31,
2004. The objective of financial accounting and reporting
standards for income taxes are to recognize the amount
of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences
of events that have been recognized in a company’s
financial statements or tax returns. We have considered
various factors, including future reversals of existing taxable
temporary differences, future projected taxable income and
tax planning strategies in determining a valuation allowance
for our deferred tax assets, and we believe that it is more
likely than not that we will be able to realize the $111 million
in deferred tax assets in the future. When a determination
is made that all, or a portion, of the deferred tax assets
may not be realized, an increase in income tax expense
would be recorded in that period.
• Valuation of Foreign Currency and Derivative Contracts. We
have two interest rate swap agreements outstanding as of
December 31, 2004. Our interest rate swap agreements with
a fair market value of $19 million as of December 31, 2004
have been designated as fair value hedges, as described in
Note 1 to our consolidated financial statements. While we
intend to continue to meet the conditions for hedge accounting,
if a particular interest rate swap does not qualify as
highly effective, any change in the fair value of the derivative
used as a hedge would be reflected in current earnings.
Should any change in management strategy, or any other
circumstance, cause an existing highly-effective hedge to
become ineffective, the accumulated loss or gain in the value
of the derivative instrument since its inception may be
reclassified from the stockholders’ equity section of the balance
sheet to current net income (loss). We also have two
interest rate cap agreements that are fair valued each quarter
and the increase or decrease in fair value is recorded in net
income (loss). We also have several foreign currency forward
exchange contracts that we previously used to hedge the
mortgage loan on our Canadian properties. The hedge was
deemed ineffective for accounting purposes in the fourth
quarter of 2003. Accordingly, the change in fair value of
these foreign currency forward exchange contracts is
recorded in net income (loss) on the consolidated statements
of operations. See the discussion in “Quantitative and
Qualitative Disclosures About Market Risk.” We estimate the
fair value of all of these instruments through the use of third
party valuations, which utilize the market standard methodology
of netting the discounted future cash receipts and the
discounted expected cash payments. The variable cash flow
streams are based on an expectation of future interest and
exchange rates derived from observed market interest and
exchange rate curves. The values of these instruments will
change over time as cash receipts and payments are made
and as market conditions change. Any event that impacts the
level of actual and expected future interest or exchange rates
will impact our valuations. The fair value of our existing foreign
currency and derivatives is likely to fluctuate materially
from year to year based on changing levels of interest and
exchange rates and shortening terms to maturity.
• Consolidation Policies. Judgment is required with respect to
the consolidation of partnership and joint venture entities in
the evaluation of control, including assessment of the importance
of rights and privileges of the partners based on voting
rights, as well as financial interests that are not controllable
through voting interests. Currently, we have investments in
entities that in the aggregate own 123 hotel properties and
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HOST MARRIOTT 2004