Contract acquisition costs

199

207

Assets, Current, Total

2,851

3,406

Property and equipment

1,362

1,443

Intangible assets

Goodwill

875

731

^[1]

710

^[1]

Goodwill And Intangible Assets, Net, Total

1,606

1,585

Equity and cost method investments

249

^[1]

346

^[1]

Notes receivable

452

^[1]

830

^[1]

Deferred taxes, net

1,020

^[1]

727

^[1]

Current portion of long-term debt

393

566

Assets, Total

7,933

8,903

Current liabilities

120

Accounts payable

562

^[1]

704

^[1]

Accrued payroll and benefits

519

633

Liability for guest loyalty program

454

446

Liabilities, Current, Total

688

^[1]

630

^[1]

2,287

2,533

Long-term debt

2,234

2,975

Liability for guest loyalty program

1,193

1,090

Other long-term liabilities

1,077

^[1]

914

^[1]

Marriott shareholders' equity

Class A Common Stock

Additional paid-in-capital

3,585

3,590

Retained earnings

3,103

3,565

Treasury stock, at cost

(5,564)

(5,765)

Accumulated other comprehensive (loss) income

(15)

Stockholders' Equity Attributable to Parent, Total

1,142

1,380

Noncontrolling interests

Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest, Total

1,142

1,391

Liabilities and Stockholders' Equity, Total

$ 7,933

$ 8,903

[1]	See Footnote No. 24, "Related Party Transactions," of the Notes to Consolidated Financial Statements for disclosure of related party amounts.

Statement Of Cash Flows Indirect (USD $) In Millions, unless otherwise specified	12 Months Ended
	Jan. 01, 2010	Jan. 02, 2009	Dec. 28, 2007
OPERATING ACTIVITIES
Net (loss) income	$ (353)	$ 347	$ 695
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization	185	190	197
Income taxes	(167)	101	(152)
Timeshare activity, net	146	(398)	(155)
Timeshare strategy-impairment charge	752	0	0
Liability for guest loyalty program	103	116	122
Restructuring costs, net	16	51	0
Asset impairments and write-offs	80	62	13
Working capital changes and other	106	172	58
Net cash provided by operating activities	868	641	778
INVESTING ACTIVITIES
Capital expenditures	(147)	(357)	(671)
Dispositions	2	38	745
Loan advances	(65)	(53)	(31)
Loan collections and sales	20	36	106
Equity and cost method investments	(28)	(25)	(40)
Contract acquisition costs	(39)	(133)	(59)
Sale of available-for-sale securities	16	22	43
Partial surrender of life insurance policy cash value	97	0	0
Other	75	(11)	32
Net cash (used in) provided by investing activities	(69)	(483)	125
FINANCING ACTIVITIES
Commercial paper/credit facility, net	(544)	384	258
Issuance of long-term debt	0	17	820
Repayment of long-term debt	(238)	(275)	(153)
Issuance of Class A Common Stock	27	51	203
Dividends paid	(63)	(115)	(105)
Purchase of treasury stock	0	(434)	(1,757)
Other	0	16	(28)
Net cash used in financing activities	(818)	(356)	(762)
(DECREASE) INCREASE IN CASH AND EQUIVALENTS	(19)	(198)	141
CASH AND EQUIVALENTS, beginning of year	134	332	191
CASH AND EQUIVALENTS, end of year	$ 115	$ 134	$ 332

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	12 Months Ended
	Jan. 01, 2010	Jan. 02, 2009	Dec. 28, 2007
Net (loss) income	$ (353)	$ 347	$ 695
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	24	(59)	35
Other derivative instrument adjustments	(6)	12	(2)
Unrealized gains (losses) on available-for-sale securities	6	(21)	(8)
Reclassification of losses (gains) on available-for-sale securities	4	2	(18)
Total other comprehensive (loss) income, net of tax	28	(66)	7
Comprehensive (loss) income	(325)	281	702
Parent
Net (loss) income	(346)	362	696
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	24	(59)	35
Other derivative instrument adjustments	(6)	12	(2)
Unrealized gains (losses) on available-for-sale securities	6	(21)	(8)
Reclassification of losses (gains) on available-for-sale securities	4	2	(18)
Total other comprehensive (loss) income, net of tax	28	(66)	7
Comprehensive (loss) income	(318)	296	703
Equity Attributable to Noncontrolling Interests
Net (loss) income	(7)	(15)	(1)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	0	0	0
Other derivative instrument adjustments	0	0	0
Unrealized gains (losses) on available-for-sale securities	0	0	0
Reclassification of losses (gains) on available-for-sale securities	0	0	0
Total other comprehensive (loss) income, net of tax	0	0	0
Comprehensive (loss) income	$ (7)	$ (15)	$ (1)

Net of tax effect change in accumulated gains and losses from derivative instruments designated and qualifying as the effective portion of cash flow hedges after taxes. A cash flow hedge is a hedge of the exposure to variability in the cash flows of a recognized asset or liability or a forecasted transaction that is attributable to a particular risk. The change includes an entity's share of an equity investee's increase (decrease) in deferred hedging gains or losses.

+ References+ Details

Beginning Balance at Dec. 29, 2006

Appreciation or loss in value (before reclassification adjustment) of the total of unsold securities during the period being reported on, net of tax. Reclassification adjustments include: (1) the unrealized holding gain or loss, net of tax, at the date of the transfer for a debt security from the held-to-maturity category transferred into the available-for-sale category. Also includes the unrealized gain or loss at the date of transfer for a debt security from the available-for-sale category transferred into the held-to-maturity category; (2) the unrealized gains or losses realized upon the sale of securities, after tax; and (3) the unrealized gains or losses realized upon the write-down of securities, after tax.

+ References+ Details

Statement Of Shareholders' Equity (USD $)
In Millions

Total

Class A Common Stock

Additional Paid-in-Capital

Retained Earnings

Treasury Stock, at Cost

Accumulated Other Comprehensive Income (Loss)

Equity Attributable to Noncontrolling Interests

$ 2,651

$ 5

$ 3,617

$ 2,860

$ (3,908)

$ 44

$ 33

Beginning Balance at Dec. 29, 2006

393.3

393.3

8.6

Impact of adoption of ASC 860-50-35

(41.0)

^[1]

Impact of adoption of ASC 740-10

^[2]

(155)

(121)

(34)

Other comprehensive income (loss)

2,497

3,496

2,827

(3,908)

Net income (loss)

695

696

(1)

Dividends

(107)

146

(84)

195

Ending Balance at Dec. 28, 2007

(1,777)

1,462

3,531

3,332

(5,490)

Ending Balance at Dec. 28, 2007

360.9

360.9

4.4

Impact of adoption of ASC 360-20-40

(11.9)

^[3]

(3)

Other comprehensive income (loss)

1,459

3,531

3,329

(5,490)

Net income (loss)

347

362

(15)

(66)

Dividends

(118)

147

(8)

(7)

Ending Balance at Jan. 02, 2009

(371)

1,391

3,590

3,565

(5,765)

(15)

Ending Balance at Jan. 02, 2009

353.4

4.8

Other comprehensive income (loss)

Net income (loss)

(353)

(346)

(7)

Dividends

(33)

(125)

113

(5)

109

(4)

Ending Balance at Jan. 01, 2010

$ 1,142

$ 5

$ 3,585

$ 3,103

$ (5,564)

$ 13

$ 0

Ending Balance at Jan. 01, 2010

358.2

[1]	This was previously FAS No. 156 and was updated with referencing to the Accounting Standards Codification ("ASC").
[2]	This was previously FASB Interpretation No. ("FIN") 48 and was updated with referencing to the ASC.
[3]	This was previously Emerging Issues Task Force Issue No. ("EITF") 06-8 and was updated with referencing to the ASC.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Jan. 01, 2010

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its subsidiaries “we,” “us,” or the “Company”). In accordance with the guidance for noncontrolling interests in consolidated financial statements, references in this report to our earnings per share, net income and shareholders’ equity attributable to Marriott do not include noncontrolling interests (previously known as minority interests), which we report separately. Please see “New Accounting Standards,” later in this Footnote No. 1 for additional information on this accounting standard, which was adopted in 2009.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.

As a result of the discontinuation of our synthetic fuel business on November 3, 2007, the balances and activities of the synthetic fuel reportable segment have been segregated and reported as discontinued operations for all periods presented.

We have reclassified certain prior year amounts to conform to our 2009 presentation. These reclassifications resulted from communications with the Staff of the Securities and Exchange Commission (“SEC”) on the income statement presentation of the provision for loan losses associated with our lodging operations in the normal course of business, which we now classify as a component of “General, administrative, and other” within “Operating (loss) income” in our Consolidated Statements of Income, and which we previously classified as “Provision for loan losses” below “Operating (loss) income.” We made the following reclassifications in our Consolidated Statements of Income of provisions for loan losses that we recognized in 2009, 2008, and 2007 and originally reported in “Provision for loan losses”:

The $42 million provision for loan losses in the 2009 first quarter is now reported in “General, administrative, and other” expenses, with the result that “Operating (loss) income” of $82 million as originally reported in the 2009 first quarter, now totals $40 million;

The $1 million provision for loan losses that we recognized in the 2009 second quarter is now reported in “General, administrative, and other” expenses, with the result that “Operating (loss) income” of $100 million as originally reported in the 2009 second quarter, now totals $99 million;

As a result of these two reclassifications, and our 2009 fourth quarter classification of a $3 million reversal of provision for loan losses in “General, administrative, and other” expenses, we now report our 2009 full year provision for loan losses totaling $40 million in “General, administrative, and other” expenses; and

The provisions for loan losses of $20 million reported for 2008 and $5 million of the $17 million provision for loan losses reported for 2007 are now also reported in “General, administrative, and other” expenses and the $12 million of the $17 million originally reported in 2007 is now reported below “Operating (loss) income” in “Equity in (losses) earnings.”

See “Supplementary Data-Quarterly Financial Data” table that follows our footnotes for a reconciliation of previously reported operating income to currently reported operating income for all 2008 and 2009 quarters, reflecting these reclassifications.

On May 1, 2009, the Board of Directors declared the issuance of a stock dividend of a 0.00369 share of common stock for each outstanding share of common stock of the Company, payable on July 30, 2009, to shareholders of record on June 25, 2009. On August 6, 2009, the Board of Directors declared the issuance of a stock dividend of a 0.00379 share of common stock for each outstanding share of common stock of the Company, payable on September 3, 2009, to shareholders of record on August 20, 2009. On November 5, 2009, the Board of Directors declared the issuance of a stock dividend of a 0.00341 share of common stock for each outstanding share of common stock of the Company, payable on December 3, 2009, to shareholders of record on November 19, 2009. As a result, for periods prior to the stock dividends, we have retroactively adjusted, as of the dates of record, all share and per share data in this report using factors of 0.00360 for the stock dividend declared in May 2009, and 0.00370 for the stock dividend declared in August 2009, both adjusted downward to reflect cash that was paid in lieu of fractional shares to shareholders as of the dates of record, and 0.00341 for the stock dividend declared in November 2009 to reflect 3.8 million of additional shares that were issued in 2009 in conjunction with these dividend declarations.

In our opinion, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position at fiscal year-end 2009 and fiscal year-end 2008 and the results of our operations and cash flows for fiscal years 2009, 2008, and 2007. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. We have evaluated all subsequent events through February 12, 2010, the date these financial statements were issued.

Fiscal Year

Our fiscal year ends on the Friday nearest to December 31. The fiscal years in the following table encompass a 52-week period, except for 2002 and 2008, which both encompass a 53-week period. Unless otherwise specified, each reference to a particular year means the fiscal year ended on the date shown in the following table, rather than the corresponding calendar year:


Fiscal Year	Fiscal Year-End Date	Fiscal Year	Fiscal Year-End Date
2009	January 1, 2010	2004	December 31, 2004
2008	January 2, 2009	2003	January 2, 2004
2007	December 28, 2007	2002	January 3, 2003
2006	December 29, 2006	2001	December 28, 2001
2005	December 30, 2005	2000	December 29, 2000

Revenue Recognition

Our revenues include: (1) base management and incentive management fees; (2) franchise fees; (3) revenues from lodging properties owned or leased by us; (4) timeshare sales and services, which also includes resort rental revenue, interest income associated with our “Loans to timeshare owners,” Timeshare segment note securitization gains, and revenue from our points-based use system; and (5) cost reimbursements. Management fees comprise a base fee, which is a percentage of the revenues of hotels, and an incentive fee, which is generally based on hotel profitability. Franchise fees comprise initial application fees and continuing royalties generated from our franchise programs, which permit the hotel owners and operators to use certain of our brand names. Cost reimbursements include direct and indirect costs that are reimbursed to us by lodging properties that we manage or franchise.

Base Management and Incentive Management Fees: We recognize base management fees as revenue when earned in accordance with the contract. In interim periods and at year-end, we recognize incentive management fees that would be due as if the contract were to terminate at that date, exclusive of any termination fees payable or receivable by us.

Franchise Fee Revenue: We recognize franchise fees as revenue in each accounting period as fees are earned from the franchisee.

Owned and Leased Units: We recognize room sales and revenues from other guest services for our owned and leased units when rooms are occupied and services have been rendered.

Timeshare and Fractional Intervals and Condominiums: We recognize sales when: (1) we have received a minimum of 10 percent of the purchase price; (2) the purchaser’s period to cancel for a refund has expired; (3) we deem the receivables to be collectible; and (4) we have attained certain minimum sales and construction levels. We defer all revenue using the deposit method for sales that do not meet all four of these criteria. 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 profit are deferred and recognized in earnings using the percentage of completion method. Timeshare segment deferred revenue at year-end 2009 and 2008 was $63 million and $70 million, respectively.

Timeshare Points-Based Use System Revenue: As sales under this points-based use system are considered to be the sale of real estate, we recognize these sales when the criteria noted in the “Timeshare and Fractional Intervals and Condominiums” caption are met.

Timeshare Residential (Stand-Alone Structures): We recognize sales under the full accrual method of accounting when we receive our proceeds and transfer title at settlement.

Cost Reimbursements: We recognize cost reimbursements from managed, franchised, and timeshare properties when we incur the related reimbursable costs.

Other Revenue: Includes third-party licensing fees, branding fees for third party residential sales and credit card licensing, land rental income, and other revenue.

Ground Leases

We are both the lessor and lessee of land under long-term operating leases, which include scheduled increases in minimum rents. We recognize these scheduled rent increases on a straight-line basis over the initial lease term.

Real Estate Sales

We reduce gains on sales of real estate by the maximum exposure to loss if we have continuing involvement with the property and do not transfer substantially all of the risks and rewards of ownership. In sales transactions where we retain a management contract, the terms and conditions of the management contract are generally comparable to the terms and conditions of the management contracts obtained directly with third-party owners in competitive bid processes.

Profit Sharing Plan

We contribute to a profit sharing plan for the benefit of employees meeting certain eligibility requirements and electing participation in the plan. Contributions are determined based on a specified percentage of salary deferrals by participating employees. We recognized compensation costs from profit sharing of $94 million in 2009, $111 million in 2008, and $107 million in 2007.

Self-Insurance Programs

We are self-insured for certain levels of property, liability, workers’ compensation and employee medical coverage. We accrue estimated costs of these self-insurance programs at the present value of projected settlements for known and incurred but not reported claims. We use a discount rate of 2.0 percent to determine the present value of the projected settlements, which we consider to be reasonable given our history of settled claims, including payment patterns and the fixed nature of the individual settlements.

We are subject to a variety of assessments related to our insurance activities, including those by state guaranty funds and workers’ compensation second-injury funds. Our liabilities recorded for assessments are reflected within the amounts shown in our Consolidated Balance Sheets on the self-insurance reserves line, are not discounted, and totaled $4 million at year-end for both 2009 and 2008. The $4 million liability for assessments as of year-end 2009 is expected to be paid by the end of 2010.

Marriott Rewards

Marriott Rewards is our frequent guest loyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional ownership, and residential products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by car rental and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars, and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties, with the objective of operating the program on a break-even basis to us. As members earn points at properties and other program partners, we sell the points for amounts that we expect will, in the aggregate, to equal the costs of point redemptions and program operating costs over time.

We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas that project timing of future point redemption based on historical levels, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgment factors determine the required liability for outstanding points. Our Marriott Rewards liability totaled $1,647 million and $1,536 million at fiscal year-end 2009 and 2008, respectively. A 10 percent reduction in the estimate of “breakage” would have resulted in an estimated $73 million increase in the liability at fiscal year-end 2009.

Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, communication with, and performing member services for the Marriott Rewards members. Due to the requirement that properties reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from properties in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred and recognize the corresponding expense relating to the costs of the awards redeemed.

Guarantees

We record a liability for the fair value of a guarantee on the date a guarantee is issued or modified. The offsetting entry depends on the circumstances in which the guarantee was issued. Funding under the guarantee reduces the recorded liability. When no funding is forecasted, the liability is amortized into income on a straight-line basis over the remaining term of the guarantee. On a quarterly basis, we evaluate all material estimated liabilities based on the operating results and the terms of the guarantee. If we conclude that it is probable that we will be required to fund a greater amount than previously estimated, we will record a loss unless the advance would be recoverable in the form of a loan.

Rebates and Allowances

We participate in various vendor rebate and allowance arrangements as a manager of hotel properties. There are three types of programs that are common in the hotel industry that are sometimes referred to as “rebates” or “allowances,” including unrestricted rebates, marketing (restricted) rebates and sponsorships. The primary business purpose of these arrangements is to secure favorable pricing for our hotel owners for various products and services or enhance resources for promotional campaigns co-sponsored by certain vendors. More specifically, unrestricted rebates are funds returned to the buyer, generally based upon volumes or quantities of goods purchased. Marketing (restricted) allowances are funds allocated by vendor agreements for certain marketing or other joint promotional initiatives. Sponsorships are funds paid by vendors, generally used by the vendor to gain exposure at meetings and events, which are accounted for as a reduction of the cost of the event.

We account for rebates and allowances as adjustments of the prices of the vendors’ products and services. We show vendor costs and the reimbursement of those costs as reimbursed costs and cost reimbursements revenue, respectively; therefore, rebates are reflected as a reduction of these line items.

Cash and Equivalents

We consider all highly liquid investments with an initial maturity of three months or less at date of purchase to be cash equivalents.

Restricted Cash

We recorded restricted cash, totaling $76 million and $89 million at year-end 2009 and year-end 2008, respectively, in the accompanying Consolidated Balance Sheets as $54 million and $38 million, respectively, in the “Other current assets” line and $22 million and $51 million, respectively, in the “Other long-term assets” line. Restricted cash primarily consists of cash held internationally that has not been repatriated due to accounting, statutory, tax and foreign currency risks, deposits received primarily associated with timeshare interval, fractional ownership, and residential sales that are held in escrow until the contract is closed.

Assets Held for Sale

We consider properties (other than Timeshare segment interval, fractional ownership, and residential products, which we classify as inventory) to be assets held for sale when all of the following criteria are met:

•

management commits to a plan to sell a property;

•

it is unlikely that the disposal plan will be significantly modified or discontinued;

•

the property is available for immediate sale in its present condition;

•

actions required to complete the sale of the property have been initiated;

•

sale of the property is probable and we expect the completed sale will occur within one year; and

•

the property is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and we cease depreciation.

At year-end 2009 and 2008, we had no assets held for sale or liabilities related to assets held for sale.

Loan Loss Reserves

Senior, Mezzanine, and Other Loans

We measure loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows, that assumes certain growth projections that may or may not occur, or the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. When we determine that a loan is impaired, we recognize interest income on a cash basis.

Loans to Timeshare Owners

We record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction of revenue at the time we recognize profit on a timeshare sale. We assess uncollectibility based on pools of receivables, because we hold large numbers of homogeneous timeshare notes receivable. We estimate uncollectibles based on historical activity for similar timeshare notes receivable from 2004 to the current year. We use a technique referred to as static pool analysis, which tracks uncollectibles for each year’s sales over the life of those notes. We do not record accrued interest on “Loans to timeshare owners” that are over 90 days past due. At year-end 2009, our allowance for credit losses associated with “Loans to timeshare owners” totaled $27 million. At year-end 2009, the average estimated default rate for our loans to timeshare owners was 7.6 percent, and a change of 0.3 percent in the estimated default rate would have resulted in an increase in the allowance for credit losses of $1 million.

For additional information on our notes receivable, including information on the related reserves, see Footnote No. 12 “Notes Receivable.”

Valuation of Goodwill

We evaluate the fair value of goodwill to assess potential impairments at the end of each fiscal year, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In the first step of the review process, we compare the estimated fair value the reporting unit with its carrying value. If the estimated fair value of the reporting unit exceeds its carrying amount, no further analysis is needed.

If the estimated fair value of the reporting unit is less than its carrying amount, we proceed to the second step of the review process to calculate the implied fair value of the reporting unit goodwill in order to determine whether any impairment is required. We calculate the implied fair value of the reporting unit goodwill by allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss for that excess amount. In allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit, we use industry and market data, as well as knowledge of the industry and our past experiences.

We base our calculation of the estimated fair value of a reporting unit on the income approach. For the income approach, we use internally developed discounted cash flow models that include, among others, the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on our historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections, and our expectations.

We have not recorded a goodwill impairment charge in the last three fiscal years, and at year-end 2009, the estimated fair value of each of our reporting units’ exceeded its’ respective carrying amount by more than 100 percent based on our models and assumptions.

For additional information related to goodwill, including the amounts of goodwill by segment, see Footnote No. 19, “Business Segments.”

Investments

We consolidate entities that we control. We account for investments in joint ventures using the equity method of accounting when we exercise significant influence over the venture. If we do not exercise significant influence, we account for the investment using the cost method of accounting. We account for investments in limited partnerships and limited liability companies using the equity method of accounting when we own more than a minimal investment. Our ownership interest in these equity method investments varies generally from 10 percent to 49 percent.

The fair value of our available-for-sale securities totaled $18 million and $24 million at year-end 2009 and year-end 2008, respectively. We included net unrealized holding (losses) gains on available-for-sale securities that totaled ($10) million at year-end 2008 in accumulated other comprehensive income. The amount of net (losses) gains reclassified out of accumulated other comprehensive income as a result of the sale of available-for-sale securities totaled ($4) million and ($2) million for 2009 and 2008, respectively. We determined the cost basis of the securities sold using specific identification.

Costs Incurred to Sell Real Estate Projects

We charge the majority of sales and marketing costs we incur to sell timeshares to expense when incurred. Selling and marketing costs deferred were $5 million at year-end 2009 and $7 million at year-end 2008 and are included in the accompanying Consolidated Balance Sheets in the “Other” caption within the “Current assets” section. If a contract is canceled, we charge unrecoverable direct selling and marketing costs to expense and record deposits forfeited as income.

Valuation of Intangibles and Long-Lived Assets

We test intangibles and long-lived asset groups for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, and significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When an impairment loss is recognized for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.

We base our calculations of the estimated fair value of an intangible asset or asset group on the income approach or the market approach. The assumptions and methodology we utilize for the income approach are the same as those described in the “Valuation of Goodwill” caption. For the market approach, we use internal analyses based primarily on market comparables and assumptions about market capitalization rates, growth rates, and inflation.

For information on impairment losses that we recorded in 2009 and 2008 associated with intangibles and long-lived assets, see Footnote No. 20 “Timeshare Strategy – Impairment Charges” and Footnote No. 21 “Restructuring Costs and Other Charges.”

Valuation of Investments in Ventures

We sometimes hold a minority equity interest in ventures established to develop timeshare interval, fractional ownership and residential properties or to develop or acquire and own hotel properties. These ventures are generally limited liability companies or limited partnerships, and our equity interest in these ventures generally ranges from 10 percent to 49 percent.

We evaluate an investment in a venture for impairment when circumstances indicate that the carrying value may not be recoverable, for example due to loan defaults, significant under performance relative to historical or projected operating performance and significant negative industry or economic trends.

We impair investments accounted for using the equity and cost methods of accounting when we determine that there has been an “other than temporary” decline in the estimated fair value as compared to the carrying value, of the venture. Additionally, a commitment to a plan to sell some or all of the assets in a venture could cause a recoverability evaluation for the individual long-lived assets in the venture and possibly the venture itself.

We calculate the estimated fair value of an investment in a venture using either a market approach or an income approach. The assumptions and methodology we utilize for the income approach are the same as those described in the “Valuation of Goodwill” caption. For the market approach, we use internal analyses based primarily on market comparables and assumptions about market capitalization rates, growth rates, and inflation.

For information regarding impairment losses that we recorded in 2009 and 2008 associated with investments in ventures, see Footnote No. 20 “Timeshare Strategy – Impairment Charges” and Footnote No. 21 “Restructuring Costs and Other Charges.”

Residual Interests

We periodically sell notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. We continue to service the notes and transfer all proceeds collected to special purpose entities. We retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. The interests are limited to the present value of cash available after paying financing expenses and program fees and absorbing credit losses. We measure our servicing assets using the fair value method. Under the fair value method, we carry servicing assets on the balance sheet at fair value and report the changes in fair value, primarily due to changes in valuation inputs and assumptions and to the collection or realization of expected cash flows, in earnings in the period in which the change occurs. We treat the residual interests, including servicing assets, as “trading” securities under the provisions of accounting for certain debt and equity securities, and accordingly, we record realized and unrealized gains or losses related to these assets in the “Timeshare sales and services” revenue caption in our Consolidated Statements of Income. At the dates of sale and at the end of each reporting period, we estimate the fair value of the residual interests, including servicing assets, using a discounted cash flow model. We report changes in the fair values of these residual interests, including servicing assets, through the accompanying Consolidated Statements of Income.

For additional information, including information regarding our estimates and measurements of our residual interests, see Footnote No. 5, “Fair Value Measurements,” and Footnote No. 13, “Asset Securitizations.”

Derivative Instruments

We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we do not use derivatives for trading or speculative purposes.

We record all derivatives at fair value either as assets or liabilities. We recognize, currently in earnings, changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments. We record changes in the fair value of the hedged item in a fair value hedge as an adjustment to the carrying amount of the hedged item and recognize the change in the fair value of the derivative in earnings in the same income statement line item.

We record the effective portion of changes in fair value of derivatives designated as cash flow hedging instruments as a component of other comprehensive income and report the ineffective portion currently in earnings. We reclassify amounts included in other comprehensive income into earnings in the same period during which the hedged item affects earnings.

Foreign Operations

The U.S. dollar is the functional currency of our consolidated and unconsolidated entities operating in the United States. The functional currency for our consolidated and unconsolidated entities operating outside of the United States is generally the currency of the primary economic environment in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars, and we do the same, as needed, for unconsolidated entities whose functional currency is not the U.S. dollar. We translate assets and liabilities at the exchange rate in effect as of the financial statement date, and income statement accounts are translated using the weighted average exchange rate for the period. We include translation adjustments from foreign exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature as a separate component of shareholders’ equity. We report gains and losses from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency transactions, currently in operating costs and expenses, and those amounted to a loss of less than $1 million in 2009, a $6 million loss in 2008, and a $2 million loss in 2007. Gains and other income for 2007 included $6 million attributable to currency translation adjustment gains, net of losses, from the sale or complete or substantially complete liquidation of investments. There were no similar gains or losses in 2008 and 2009.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for legal contingencies when we determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations we evaluate, among other things, the degree of probability of an unfavorable outcome, and when it is probable that a liability has been incurred, our ability to make a reasonable estimate of the loss. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.

Income Taxes

We record the amounts of taxes payable or refundable for the current year, as well as deferred tax liabilities and assets for the future tax consequences of events that we have recognized in our financial statements or tax returns. We use judgment in assessing future profitability and the likely future tax consequences of events that we have recognized in our financial statements or tax returns. We base our estimates of deferred tax assets and liabilities on current tax laws, rates and interpretations, and, in certain cases, business plans and other expectations about future outcomes. We develop our estimates of future profitability and based on our historical data and experience, industry projections, micro and macro general economic condition projections, and our expectations.

Changes in existing tax laws and rates, their related interpretations, as well as the uncertainty generated by the current economic environment may affect the amounts of deferred tax liabilities or the valuations of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

For tax positions we have taken or expect to take in a tax return, we apply a more likely than not threshold, under which we must conclude a tax position is more likely than not to be sustained, assuming that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information, in order to continue to recognize the benefit. In determining our provision for income taxes, we use judgment, reflecting our estimates and assumptions, in applying the more likely than not threshold.

For information about income taxes and deferred tax assets and liabilities, see Footnote No. 2 “Income Taxes.”

New Accounting Standards

Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations” (“FAS No. 141(R)”) or Accounting Standards Codification (“ASC”) 805, “Business Combinations”

We adopted FAS No. 141(R), or ASC 805, on January 3, 2009, the first day of our 2009 fiscal year. This topic significantly changed the accounting for business combinations. Under this topic, an acquiring entity is required to recognize all the assets acquired and all the liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Transaction costs are no longer included in the measurement of the business acquired. Instead, these costs are expensed as they are incurred. This topic also includes a substantial number of new disclosure requirements. It applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for us was the beginning of our 2009 fiscal year. The adoption of this topic did not have a material impact on our financial statements.

Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS No. 157”) or ASC 820, “Fair Value Measurements and Disclosures”

We adopted FAS No. 157 or ASC 820, on December 29, 2007, the first day of our 2008 fiscal year. FASB Staff Position (“FSP”) FAS No. 157-2, “Effective Date of Financial Accounting Standards Board (“FASB”) Statement No. 157” (“FSP FAS No. 157-2”), or ASC 820-10, amended ASC 820 by delaying its effective date, by one year, for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. In accordance with ASC 820-10, we adopted the provisions of ASC 820 to non-financial assets and non-financial liabilities in the first quarter of 2009. See Footnote No. 5, “Fair Value Measurements,” for additional information. The adoption did not have a material impact on our financial statements.

Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51” (“FAS No. 160”) or ASC 810-10-65-1, “Consolidation – Transition”

We adopted FAS No. 160 or ASC 810-10-65-1, on January 3, 2009, the first day of our 2009 fiscal year. This topic establishes new accounting and reporting standards for noncontrolling interests, previously known as minority interests, in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of noncontrolling interests as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income or loss attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement. This topic clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income attributable to Marriott when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. This topic also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. This topic is applied prospectively for fiscal years and interim periods within those fiscal years, beginning with the current fiscal year, except for the presentation and disclosure requirements, which are applied retrospectively for all periods presented. The adoption of this topic did not have a material impact on our financial statements.

Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“FAS No. 161”) or new accounting guidance within ASC 815, “Derivatives and Hedging”

We adopted FAS No. 161, or new accounting guidance within ASC 815, on January 3, 2009, the first day of our 2009 fiscal year. This topic requires enhanced disclosure of derivatives and hedging activities in order to improve the transparency of financial reporting. Under this topic’s guidelines, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS No. 133”), or ASC 815, and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This topic is applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under ASC 815 for all financial statements issued for fiscal years and interim periods beginning with our current fiscal year. See Footnote No. 17, “Derivative Instruments,” for the related disclosures. The adoption of this topic did not have a material impact on our financial statements.

FSP FAS No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS No. 141(R)-1”) or new accounting guidance within ASC 805, “Business Combinations”

We adopted FSP FAS No. 141(R)-1, or ASC 805, on January 3, 2009, the first day of our 2009 fiscal year. This topic applies to all assets acquired and all liabilities assumed in a business combination that arise from contingencies. This topic states that the acquirer will recognize such an asset or liability if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If it cannot be determined during the measurement period, then the asset or liability should be recognized at the acquisition date if the following criteria, consistent with the guidelines for accounting for contingencies, are met: (1) information available before the end of the measurement period indicates that it is probable that an asset existed or that a liability had been incurred at the acquisition date, and (2) the amount of the asset or liability can be reasonably estimated. The adoption of this topic did not have a material impact on our financial statements.

FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS No. 142-3”) or ASC 350-30-50-4

We adopted FSP FAS No. 142-3, or ASC 350-30-50-4, on January 3, 2009, the first day of our 2009 fiscal year. This topic amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No. 142”). This topic is intended to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure the fair value of the asset. This topic requires an entity to disclose information related to the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. The adoption of this topic did not have a material impact on our financial statements.

EITF Issue 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”) or new accounting guidance within ASC 323, “Investments-Equity Method and Joint Ventures”

We adopted Emerging Issues Task Force (“EITF”) 08-6, or ASC 323, on January 3, 2009, the first day of our 2009 fiscal year concurrently with the adoption of ASC 805 and ASC 820-10-65-1. The intent of this topic is to clarify the accounting for certain transactions and impairment considerations related to equity method investments as modified by the provisions of ASC 805 and ASC 820-10-65-1. The adoption of this topic did not have a material impact on our financial statements.

FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS No. 115-2 and FAS No. 124-2”) or ASC 320-10-65-1

We adopted FSP FAS No. 115-2 and FAS No. 124-2, or ASC 320-10-65-1, in the second quarter of 2009. This topic modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and securities with unrealized losses. The adoption of this topic did not have a material impact on our financial statements.

FSP FAS No. 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB Opinion No. 28-1”) or ASC 825-10-65-1

We adopted FSP FAS No. 107-1 and APB Opinion No. 28-1, or ASC 825-10-65-1, in the second quarter of 2009. This topic requires fair value disclosures for financial instruments that are not reflected in the Consolidated Balance Sheets at fair value. Prior to the issuance of this topic, the fair values of those assets and liabilities were disclosed only annually. With the issuance of this topic, we are now required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the Consolidated Balance Sheets at fair value. Please see Footnote No. 6, “Fair Value of Financial Instruments” for the relevant disclosures. The adoption of this topic did not have a material impact on our financial statements.

FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”) or ASC 820-10-65-4

We adopted FSP FAS No. 157-4, or ASC 820-10-65-4, in the second quarter of 2009. This topic clarifies the methodology to be used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. This topic also reaffirms the objective of fair value measurement, which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The adoption of this topic did not have a material impact on our financial statements.

Financial Accounting Standards No. 165, “Subsequent Events” (“FAS No. 165”) or ASC 855, “Subsequent Events”

We adopted FAS No. 165, or ASC 855, in the second quarter of 2009. This topic establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. See Footnote No. 1, “Basis of Presentation,” for the related disclosures. The adoption of this topic did not have a material impact on our financial statements.

Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“FAS No. 168”) or ASC 105, “Generally Accepted Accounting Principles”

We adopted FAS No. 168, or ASC 105, in the fourth quarter of 2009. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. The adoption of this topic did not have a material impact on our financial statements.

Accounting Standards Update No. 2009-05 “Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value” (“ASU No. 2009-5”)

We adopted ASU No. 2009-5, which amends ASU Subtopic 820-10, “Fair Value Measurements and Disclosures-Overall” for the fair value measurement of liabilities, in the fourth quarter of 2009. ASU No. 2009-5 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value utilizing one or more of the following techniques: (1) a valuation technique that uses the quoted market price of an identical liability or similar liabilities when traded as assets; or (2) another valuation technique that is consistent with the principles of Topic 820, such as a present value technique. The adoption of ASU No. 2009-5 did not have a material impact on our financial statements.

Accounting Standards Update No. 2010-1 “Accounting for Distributions to Shareholders with Components of Stock and Cash” (“ASU No. 2010-1”)

We adopted ASU No. 2010-1 in the fourth quarter of 2009. ASU No. 2010-1 provides clarification that in circumstances where (1) a shareholder can elect to receive his or her entire distribution in cash or shares of equivalent value and (2) the total amount of cash that all shareholders can elect to receive in the aggregate is potentially limited, the stock portion of that distribution is considered a share issuance that is reflected prospectively in earnings per share rather than being treated as a stock dividend for purposes of applying ASC 505, “Equity,” and ASC 260, “Earnings Per Share.” The adoption of ASU No. 2010-1 did not have a material impact on our financial statements, particularly as shareholders had no option to elect to receive all of their respective 2009 stock dividends in cash.

Future Adoption of Accounting Standards

The FASB issued the following two new accounting standards on June 12, 2009.

Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“FAS No. 166”) or Accounting Standards Update No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets” (“ASU 2009-16”) and Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS No. 167”) or Accounting Standards Update No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”)

FAS No. 166, or ASU 2009-16, amends FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” by: eliminating the concept of a qualifying special-purpose entity (“QSPE”); clarifying and amending the derecognition criteria for a transfer to be accounted for as a sale; amending and clarifying the unit of account eligible for sale accounting; and requiring that a transferor initially measure at fair value and recognize all assets obtained (for example beneficial interests) and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. Additionally, on and after the effective date, existing QSPEs (as defined under previous accounting standards) must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance. The topic requires enhanced disclosures about, among other things, a transferor’s continuing involvement with transfers of financial assets accounted for as sales, the risks inherent in the transferred financial assets that have been retained, and the nature and financial effect of restrictions on the transferor’s assets that continue to be reported in the statement of financial position.

The topic will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009, which for us would be January 2, 2010, the first day of our 2010 fiscal year.

FAS No. 167, or ASU 2009-17, changes the consolidation guidance applicable to a variable interest entity (“VIE”). It also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Previously, the guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. QSPEs, which were previously exempt from the application of this standard, will be subject to the provisions of this standard when it becomes effective. The topic also requires enhanced disclosures about an enterprise’s involvement with a VIE.

We expect that the initial adoption of both topics in our 2010 first quarter will require our consolidation of 13 existing qualifying special purpose entities associated with past securitization transactions. Accordingly, we expect to record a one-time non-cash after-tax charge of approximately $105 million ($170 million pretax) in the 2010 first quarter, representing the cumulative effect of a change in accounting principle. The cumulative effect will consist primarily of the reestablishment of notes receivable (net of reserves) associated with those securitization transactions, more than offset by the elimination of residual interests that we initially recorded in connection with those transactions, the impact of recording debt obligations associated with third-party interests held in the special purpose entities and related adjustments to inventory balances. We anticipate that our adoption of these standards will have the following impacts on our balance sheet: (1) assets will increase by approximately $1,010 million, primarily representing the consolidation of notes receivable; (2) liabilities will increase by approximately $1,115 million, primarily representing the consolidation of debt obligations associated with third party interests; and (3) shareholders’ equity will decrease by approximately $105 million.

For the estimated ongoing impact on our financial statements of recently issued accounting standards, FAS No. 166, “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140,” or ASU 2009-16 and FAS No. 167, “Amendments to FASB Interpretation No. 46(R),” or ASU 2009-17, “Consolidation,” see the “New Accounting Standards” section of Management’s Discussion and Analysis.

INCOME TAXES

12 Months Ended

Jan. 01, 2010

INCOME TAXES

2.	INCOME TAXES

We adopted the provisions for accounting for uncertainty in income taxes, on December 30, 2006, the first day of fiscal year 2007. As a result of the implementation, we recorded a $155 million increase in the net liability for unrecognized tax positions, which was recorded as an adjustment to the opening balance of retained earnings and additional paid-in-capital on December 30, 2006. The total amount of unrecognized tax benefits as of year-end 2009 and year-end 2008 was $249 million and $141 million, respectively. Included in the balances at year-end 2009 and year-end 2008 were $136 million and $87 million, respectively, of tax positions that, if recognized, would impact the effective tax rate.

The unrecognized tax benefit reconciliation from the beginning balance to the ending balance is as follows:


*($ in millions)*	Amount
Unrecognized tax benefit at beginning of year (December 29, 2007)	$	132
Change attributable to tax positions taken during a prior period		92
Change attributable to tax positions taken during the current period		5
Decrease attributable to settlements with taxing authorities		(86	)
Decrease attributable to lapse of statute of limitations		(2	)

Unrecognized tax benefit at end of year (January 2, 2009)		141
Change attributable to tax positions taken during a prior period		99
Change attributable to tax positions taken during the current period		22
Decrease attributable to settlements with taxing authorities		(10	)
Decrease attributable to lapse of statute of limitations		(3	)

Unrecognized tax benefit at end of year (January 1, 2010)	$	249

In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. Our Consolidated Statement of Income for the year ended January 1, 2010, and our Consolidated Balance Sheet as of that date included interest of $2 million and $28 million, respectively. Our Consolidated Statement of Income for the year ended January 2, 2009, and our Consolidated Balance Sheet as of that date included interest of $42 million and $29 million, respectively.

We file income tax returns, including returns for our subsidiaries, with federal, state, local, and foreign jurisdictions. We are participating in the Internal Revenue Service (“IRS”) Compliance Assurance Program (“CAP”) for the 2009 and 2008 tax years and we will participate for 2010. This program accelerates the examination of key transactions with the goal of resolving any issues before the tax return is filed. Our federal income tax returns have been examined and we have settled all issues for tax years through 2004. We filed a refund claim relating to 2000 and 2001. The IRS disallowed the claims, and in July 2009, we protested the disallowance. This issue is pending in the IRS Appeals Division. The 2005, 2006, and 2007 field examinations have been completed, and the unresolved issues from those years are now with the IRS Appeals Division. The 2008 and 2009 IRS examinations are ongoing as part of the IRS’s Compliance Assurance Program. Various state, local, and foreign income tax returns are also under examination by taxing authorities.

In 2009 and 2008, we recorded an income tax expense of $52 million and $24 million, respectively, primarily related to the treatment of funds received from certain foreign subsidiaries. We are contesting the issue with the IRS for tax years 2005, 2006 and 2007. The charges recorded in 2009 primarily relate to our ongoing current fiscal year exposure related to this issue. In addition, we recorded a $19 million tax expense in 2008 due primarily to prior years’ tax adjustments, including a settlement with the IRS that resulted in a lower than expected refund of taxes associated with a 1995 leasing transaction. The settlement resulted in a $26 million tax refund, which we received during 2008.

We also recorded, in 2008, a $29 million income tax expense primarily related to an unfavorable U.S. Court of Federal Claims decision involving a refund claim associated with a 1994 tax planning transaction. The tax had been paid, and the issue is now closed.

For 2009, we increased unrecognized tax benefits by $121 million, primarily representing an increase for the foreign subsidiaries issue due to our ongoing current fiscal year exposure. The balance of unrecognized tax benefits was $249 million at year-end 2009.

As a large taxpayer, we are under continual audit by the IRS and other taxing authorities. We anticipate concluding U.S. federal appeals negotiations for the 2005, 2006, and 2007 tax years in the next 12 months where the items under consideration include the taxation of our loyalty and gift card programs and the treatment of funds received from foreign subsidiaries. The conclusion of the negotiations could have a material impact on our unrecognized tax benefit balances.

Total deferred tax assets and liabilities as of year-end 2009 and year-end 2008, were as follows:


*($ in millions)*	2009			2008
Deferred tax assets	$	1,307		$	1,048
Deferred tax liabilities		(70	)		(135	)

Net deferred taxes	$	1,237		$	913

The tax effect of each type of temporary difference and carry-forward that gives rise to a significant portion of deferred tax assets and liabilities as of year-end 2009 and year-end 2008, were as follows:


*($ in millions)*	2009			2008
Self-insurance	$	15		$	25
Employee benefits		278			280
Deferred income		22			24
Reserves		198			82
Frequent guest program		115			113
Joint venture interests		148			16
FIN 48 deferred taxes ⁽¹⁾		99			42
Tax credits		223			237
Net operating loss carry-forwards		184			170
Timeshare financing		(23	)		(22	)
Property, equipment, and intangible assets		(17	)		(41	)
Other, net		42			25

Deferred taxes		1,284			951
Less: valuation allowance		(47	)		(38	)

Net deferred taxes	$	1,237		$	913

⁽¹⁾	Primarily related to the treatment of funds received from certain foreign subsidiaries, as discussed earlier in this footnote.

At year-end 2009, we had approximately $223 million of tax credits that do not expire. We claimed approximately $6 million of tax credits in 2008 (treating them as a reduction of 2008 Federal and Hawaii income taxes) associated with investment tax credits that arose in 2008. We accounted for these credits using the flow-through method. We recorded $33 million of net operating loss benefits in 2009. At year-end 2009, we had approximately $945 million of net operating losses, of which $555 million expire through 2029.

We have made no provision for U.S. income taxes or additional foreign taxes on the cumulative unremitted earnings of non-U.S. subsidiaries ($932 million as of year-end 2009) because we consider these earnings to be permanently invested. These earnings could become subject to additional taxes if remitted as dividends, loaned to us or a U.S. affiliate or if we sold our interests in the affiliates. We cannot practically estimate the amount of additional taxes that might be payable on the unremitted earnings. We conduct business in countries that grant a “holiday” from income taxes for 10- and 30-year periods. The holidays expire through 2034. The aggregate amount of taxes not incurred due to tax “holidays” and the related earnings per share impacts are $4 million ($0.01 per diluted share), $11 million ($0.03 per diluted share), and $14 million ($0.03 per diluted share) for 2009, 2008, and 2007, respectively.

The benefit (provision for) from income taxes consists of:


*($ in millions)*	2009			2008			2007
Current -Federal	$	(169	)	$	(275	)	$	(303	)
-State		(12	)		(40	)		(59	)
-Foreign		(61	)		(85	)		(61	)

		(242	)		(400	)		(423	)

Deferred -Federal		234			7			(10	)
-State		28			8			1
-Foreign		45			35			(9	)

		307			50			(18	)

	$	65		$	(350	)	$	(441	)

The current tax provision does not reflect the (costs) benefits attributable to us relating to the exercise or vesting of employee share-based awards of $(8) million in 2009, $21 million in 2008, and $114 million in 2007. Included in the preceding table are tax credits of $2 million in 2009, $9 million in 2008, and $4 million in 2007. The taxes applicable to other comprehensive income are not material.

A reconciliation of the U.S. statutory tax rate to our effective income tax rate for continuing operations follows:


	2009		2008		2007
U.S. statutory tax rate	(35.0	)%	35.0	%	35.0	%
State income taxes, net of U.S. tax benefit	(2.1	)	2.6		2.8
Nondeductible expenses	0.5		0.6		1.4
Foreign income	5.2		(1.6	)	(0.9	)
Audit activity ⁽¹⁾	13.7		11.2		—
Company owned life insurance	(2.0	)	2.7		(0.6	)
Change in valuation allowance	2.2		—		—
Tax credits	(0.4	)	(1.2	)	(0.3	)
Other, net	2.3		1.1		1.4

Effective rate	(15.6	)%	50.4	%	38.8	%

⁽¹⁾	Primarily related to the treatment of funds received from certain foreign subsidiaries, as discussed earlier in this footnote.

Cash paid for income taxes, net of refunds, was $110 million in 2009, $220 million in 2008, and $350 million in 2007.

SHARE-BASED COMPENSATION

12 Months Ended

Jan. 01, 2010

SHARE-BASED COMPENSATION

4.	SHARE-BASED COMPENSATION

Under our 2002 Comprehensive Stock and Cash Incentive Plan, we award: (1) stock options to purchase our Class A Common Stock (“Stock Option Program”); (2) share appreciation rights (“SARs”) for our Class A Common Stock (“Stock Appreciation Right Program”); (3) restricted stock units of our Class A Common Stock; and (4) deferred stock units. We grant awards at exercise prices or strike prices that are equal to the market price of our Class A Common Stock on the date of grant.

For all share-based awards, the guidance requires that we measure compensation costs related to our share-based payment transactions at fair value on the grant date and that we recognize those costs in the financial statements over the vesting period during which the employee provides service in exchange for the award.

During 2009, we granted 0.8 million restricted stock units, 0.5 million Employee SARs, 5,600 Non-employee SARs, and 39,000 deferred stock units. See Footnote No. 4, “Share-Based Compensation” in our 2008 Annual Report on Form 10-K for information regarding grants made in August 2008 that would ordinarily have been made in February 2009, but were accelerated to encourage associate retention in a difficult economic climate. Awards for the most senior executives were not accelerated.

We recorded share-based compensation expense related to award grants of $85 million in 2009, $112 million in 2008, and $104 million in 2007. Deferred compensation costs related to unvested awards totaled $122 million at year-end 2009 and $215 million at year-end 2008, and the weighted average period over which we expect the deferred compensation costs at year-end 2009 to be recognized is two years.

For awards granted after 2005, we recognize share-based compensation expense over the period from the grant date to the date on which the award is no longer contingent on the employee providing additional service (the “substantive vesting period”). We continue to follow the stated vesting period for the unvested portion of awards granted prior to fiscal year 2006 and the adoption of the current guidance for share-based compensation and follow the substantive vesting period for awards granted after fiscal year 2005.

In accordance with the guidance for share-based compensation, we present the tax benefits and costs resulting from the exercise or vesting of share-based awards as financing cash flows. An $8 million tax cost resulted from the exercise of share-based awards in 2009. Tax benefits resulted from the exercise of share-based awards totaling $21 million in 2008, and $114 million in 2007.

The aggregate amount of cash we received from the exercise of stock options granted under share-based payment arrangements was $35 million, $30 million, and $89 million, for 2009, 2008, and 2007, respectively.

Restricted Stock Units

We issue restricted stock units under the Comprehensive Plan to certain officers and key employees and those units vest generally over four years in annual installments commencing one year after the date of grant. We recognize compensation expense for the restricted stock units over the service period equal to the fair market value of the stock units on the date of issuance. Upon vesting, restricted stock units convert to shares and are distributed from treasury shares. At year-end 2009 and year-end 2008, we had approximately $109 million and $192 million, respectively, in deferred compensation costs related to restricted stock units. Share-based compensation expense associated with restricted stock units was $71 million, $85 million, and $82 million for 2009, 2008, and 2007, respectively. The weighted average remaining term for restricted stock unit grants outstanding at year-end 2009 was two years. Restricted stock units converted and distributed during 2009, 2008, and 2007, had aggregate intrinsic values of $39 million, $90 million, and $147 million, respectively. The weighted average grant-date fair values of restricted stock units granted in 2009, 2008, and 2007 were $19, $30, and $49, respectively.

The following table shows changes in our outstanding restricted stock unit grants in 2009:


	Number of Restricted Stock Units (in millions)		Weighted Average Grant-Date Fair Value
Outstanding at year-end 2008	9.3		$	34
Granted during 2009	0.8			19
Distributed during 2009	(2.6	)		36
Forfeited during 2009	(0.4	)		33

Outstanding at year-end 2009	7.1			30

Stock Options and SARs

Employee stock options may be granted to officers and key employees at exercise prices or strike prices equal to the market price of our Class A Common Stock on the date of grant. Non-qualified options generally expire 10 years after the date of grant, except those issued from 1990 through 2000, which expire 15 years after the date of the grant. Most stock options under the Stock Option Program are exercisable in cumulative installments of one quarter at the end of each of the first four years following the date of grant.

We recognized compensation expense associated with employee stock options of $1 million in 2009, $6 million in 2008, and $12 million in 2007. At year-end 2009 and year-end 2008, there was approximately $1 million and $2 million, respectively, in deferred compensation costs related to employee stock options. Upon the exercise of stock options, we issue shares from treasury shares.

Changes in our outstanding Stock Option Program awards in 2009 were as follows:


	Number of Options (in millions)		Weighted Average Exercise Price
Outstanding at year-end 2008	35.3		$	17
Granted during 2009	—			—
Exercised during 2009	(2.9	)		12
Forfeited during 2009	(0.2	)		20

Outstanding at year-end 2009	32.2			18

The following table shows the stock options issued under the Stock Option Program awards that were outstanding at year-end 2009:


					Outstanding				Exercisable
Range of Exercise Prices					Number of Stock Options (in millions)	Weighted Average Exercise Price		Weighted Average Remaining Life (in years)	Number of Stock Options (in millions)	Weighted Average Exercise Price		Weighted Average Remaining Life (in years)
$	8	to	$	12	1.8	$	10	1	1.8	$	10	1
	13	to		17	19.2		15	4	19.2		15	4
	18	to		22	2.3		19	3	2.3		19	3
	23	to		49	8.9		25	4	8.8		24	4

	8	to		49	32.2		18	4	32.1		18	3

The number of options granted in the last three fiscal years and the associated weighted average grant-date fair values and weighted average exercise prices are noted in the following table:


	2009		2008		2007
Options granted		—		218,000		33,000
Weighted average grant-date fair value	$	—	$	12	$	19
Weighted average exercise price	$	—	$	31	$	49

The total intrinsic value of options outstanding at year-end 2009 and year-end 2008 was $312 million and $88 million, respectively, and the total intrinsic value for stock options exercisable as of year-end 2009 and year-end 2008 was $313 million and $95 million, respectively. The total intrinsic value of stock options exercised during 2009, 2008, and 2007 was approximately $30 million, $42 million, and $206 million, respectively.

Employee SARs may be granted to officers and key employees at exercise prices or strike prices equal to the market price of our Class A Common Stock on the date of grant. SARs generally expire 10 years after the date of grant and both vest and are exercisable in cumulative installments of one quarter at the end of each of the first four years following the date of grant. Non-employee SARs may be granted to directors at exercise prices or strike prices equal to the market price of our Class A Common Stock on the date of grant. Non-employee SARs generally expire 10 years after the date of grant and vest upon grant; however, they are generally not exercisable until one year after grant. We first began issuing SARs in 2006. On exercise of SARs, employees or Non-employee directors receive the number of shares of Class A Common Stock equal to the number of SARs that are being exercised multiplied by the quotient of (a) the final value minus the base value, divided by (b) the final value.

We recognized compensation expense associated with Employee SARs and Non-employee SARs of $11 million in 2009, $18 million in 2008, and $5 million in 2007. At year-end 2009 and year-end 2008, we had approximately $11 million and $19 million, respectively, in deferred compensation costs related to SARs. Upon the exercise of SARs, we issue shares from treasury shares.

The following tables show the number of Employee SARs and Non-employee SARs granted in the last three fiscal years, the associated weighted average base values, and the weighted average grant-date fair values:


Employee SARs	2009		2008		2007
Employee SARs granted (in millions)		0.5		2.7		0.4
Weighted average base value	$	15	$	33	$	49
Weighted average grant-date fair value	$	5	$	12	$	19

Non-employee SARs	2009		2008		2007
Non-employee SARs granted		5,600		4,000		4,000
Weighted average base value	$	23	$	36	$	46
Weighted average grant-date fair value	$	10	$	15	$	20

The number of SARs forfeited in 2009 and 2008 was 22,000 and 184,000, respectively. The total intrinsic value of SARs outstanding was zero at year-end 2009 and year-end 2008, and the total intrinsic value of SARs exercisable was zero as of year-end 2009 and year-end 2008. No SARs were exercised in 2009 or 2008. The total intrinsic value of SARs exercised during 2007 was $100,000.

We use a binomial method to estimate the fair value of each stock option or SAR granted. The assumptions for stock options and employee SARs for 2009, 2008, and 2007 are noted in the following table:


	2009		2008		2007
Expected volatility	32	%	29	%	28	%
Dividend yield	0.95	%	0.80-0.95	%	0.60	%
Risk-free rate	2.2	%	3.4-3.9	%	4.8	%
Expected term (in years)	7		6.9		7

Estimated volatilities for 2009, 2008, and 2007 were based on the historical share-price volatility for the period beginning January 1999 through the last day of the prior year calculated on a weekly basis. The weighted average expected stock option or SARs terms for 2009, 2008, and 2007 were a product of the lattice-based binomial valuation model that uses suboptimal exercise factors to calculate the expected terms.

The risk-free rates are based on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, converted to a continuously compounded rate. Non-employee SARs were generally valued using assumptions consistent with those shown above for Employee SARs, except using an expected term of 10 years.

For Non-employee SARs issued in 2009, 2008, and 2007, the risk-free interest rates at the date of grant were 3.2 percent, 3.9 percent, and 4.6 percent, respectively.

Deferred Stock Units

We also issue deferred stock units to Non-employee directors. These Non-employee director deferred stock units vest within one year and are distributed upon election. At year-end 2009 and year-end 2008, there was approximately $228,000 and $203,000, respectively, in deferred costs related to Non-employee director deferred stock units.

The share-based compensation expense, number of deferred stock units granted, weighted average grant-date fair value, and aggregate intrinsic value of Non-employee director deferred stock units are noted in the following table:


	2009		2008		2007
Share-based compensation expense	$	715,000	$	684,000	$	666,000
Non-employee director deferred stock units granted		39,000		25,000		20,000
Weighted average grant-date fair value (per share)	$	23	$	33	$	46
Aggregate intrinsic value (in millions)	$	0.5	$	0.4	$	0.3

At year-end 2009 and year-end 2008, there were 249,000 and 233,000, respectively, Non-employee deferred stock units outstanding, and the weighted average grant-date fair value of those outstanding deferred stock units was $24 for 2009 and $24 for 2008.

Other Information

Although the Comprehensive Plan also provides for issuance of deferred stock bonus awards, deferred stock awards, and restricted stock awards, our Compensation Policy Committee indefinitely suspended the issuance of deferred bonus stock commencing with our 2001 fiscal year and the issuance of both deferred stock awards and restricted stock awards commencing with the 2003 fiscal year. At year-end 2009 and year-end 2008, there was approximately $1 million and $2 million, respectively, in deferred compensation costs related to these suspended award programs, and the weighted average remaining term was one year for such award grants outstanding at year-end 2009. Share-based compensation expense associated with these suspended award programs was $1 million, $2 million, and $4 million for 2009, 2008, and 2007, respectively.

At year-end 2009, 69 million shares were reserved under the Comprehensive Plan including 36 million shares under the Stock Option Program and Stock Appreciation Right Program.

FAIR VALUE MEASUREMENTS

12 Months Ended

Jan. 01, 2010

FAIR VALUE MEASUREMENTS

5.	FAIR VALUE MEASUREMENTS

The guidance for fair value measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. The guidance for fair value measurement details the disclosures that are required for items measured at fair value.

We have various financial instruments we must measure at fair value on a recurring basis, including certain marketable securities, derivatives, and residual interests related to our asset securitizations. We also apply the provisions of fair value measurement to various non-recurring measurements for our financial and non-financial assets and liabilities, which included the impairment of a joint venture investment, and two security deposits in the first quarter of 2009, the impairment of Timeshare segment inventory, property and equipment, anticipated fundings in conjunction with certain purchase commitments, and a joint venture investment in the third quarter of 2009, and the impairment of a joint venture investment and an intangible asset in the fourth quarter of 2009. See Footnote No. 21, “Restructuring Costs and Other Charges,” and Footnote No. 20, “Timeshare Strategy-Impairment Charges,” for further information. We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect our assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

In accordance with the fair value hierarchy, the following table shows the fair value as of year-end 2009, of those assets and liabilities that we must measure at fair value on a recurring basis and that we classify as “Other current assets,” “Other assets,” “Other current liabilities,” and “Other long-term liabilities”:


*($ in millions)*	Fair Value Measurements as of Year-End 2009
Description	Balance at Year-End 2009			Level 1		Level 2			Level 3
Assets:
Servicing assets and other residual interests	$	214		$	—	$	—		$	214
Marketable securities		18			18		—			—
Derivative instruments		2			2		—			—

Liabilities:
Derivative instruments		(4	)		—		(3	)		(1	)

The following table summarizes the changes in fair value of our Level 3 assets and liabilities for year-end 2009:


*($ in millions)*	Fair Value Measurements of Assets and Liabilities Using Level 3 Inputs
	Servicing Assets and Other Residual Interests			Derivative Instruments
Balance at beginning of fiscal year 2009	$	221		$	(15	)
Total gains (losses) (realized or unrealized)
Included in earnings		18			—
Included in other comprehensive income		—			—
Purchases, sales, issuances, and settlements		(25	)		14

Ending balance at fiscal year-end 2009	$	214		$	(1	)

Gains for 2009 included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	16		$	1

As discussed in more detail in Footnote No. 13, “Asset Securitizations,” we periodically sell notes receivable originated by our Timeshare segment. We continue to service the notes after the sale, and we retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. At the dates of sale and at the end of each reporting period, we estimate the fair value of our residual interests using a discounted cash flow model. These transactions may utilize interest rate swaps to protect the net interest margin associated with the beneficial interest.

The most significant estimate involved in the measurement process is the discount rate, followed by the default rate and the loan prepayment rate. Estimates of these rates are based on management’s expectations of future prepayment rates and default rates, reflecting our historical experience, industry trends, current market interest rates, expected future interest rates, and other considerations. Actual prepayment rates, default rates, and discount rates could differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers. If actual prepayments of the notes being serviced were to occur more slowly than had been projected, or if actual default rates or actual discount rates are lower than expected, the carrying value of servicing assets could increase and accretion and servicing income would exceed previously projected amounts. Conversely, if actual prepayments occur at a faster than projected pace, or if actual default or actual discount rates are higher than we expect, the carrying value of servicing assets could decrease and accretion and servicing income would be below previously projected amounts. Accordingly, the residual interests actually realized, could differ from the amounts initially or currently recorded.

The discount rates we use in determining the fair values of our residual interests are based on the volatility characteristics (i.e., defaults and prepayments) of the residual assets. We assume increases in the default and prepayment rates and discount the resulting cash flows with a low risk rate to derive a stressed asset value. The low risk rate approximates credit spreads in the current market. Using our base case cash flows, we then determine the discount rate, which when applied to the base case cash flows, produces the stressed asset value, which we assume approximates an exit price for the residual assets. We adjust discount rates quarterly as interest rates, credit spreads, and volatility characteristics in the market fluctuate.

As noted in the “Residual Interests” caption of Footnote No. 1, “Summary of Significant Accounting Policies,” we treat the residual interests, including servicing assets, as trading securities under the provisions of accounting for certain investments in debt and equity securities. During 2009 and 2008, we recorded trading gains of $18 million and losses of $9 million, respectively, and in 2007, we recorded trading gains of $30 million.

During 2009, 2008, and 2007, we used the following key assumptions to measure, at the date of sale, the fair value of the residual interests, including servicing assets: average discount rates of 12.53 percent, 9.23 percent, and 9.02 percent, respectively; average expected annual prepayments, including defaults, of 19.46 percent, 24.01 percent, and 25.02 percent, respectively; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 72 months, 76 months, and 75 months, respectively; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 38 months, 35 months, and 34 months, respectively. Our key assumptions are based on experience with notes receivable and servicing assets.

We used the following key assumptions in measuring the fair value of the residual interests, including servicing assets, in our 13 outstanding Timeshare note sales as of year-end 2009: an average discount rate of 16.06 percent; an average expected annual prepayment rate, including defaults, of 15.58 percent; an expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 57 months; and an expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 37 months.

We completed a stress test on the fair value of the residual interests, including servicing assets, as of the end of 2009 to measure the change in value associated with independent changes in individual key variables. This methodology applied unfavorable changes that would be statistically significant for the key variables of prepayment rate, discount rate, and weighted average remaining term. Before we applied any of these stress test changes, we determined that the fair value of the residual interests, including servicing assets, was $214 million as of year-end 2009.

Applying the stress tests, we concluded that each change to a variable shown in the table below would have the following impact on the valuation of our residual interests as of year-end 2009:


	Decrease in Year- End Valuation ($ in millions)		Percentage Decrease
100 basis point increase in the prepayment rate	$	6	2.6%
200 basis point increase in the prepayment rate		12	5.4%
100 basis point increase in the discount rate		5	2.3%
200 basis point increase in the discount rate		10	4.6%
Two month decline in the weighted average remaining term		2	0.9%
Four month decline in the weighted average remaining term		4	1.7%

We value our Level 3 input derivatives using valuations that are calibrated to the initial trade prices. Subsequent valuations are based on unobservable inputs to the valuation model including interest rates and volatilities. We record realized and unrealized gains and losses on these derivative instruments in gains from the sale of timeshare notes receivable, which are recorded within the “Timeshare sales and services” revenue caption in our Consolidated Statements of Income.

In connection with the first and fourth quarter 2009 note sales, on the date of transfer, we recorded notes that we effectively owned after the transfer at a fair value of $81 million and $57 million, respectively. We used a discounted cash flow model, including Level 3 inputs, to determine the fair value of notes we effectively owned after the transfer. We based the discount rate we used in determining the fair value on the methodology described earlier in this footnote. Other assumptions, such as default and prepayment rates, are consistent with those used in determining the fair value of our residual interests. For additional information, see Footnote No. 13, “Asset Securitizations.”

During 2009, we recorded $90 million of impairment charges for two of our security deposits, one intangible asset, and two joint venture investments, prior to the application of an $11 million liability remaining from 2008. These charges are reflected in our Consolidated Statement of Income as $57 million in the “General, administrative, and other” expense caption and $33 million in the “Equity in (losses) earnings” caption. For additional information, see Footnote No. 21, “Restructuring Costs and Other Charges.”

During 2009, we also recorded an other-than-temporary impairment charge related to marketable equity securities. This charge is reflected in our Consolidated Statement of Income as $5 million in the “Gains and other income” caption. We measure these securities using Level 1 inputs on a recurring basis.

In 2009, in conjunction with our evaluation of the entire Timeshare portfolio and our resulting decisions to adjust the business strategy to reflect current market conditions, we recorded $685 million of impairment charges in accordance with the guidance for fair value measurement for inventory, property and equipment, anticipated fundings in conjunction with certain purchase commitments, and one joint venture investment. We reflected these charges in our Consolidated Statement of Income as $614 million in the “Timeshare strategy–impairment charges” caption and $71 million in the “Timeshare strategy-impairment charges (non-operating)” caption. For additional information, see Footnote No. 20, “Timeshare Strategy-Impairment Charges.”

FAIR VALUE OF FINANCIAL INSTRUMENTS

This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Jan. 01, 2010

6.	FAIR VALUE OF FINANCIAL INSTRUMENTS

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. The following table shows the carrying values and the fair values of non-current financial assets and liabilities that qualify as financial instruments, determined in accordance with the guidance for disclosures about fair value of financial instruments.


	At Year-End 2009						At Year-End 2008
*($ in millions)*	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cost method investments	$	41		$	43		$	37		$	36
Long-term notes receivable		452			445			830			817
Residual interests and effectively owned notes		197			197			135			135
Restricted cash		22			22			51			51
Marketable securities		18			18			24			24
Other long-term receivables		6			6			24			24

Total long-term financial assets	$	736		$	731		$	1,101		$	1,087

Long-term debt	$	(2,206	)	$	(2,286	)	$	(2,941	)	$	(2,720	)
Other long-term liabilities		(86	)		(75	)		(92	)		(92	)
Long-term derivative liabilities		(1	)		(1	)		(20	)		(20	)

Total long-term financial liabilities	$	(2,293	)	$	(2,362	)	$	(3,053	)	$	(2,832	)

We estimate the fair value of our cost method investments by applying a cap rate to stabilized earnings (a market approach). We estimate the fair value of our long-term notes receivables using various methods, which include discounting cash flows using risk-adjusted rates and applying historical results from our most recent securitization transaction to our unsold notes receivables. The carrying value of our restricted cash approximates its fair value, and we estimate the fair value of our other long-term receivables by discounting future cash flows at risk-adjusted rates. The carrying value of our marketable securities at year-end 2009, of $18 million includes debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs. Our residual interests, marketable securities, and restricted cash are included within the “Other long-term assets” caption on our Consolidated Balance Sheets.

We estimate the fair value of our long-term debt, excluding leases, using a combination of quoted market prices and expected future payments discounted at risk-adjusted rates. Other long-term liabilities represent guarantee costs and reserves and deposit liabilities. The carrying values of our guarantee costs and reserves approximate their fair values. We estimate the fair value of our deposit liabilities primarily by discounting future payments at a risk adjusted rate.

Our residual interests related to our timeshare securitizations, marketable securities, and derivative liabilities are carried at fair value. Please see Footnote No. 5, “Fair Value Measurements,” for additional information on the methods and assumptions used to estimate the fair value of these financial instruments and for further information on the effectively held notes. We include our long-term derivative liabilities within the “Other long-term liabilities” caption on our Consolidated Balance Sheets. See Footnote No. 17, “Derivative Instruments” for additional information.

ACQUISITIONS AND DISPOSITIONS

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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ACQUISITIONS AND DISPOSITIONS

12 Months Ended

Jan. 01, 2010

10.

ACQUISITIONS AND DISPOSITIONS

We made no significant acquisitions or dispositions in 2009.

2008 Acquisitions

At year-end 2007, we were party to a venture that developed and marketed fractional ownership and residential products. In 2008, we purchased our partner’s interest in that joint venture together with additional land. Cash consideration for this transaction totaled $42 million and we acquired assets and liabilities totaling $80 million and $38 million, respectively, on the date of purchase. In 2008, we also purchased real estate for a timeshare project for a total purchase price of approximately $63 million. Cash consideration totaled approximately $39 million, and non-current liabilities recorded as a result of this transaction were $24 million. In addition, in 2008, we purchased real estate for another timeshare project for cash consideration of $47 million. Also in 2008, we purchased units in an existing building for our timeshare operations for cash consideration of approximately $14 million. We also purchased real estate for another timeshare project for $28 million. Cash consideration totaled approximately $27 million, and we acquired assets and liabilities totaling $28 million and $1 million, respectively, on the date of purchase.

2008 Dispositions

In 2008, we sold, at book value, two limited-service properties and two land parcels for cash proceeds of $33 million, and we received a $22 million equity interest in the entity that purchased one of the land parcels. We accounted for each of the sales under the full accrual method in accordance with accounting for sales of real estate and each property will continue to operate under our brands pursuant to management or franchise agreements. Also, in 2008, we sold our interest in an entity that leases four hotels. In conjunction with that transaction, we received cash proceeds totaling $5 million, and the sales price of the investment approximated its book value.

2007 Acquisitions

During 2007, we acquired one full-service property, one limited-service property, and one extended-stay property for cash consideration of $199 million. These three properties were acquired in conjunction with a land assemblage for a large hotel complex that is still in the formative development stage. In addition, we acquired certain land parcels in 2007 for cash consideration of $52 million. Also during 2007, we acquired the fee simple interest in the improvements of three properties and the leasehold interest in the ground underlying the three properties for cash consideration of $58 million. The purchase included one full-service property and two limited-service properties, which were each sold later in the same year.

During the first half of 2007, we were party to a venture that developed and marketed fractional ownership and residential interests. In the second half of 2007, we purchased our partner’s interest in the joint venture for $6 million. In conjunction with that transaction, we acquired assets and liabilities totaling $90 million and $84 million, respectively, on the date of the purchase. During the first half of 2007, we were party to another venture that was established to develop and market timeshare and residential interests. In the second half of 2007, we purchased our partner’s interest in that joint venture, and concurrent with this transaction, we purchased additional land and assets from our partner as well. Aggregate cash and notes payable issued for these transactions totaled $106 million, and we acquired assets and liabilities totaling $182 million and $76 million, respectively, on the date of purchase.

2007 Dispositions

In 2007, we sold nine properties for cash proceeds of $601 million and recognized gains totaling $24 million. We continue to operate eight of the nine properties under long-term agreements. We sold two parcels of land for $55 million in cash proceeds that were under development and recognized a gain of $2 million. We also sold the fee simple interest in the improvements of three properties and the leasehold interest in the ground underlying the three properties, initially acquired in early 2007, for book value and received $58 million in cash proceeds. We continue to manage the properties under long-term agreements. We accounted for each of the foregoing sales under the full accrual method in accordance with the accounting for sales of real estate. During the year, we also sold our interests in five joint ventures for cash proceeds of $30 million and recognized gains totaling $13 million. We had other asset sales during the year, which generated proceeds totaling $1 million. Cash flows totaling $745 million for all the preceding dispositions in 2007 are reflected in the “Dispositions” line in our Consolidated Statements of Cash Flows.

In 2007, we also sold land that was under development. Due to a contingency in the sales contract, we accounted for this sale under the deposit method in accordance with the accounting for sales of real estate. Accordingly, the cash proceeds, totaling $90 million, were reflected in “Other investing activities” in our Consolidated Statements of Cash Flows. In 2008, the contingency was resolved and we recorded a gain of $1 million.

NOTES RECEIVABLE

12 Months Ended

Jan. 01, 2010

NOTES RECEIVABLE

12.

NOTES RECEIVABLE

The following table details the composition of our notes receivable balances at year-end 2009 and year-end 2008.


*($ in millions)*	2009			2008
Loans to timeshare owners	$	424		$	688
Senior loans		1			2
Mezzanine and other loans		195			236

		620			926
Less current portion		(168	)		(96	)

	$	452		$	830

We classify notes receivable due within one year as current assets in the caption “Accounts and notes receivable” in the accompanying Consolidated Balance Sheets, including $73 million and $81 million, as of year-end 2009 and year-end 2008, respectively, related to loans to timeshare owners. Total long-term notes receivable as of year-end 2009 and year-end 2008 of $452 million and $830 million, respectively, consist of loans to timeshare owners of $352 million and $607 million, respectively, loans to equity method investees of $10 million and $50 million, respectively, and other notes receivable of $90 million and $173 million, respectively.

Notes receivable at year-end 2009 were due to us as follows: $168 million in 2010; $58 million in 2011; $64 million in 2012; $43 million in 2013; $39 million in 2014; and $248 million thereafter. The 2009 notes receivable balance is net of reserves of $210 million and unamortized discounts totaling $16 million. The 2008 notes receivable balance is net of reserves of $148 million and unamortized discounts totaling $21 million. Gains from the sale of notes receivable totaled approximately $37 million, $16 million, and $82 million during 2009, 2008, and 2007, respectively.

Senior, Mezzanine, and Other Loans

We reflect interest income associated with “Senior, mezzanine, and other loans” in the “Interest income” caption in the accompanying Consolidated Statements of Income. For financial statement purposes we do not accrue interest on “Senior, mezzanine, and other loans” that are impaired. At year-end 2009, our recorded investment in impaired “Senior, mezzanine, and other loans” was $191 million. We had a $183 million notes receivable reserve representing an allowance for credit losses, leaving $8 million of our investment in impaired loans for which there was no related allowance for credit losses. At year-end 2008, our recorded investment in impaired “Senior, mezzanine, and other loans” was $157 million. We had a $113 million notes receivable reserve representing an allowance for credit losses, leaving $44 million of our investment in impaired loans for which there was no related allowance for credit losses. During 2009 and 2008, our average investment in impaired loans totaled $174 million and $135 million, respectively.

In 2009, we fully reserved two notes receivable balances that we deemed uncollectible, one of which relates to a project that is in development, and partially reserved one notes receivable balance. We recorded a total charge of $43 million in 2009 in the “General, administrative, and other” expense caption in our Consolidated Statements of Income related to these notes receivable balances. See Footnote No. 21, “Restructuring Costs and Other Charges” for additional information.

In 2009, we also fully reserved certain notes receivable balances that we deemed uncollectible, which relate to a Timeshare segment joint venture project that is in development. Accordingly, we recorded a loan impairment charge of $40 million in 2009 in the “Timeshare strategy-impairment charges (non-operating)” caption of our Consolidated Statements of Income. See Footnote No. 20, “Timeshare Strategy-Impairment Charges,” for additional information.

The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for 2007, 2008, and 2009:


*($ in millions)*	Notes Receivable Reserve
Year-end 2006 balance	$	70
Additions		11
Reversals		—
Write-offs		—
Transfers and other		11

Year-end 2007 balance		92
Additions		22
Reversals		(5	)
Write-offs		(3	)
Transfers and other		7

Year-end 2008 balance		113
Additions		84
Reversals		—
Write-offs		(28	)
Transfers and other		14

Year-end 2009 balance	$	183

Loans to Timeshare Owners

At year-end 2009, the weighted average interest rate for our “Loans to timeshare owners” was 12.2 percent and the stated interest rates associated with these loans ranged from zero to 19.50 percent. We reflect interest income associated with “Loans to timeshare owners” of $46 million, $68 million, and $50 million for 2009, 2008, and 2007, respectively, in the accompanying Consolidated Statements of Income in the “Timeshare sales and services” revenue caption. Our recorded investment in “Loans to timeshare owners” on nonaccrual status at year-end 2009 and year-end 2008 totaled $113 million and $74 million, respectively.

The following table summarizes the activity related to our “Loans to timeshare owners” notes receivable reserve for 2007, 2008, and 2009:


*($ in millions)*	Notes Receivable Reserve
Year-end 2006 balance	$	29
Additions for current year sales		29
Write-offs		(24	)
Other		(15	)

Year-end 2007 balance		19
Additions for current year sales		36
Write-offs		(20	)

Year-end 2008 balance		35
Additions for current year sales		5
Write-offs		(13	)

Year-end 2009 balance	$	27

ASSET SECURITIZATIONS

12 Months Ended

Jan. 01, 2010

ASSET SECURITIZATIONS

13.

ASSET SECURITIZATIONS

We periodically sell, without recourse, through special purpose entities, notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. We continue to service the notes and transfer all proceeds collected to special purpose entities. We retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. The interests are limited to the present value of cash available after paying financing expenses and program fees and absorbing credit losses. The executed transactions typically include minimal cash reserves established at time of sale as well as default and delinquency triggers, which are monitored on a monthly basis.

We measure our servicing assets using the fair value method. Under the fair value method, we carry servicing assets on the balance sheet at fair value, and report the changes in fair value, primarily due to changes in valuation inputs and assumptions and to the collection or realization of expected cash flows, in earnings in the period in which the change occurs.

To determine the fair value of servicing assets, we use a valuation model that calculates the present value of estimated future net servicing income, which is based on the monthly fee we receive for servicing the securitized notes. We use market assumptions in the valuation model, including estimates of prepayment speeds, default rates, and discount rates. We have inherent risk for changes in the fair value of the servicing asset but do not deem the risk significant and therefore, do not use other financial instruments to mitigate this risk.

The changes in servicing assets for year-end 2008 and year-end 2009, measured using the fair value method were:


*($ in millions)*	Servicing Assets
Fair value, beginning of fiscal year 2008	$	15
Servicing from securitizations		3
Changes in fair value ⁽¹⁾		(6	)

Fair value, fiscal year-end 2008		12
Servicing from securitizations		8
Disposals ⁽²⁾		(3	)
Changes in fair value ⁽¹⁾		(3	)

Fair value, fiscal year-end 2009	$	14

⁽¹⁾	Principally represents changes due to collection/realization of expected cash flows over time and changes in fair value due to changes in key variables listed below.

⁽²⁾	Represents release of servicing assets related to the repurchase of outstanding note sale pools.

At year-end 2009, $1,235 million of principal due from timeshare interval and fractional owners remained outstanding in 13 special purpose entities formed in connection with our timeshare note sales. Delinquencies of more than 90 days amounted to $16 million. The impact to us from delinquencies, and our maximum exposure to loss as a result of our involvement with these special purpose entities, is limited to our residual interests and servicing assets, as discussed in Footnote No. 5, “Fair Value Measurements.” Please see the “Timeshare Residual Interests Valuation” caption in Footnote No. 21, “Restructuring Costs and Other Charges” for additional information on the risks associated with our residual interests. Under the terms of our timeshare note sales, we have the right, at our option, to repurchase defaulted mortgage notes at par. The transaction documents typically limit such repurchases to 10 percent of the transaction’s initial mortgage balance, but during 2009, investors in three of our outstanding note sale transactions agreed to increase the applicable limit to 15 percent. In cases where we have chosen to exercise this repurchase right, we have been able to resell the timeshare units underlying the defaulted loans without incurring material losses although we may not be able to do so in the future.

Cash flows between us and third-party purchasers during 2009, 2008, and 2007 were as follows: net proceeds to us from new timeshare note sales of $349 million, $237 million, and $515 million respectively; voluntary repurchases by us of defaulted notes (over 150 days overdue) of $81 million, $56 million, and $30 million respectively; servicing fees received by us of $6 million, $6 million, and $6 million, respectively; and cash flows received from our retained interests of $75 million, $96 million, and $100 million respectively.

We earned contractually specified servicing fees of $6 million in 2009, $6 million in 2008, and $6 million in 2007. We also earned contractually specified late fees and ancillary fees of $7 million in 2009, $7 million in 2008, and $7 million in 2007. We reflect all of these fees within the “Timeshare sales and services” line in our “Condensed Consolidated Statements of Income.”

In 2009, 2008, and 2007, we sold notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional ownership products of $446 million, $300 million, and $520 million, respectively. During 2009, we entered into two note sale transactions for $284 million and $380 million. The second of these transactions included our reacquisition and sale of $218 million of notes that were previously securitized in the first transaction. Each note sale was made to a newly formed transaction-specific trust that, simultaneously with its purchase of the notes receivable, issued $522 million, $246 million, and $520 million, respectively, of the trust’s notes. In connection with the sale of the notes receivable, we received net proceeds of $349 million in 2009, $237 million in 2008, and $515 million in 2007. We have included gains from the sales of timeshare notes receivable totaling $37 million in 2009, $16 million, net of $12 million of hedge ineffectiveness, in 2008, and $81 million in 2007 in the “Timeshare sales and services” revenue caption in our Consolidated Statements of Income.

See Footnote No. 5, “Fair Value Measurements,” in this report for further discussion of our servicing assets and residual interests. Additionally, see our “New Accounting Standards” discussion in “Management’s Discussion and Analysis” on the adoption of ASU 2009-17 in 2010 and its potential impact.

TIMESHARE STRATEGY - IMPAIRMENT CHARGES

Provides the disclosures pertaining to a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

+ References+ Details

LONG-TERM DEBT

12 Months Ended

Jan. 01, 2010

LONG-TERM DEBT

14.

LONG-TERM DEBT

Our long-term debt at year-end 2009 and year-end 2008, net of unamortized debt discounts of $20 million and $27 million, respectively, consisted of the following:


*($ in millions)*	2009			2008
Senior Notes:
Series C, matured September 15, 2009	$	—		$	76
Series F, interest rate of 4.625%, face amount of $348, maturing June 15, 2012 (effective interest rate of 5.020%)		347			347
Series G, interest rate of 5.810%, face amount of $316, maturing November 10, 2015 (effective interest rate of 6.550%)		302			349
Series H, interest rate of 6.200%, face amount of $289, maturing June 15, 2016 (effective interest rate of 6.300%)		289			314
Series I, interest rate of 6.375%, face amount of $293, maturing June 15, 2017 (effective interest rate of 6.450%)		291			335
Series J, interest rate of 5.625%, face amount of $400, maturing February 15, 2013 (effective interest rate of 5.710%)		398			397
$2.4B Effective Credit Facility, average interest rate of 0.872% at January 1, 2010		425			969
Other		246			308

		2,298			3,095
Less current portion		(64	)		(120	)

	$	2,234		$	2,975

As of year-end 2009, all debt was unsecured, and we had long-term public debt ratings of BBB- from Standard and Poor’s and Baa3 from Moody’s.

We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for $2.4 billion of aggregate effective borrowings to support general corporate needs, including working capital and capital expenditures, and letters of credit supported our commercial paper program. The Credit Facility expires on May 14, 2012. Borrowings under the Credit Facility bear interest at the London Interbank Offered Rate (LIBOR) plus a fixed spread. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating.

Until the 2008 fourth quarter, when disruptions in the financial markets significantly reduced liquidity in the commercial paper market, we regularly issued short-term commercial paper primarily in the United States and, to a much lesser extent, in Europe. At that time, we suspended issuing commercial paper and used funds borrowed under the Credit Facility to repay all of our previously issued commercial paper as it matured. Our Standard and Poor’s commercial paper rating at the end of 2009 was A3. Because the current market for A3 commercial paper is very limited, it would be very difficult to rely on the use of this market as a meaningful source of liquidity, and we do not anticipate issuing commercial paper under these circumstances.

We classified outstanding commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis. We reserved unused capacity under our Credit Facility to repay outstanding commercial paper borrowings in the event that the commercial paper market was not available to us for any reason when outstanding borrowings matured. Given our borrowing capacity under the Credit Facility, fluctuations in the commercial paper market or the costs at which we can issue commercial paper have not affected our liquidity, and we do not expect them to do so in the future.

Although we are predominantly a manager and franchisor of hotel properties, we may use capital to buy, develop, and improve hotels, as well as to develop timeshare properties. Capital markets were disrupted in the fourth quarter of 2008 and have remained challenging due to the recession and ongoing worldwide financial instability. See the “Cash Requirements and Our Credit Facilities” discussion in the “Liquidity and Capital Resources” section of this report for additional information regarding our Credit Facility.

In 2009, we repurchased $122 million principal amount of our Senior Notes in the open market, across multiple series. We recorded a gain of $21 million for the debt extinguishment representing the difference between the acquired debt’s purchase price of $98 million and its carrying amount of $119 million. The weighted average interest rate on the senior debt that was paid down in 2009 was 6.8 percent.

In the fourth quarter of 2009, we made a $79 million cash payment of principal and interest to retire, at maturity, all of our outstanding Series C Senior Notes.

Aggregate debt maturities at year-end 2009 were: $64 million in 2010; $12 million in 2011; $784 million in 2012; $410 million in 2013; $12 million in 2014; and $1,016 million thereafter.

Cash paid for interest, net of amounts capitalized, was $96 million in 2009, $110 million in 2008, and $115 million in 2007.

DERIVATIVE INSTRUMENTS

12 Months Ended

Jan. 01, 2010

DERIVATIVE INSTRUMENTS

17.

DERIVATIVE INSTRUMENTS

We adopted the current guidance for disclosures about derivative instruments and hedging activities on January 3, 2009, the first day of our 2009 fiscal year. This guidance enhances the current disclosure framework for derivative instruments and hedging activities.

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the change in fair value of the derivative instrument will be reflected in the Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value and the hedge documentation standards are fulfilled at the time we enter into the derivative contract. A hedge is designated as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value, for the effective portion of qualifying hedges, are recorded in other comprehensive income (“OCI”). The derivative’s gain or loss is released from OCI to match the timing of the underlying hedged cash flows effect on earnings.

We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we release gains and losses from OCI based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such untimely transactions require us to immediately recognize in earnings gains and losses previously recorded in OCI.

Changes in interest rates, foreign exchange rates, and equity securities expose us to market risk. We manage our exposure to these risks by monitoring available financing alternatives, as well as through development and application of credit granting policies. We also use derivative instruments, including cash flow hedges, net investment in foreign operations hedges, fair value hedges, and other derivative instruments, as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes.

Our use of derivative instruments to manage market risks exposes us to the risk that a counterparty could default on a derivative contract. Our financial instrument counterparties are high-quality investment or commercial banks with significant experience with such instruments. We manage our exposure to counterparty risk by requiring specific minimum credit standards for our counterparties and by spreading our derivative contracts among diverse counterparties. As of year-end 2009, we had derivative contracts outstanding with eight investment grade counterparties.

In the event that we were to default under a derivative contract or similar obligation, our derivative counterparty would generally have the right, but not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value. Although the netting terms of our derivative contracts vary by agreement, in a settlement following a default, the liability positions under some of these contracts would be netted against the asset positions with the same counterparty. At year-end 2009, we had open derivative contracts in a liability position with a total fair value of $4 million.

During 2009, we used the following derivative instruments to mitigate our interest rate and foreign currency exchange rate risks:

Cash Flow Hedges

During 2008, we entered into interest rate swaps to manage interest rate risk associated with forecasted timeshare note sales. During 2008, 11 swaps were designated as cash flow hedges under the guidance for derivatives and hedging. We terminated nine of the 11 swaps in 2008 and recognized a $6 million loss in “Timeshare sales and services” revenue in our 2008 full-year income statement. The remaining two swaps became ineffective in the fourth quarter of 2008. We recognized a $12 million loss in “Timeshare sales and services” revenue in our full-year 2008 income statement and no longer accounted for them as cash flow hedges. We terminated these swaps in the first quarter of 2009 and recognized no additional gain or loss.

During 2009, 2008 and 2007, we entered into forward foreign exchange contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts had original terms of less than three years and will expire in the first quarter of 2010. During 2009, we also entered into foreign exchange option contracts to hedge the risk associated with forecasted transactions for contracts and fees denominated in foreign currencies. These contracts had original terms of less than one year and will expire in the first quarter of 2010. We anticipate entering into similar foreign exchange contracts upon expiration of these forwards and options.

Net Investment Hedges

During 2009, 2008 and 2007, we entered into forward foreign exchange contracts to manage our risk of currency exchange rate volatility associated with certain of our investments in foreign operations. The contracts offset the gains and losses associated with translation adjustments for various investments in foreign operations and had original terms of approximately one month. We anticipate entering into similar contracts when these contracts expire in the first quarter of 2010.

Fair Value Hedges

In 2003, we entered into an interest rate swap to address interest rate risk. Under this agreement, which has an aggregate notional amount of $92 million and matures in 2010, we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. We classify this swap as a fair value hedge under the guidance for derivatives and hedging and we recognize the change in the fair value of the swap, as well as the change in the fair value of the underlying note receivable, in interest income. Due to the structure of the swap, the change in its fair value moves in tandem with the change in fair value of the underlying note receivable. The hedge is highly effective and, therefore, we reported no net gain or loss in 2009.

Derivatives not Designated as Hedging Instruments

In certain note sale transactions, we use interest rate swaps to limit the variability in the value of the excess spread (or the difference between the loan portfolio average fixed coupon rate and the variable rate expected by the note investors) due to changing interest rates. Although we expect to receive the excess spread, we provide interest rate swaps for the benefit of the investors in the event the underlying notes do not perform as expected. The interest rate swaps used in some conduit note sale transactions move inversely to the movement in the excess spread and thus provide a natural hedge in the transaction. We use multiple interest rate swaps, including differential swaps, in some of the term asset backed securities transactions that largely offset one another to the extent that the sold notes prepay within expectations. Given the natural hedges provided by both of these types of transactions, we did not apply hedge accounting to these interest rate swaps. In certain deals, we sell a portfolio of fixed-coupon consumer loans to investors who require a variable rate of return. If unhedged, an increase in the variable rate of those deals would compress the excess spread; therefore, we enter into these interest rate swaps to preserve the excess spread at the level expected by the investors.

At year-end 2009, we had four such swap agreements that expire through 2022. Due to market conditions, we were required to enter into a differential swap in connection with our first quarter 2009 note sale. We terminated that swap in the 2009 fourth quarter for a loss of $4 million related to our retained interests for our 2009 first quarter note sale.

We do not apply the standards of hedge accounting to some of our foreign exchange contracts because there is no material timing difference between the recognition of the gain or loss on the underlying asset or liability and the gain or loss on the derivative instrument. During 2009, 2008 and 2007, we entered into these forward contracts to hedge foreign currency denominated net monetary assets and/or liabilities. We anticipate entering into similar contracts when these contracts expire in the first quarter of 2010. Examples of monetary assets and liabilities that we hedge include, but are not limited to, cash, receivables, payables, and debt. Pursuant to the guidance for foreign currency translation, the gains or losses on such forward contracts are computed by multiplying the foreign currency amount of the forward contract by the difference between the spot rate at the balance sheet date and the spot rate at the date of inception of the forward contract (or the spot rate last used to measure a gain or loss on that contract for an earlier period).

The following tables summarize the fair value of our derivative instruments, and the effect of derivative instruments on our Consolidated Statements of Income and Comprehensive Income.

Fair Value of Derivative Instruments


*($ in millions)*	Balance Sheet Location	Fair Value at Year-End 2009			Fair Value at Year-End 2008			Notional Amount at Year-End 2009
Derivatives designated as hedging instruments ⁽¹⁾
Asset Derivatives
Foreign exchange forwards and options ⁽²⁾	Other assets	$	1		$	6		$	19
Net investment hedges	Other current liabilities		—			—			16

Total assets		$	1		$	6

Liability Derivatives
Interest rate swaps	Other current liabilities		(3	)		(5	)		92
Foreign exchange forwards ⁽²⁾	Other current liabilities		(1	)		(2	)		38

Total liabilities		$	(4	)	$	(7	)

Derivatives not designated as hedging instruments ⁽¹⁾
Asset Derivatives
Interest rate swaps ⁽²⁾	Other long-term liabilities	$	—		$	—		$	14
Foreign exchange forwards ⁽²⁾	Other assets		2			—			219

Total asset derivatives		$	2		$	—

Liability Derivatives
Interest rate swaps ⁽²⁾	Other long-term liabilities	$	(1	)	$	(15	)	$	62
Foreign exchange forwards ⁽²⁾	Other current liabilities		—			—			70

Total liability derivatives		$	(1	)	$	(15	)

⁽¹⁾	See Footnote No. 5, “Fair Value Measurements,” for additional information on the fair value of our derivative instruments.

⁽²⁾	Certain derivatives are subject to master netting agreements, which allows us to net payable and receivable positions for certain contracts within the same line item on the balance sheet.

The Effect of Derivative Instruments on the Consolidated Statement of Income


*($ in millions)*	Location of Gain (Loss) Recognized in Income	Fiscal Year- End 2009			Fiscal Year- End 2008			Fiscal Year- End 2007
Derivatives designated as cash flow hedges
Interest rate swaps	Timeshare sales and services	$	—		$	(19	)	$	—
Foreign exchange forwards and options	Base management fees		5			3			—
Foreign exchange forwards	Franchise fees		1			—			—
Foreign exchange forwards	Gains and other income		—			—			(1	)

Total gain from cash flow hedges			6			(16	)		(1	)

Derivatives not designated as hedging instruments
Interest rate swaps	Timeshare sales and services	$	(3	)	$	(4	)	$	(4	)
Foreign exchange forwards	General, administrative, and other		(14	)		7			(10	)

Total (loss) from derivatives not designated as hedging instruments			(17	)		3			(14	)

Total (loss) recognized in income		$	(11	)	$	(13	)	$	(15	)

The Effect of Hedging Instruments on the Statement of Comprehensive Income ^(1),
(2)


*($ in millions)*	Interest Rate Swaps			Cash Flow Hedges Foreign Exchange Forwards/Options
Deferred gains (losses) from derivatives in OCI at beginning of fiscal year 2007	$	—		$	—
Gains (losses) recognized in OCI from derivatives		(7	)		—

Deferred gains (losses) from derivatives in OCI at fiscal year-end 2007		(7	)		—
Gains (losses) recognized in OCI from derivatives		(1	)		9
Less: Gains (losses) reclassified from OCI (effective portion) to:
Base management fees		—			3
Timeshare sales and services		(6	)		—
Less: Gains (losses) reclassified from OCI (ineffective portion) to:
Timeshare sales and services		(2	)		—

Deferred gains (losses) from derivatives in OCI at fiscal year-end 2008		—			6
Less: Gains (losses) reclassified from OCI (effective portion) to:
Base management fees		—			5
Franchise fees		—			1

Deferred gains (losses) from derivatives in OCI at fiscal year-end 2009	$	—		$	—

⁽¹⁾	See Footnote No. 5, “Fair Value Measurements,” for additional information on the fair value of our derivative instruments.

⁽²⁾	Certain derivatives are subject to master netting agreements, which allows us to net payable and receivable positions for certain contracts within the same line item on the balance sheet.

CONTINGENCIES

12 Months Ended

Jan. 01, 2010

CONTINGENCIES

18.

CONTINGENCIES

Guarantees

We issue guarantees to certain lenders and hotel owners primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of three to 10 years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels and Timeshare segment properties that we or our joint venture partners are building.

The maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings at year-end 2009 are as follows:


*($ in millions)* Guarantee Type	Maximum Potential Amount of Future Fundings		Liability for Expected Future Fundings at Year-End 2009
Debt service	$	37	$	3
Operating profit		139		28
Other		103		7

Total guarantees where we are the primary obligor	$	279	$	38

The liability for expected future fundings at year-end 2009 in our Consolidated Balance Sheet is as follows: $8 million in the “Other current liabilities” line item and $30 million in the “Other long-term liabilities” line item.

Our guarantees of $279 million listed in the preceding table include $33 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties, $3 million of debt service guarantees that will not be in effect until the underlying debt has been funded, and $8 million of other guarantees.

The guarantees of $279 million in the preceding table do not include $171 million of guarantees that we anticipate will expire in the years 2013 and 2014, related to Senior Living Services lease obligations totaling $116 million and lifecare bonds of $55 million for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor of the leases and $8 million of the lifecare bonds, and CNL Retirement Properties, Inc. (“CNL”), which subsequently merged with Health Care Property Investors, Inc., is the primary obligor of $45 million of the lifecare bonds. Five Star is the primary obligor of the remainder of the lifecare bonds. Prior to our sale of the Senior Living Services business in 2003, these preexisting guarantees were guarantees by us of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called upon to make in connection with these lease obligations and lifecare bonds. While we currently do not expect to fund under the guarantees, according to recent SEC filings made by Sunrise there has been a significant deterioration in Sunrise’s financial position and access to liquidity; accordingly, Sunrise’s continued ability to meet these guarantee obligations cannot be assured.

The table also does not include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $6 million and total remaining rent payments through the initial term of approximately $62 million. Most of these obligations expire at the end of 2020. CTF Holdings Ltd. (“CTF”) had originally made available €35 million in cash collateral in the event that we are required to fund under such guarantees (approximately €7 million ($9 million) remained at year-end 2009). Our contingent liability exposure of approximately $62 million will decline to the extent that CTF obtains releases from the landlords or these hotels exit the system. Since the time we assumed these guarantees, we have not funded any amounts and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees noted in the preceding table, we provided a project completion guarantee to a lender for a project with an estimated aggregate total cost of $586 million. Payments for cost overruns for this project will be satisfied by the joint venture through contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 34 percent. Our liability for this guarantee is included in our liability for anticipated project funding that we discuss in Footnote No. 20, “Timeshare Strategy-Impairment Charges,” which represents our intention to provide ongoing financial support to ensure completion of the project. The preceding table also does not include a project completion guarantee that we provided to another lender for a project with an estimated aggregate total cost of CAD $466 million (USD $441 million). The joint venture will satisfy payments for cost overruns for this project through contributions from the partners or from borrowings, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 20 percent. We do not expect to fund under the guarantee. At year-end 2009, the carrying value of the liabilities associated with this project completion guarantee was $3 million.

In addition to the guarantees described in the preceding paragraphs, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.

Commitments and Letters of Credit

In addition to the guarantees noted previously, as of year-end 2009, we had the following commitments outstanding:

•

$4 million of loan commitments that we have extended to owners of lodging properties. We expect to fund approximately $2 million of these commitments in two to three years, and do not expect to fund the remaining $2 million of commitments, $1 million of which will expire in two to three years and $1 million of which will expire after six years.

•

Commitments to invest up to $49 million of equity for noncontrolling interests in partnerships that plan to purchase North American full-service and limited-service properties or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund $1 million of these commitments in one to two years and $38 million within three years and $10 million after three years. If not funded, $29 million of these investment commitments will expire through 2012 and $20 million will expire through 2013.

•

A commitment, with no expiration date, to invest up to $12 million in a joint venture for development of a new property that we expect to fund within three years.

•

A commitment, with no expiration date, to invest up to $7 million in a joint venture that we do not expect to fund.

•

A commitment, subject to certain conditions, to invest up to $50 million (€35 million) into a new fund, which we expect will be capitalized and launched within six to 12 months, to purchase or develop managed Marriott brand hotels in Western Europe that will be managed exclusively by us. After the initial closing of the fund, we expect that our commitment will expire after four years subject to a one-year extension option with funding occurring over time during that period.

•

A commitment to invest up to $29 million (€20 million) in a joint venture in which we are a partner. We do not expect to fund under this commitment.

•

We have two commitments aggregating to $139 million to purchase timeshare and fractional units upon completion of construction for use in our Asia Pacific points and The Ritz-Carlton Destination Club programs. We have already made deposits of $21 million in conjunction with these commitments, and we are contractually obligated to make the remaining payment of $118 million in 2010, though we expect to defer payment of approximately $100 million to 2011.

•

$6 million (€5 million) of other purchase commitments to be funded over the next 5 years, as follows: $2 million in 2010 and $1 million in 2011, 2012, 2013 and 2014.

At year-end 2009, we also had $116 million of letters of credit outstanding, the majority of which related to our self-insurance programs. Surety bonds issued as of year-end 2009 totaled $361 million, the majority of which were requested by federal, state or local governments related to our lodging operations, including our Timeshare segment and self-insurance programs.

Investment in Leveraged Lease

Historically, we had a $23 million investment in an aircraft leveraged lease with Delta Air Lines, Inc. (“Delta Airlines”), which we acquired in 1994. The gross investment was comprised of rentals receivable and the residual value of the aircraft offset by unearned income. On September 14, 2005, Delta Airlines filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and informed us that it wished to restructure the lease. As a result, our investment was impaired and we had recorded pretax charges of approximately $17 million in 2005 and $1 million in 2006. We recorded an additional $5 million loss related to this investment in fiscal 2007, and have no remaining exposure. In 2009, we reached final settlement with Delta Airlines and recorded a $3 million recovery of the investment previously reserved in the “General, administrative, and other” expense caption of our Consolidated Statements of Income.

BUSINESS SEGMENTS

12 Months Ended

Jan. 01, 2010

BUSINESS SEGMENTS

19.

BUSINESS SEGMENTS

We are a diversified hospitality company with operations in five business segments:

•

North American Full-Service Lodging, which includes the Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott, Renaissance Hotels, and Renaissance ClubSport properties located in the continental United States and Canada;

•

North American Limited-Service Lodging, which includes the Courtyard, Fairfield Inn & Suites, SpringHill Suites, Residence Inn, TownePlace Suites, and Marriott ExecuStay properties located in the continental United States and Canada;

•

International Lodging, which includes the Marriott Hotels & Resorts, JW Marriott, Renaissance Hotels, Courtyard, Fairfield Inn & Suites, Residence Inn, and Marriott Executive Apartments properties located outside the continental United States and Canada;

•

Luxury Lodging, which includes The Ritz-Carlton and Bulgari Hotels & Resorts properties worldwide (together with adjacent residential projects associated with some Ritz-Carlton hotels), as well as EDITION, for which no properties are yet open; and

•

Timeshare, which includes the development, marketing, operation, and sale of Marriott Vacation Club, The Ritz-Carlton Destination Club, The Ritz-Carlton Residences, and Grand Residences by Marriott timeshare, fractional ownership, and residential properties worldwide.

In addition to the segments above, we exited the synthetic fuel business in 2007, which we formerly reported as a separate segment but now report under discontinued operations.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, income taxes, or indirect general, administrative, and other expenses. With the exception of the Timeshare segment, we do not allocate interest income to our segments. Because note sales are an integral part of the Timeshare segment, we include note sale gains or (losses) in our Timeshare segment results. We also include interest income associated with Timeshare segment notes in our Timeshare segment results because financing sales are an integral part of that segment’s business. Additionally, we allocate other gains or losses, equity in earnings or losses from our joint ventures, divisional general, administrative, and other expenses, and income or losses attributable to noncontrolling interests to each of our segments. “Other unallocated corporate” represents that portion of our revenues, general, administrative, and other expenses, (which now includes provision for loan losses, as indicated in Footnote No. 1, “Summary of Significant Accounting Policies,”) equity in earnings or losses, and other gains or losses that are not allocable to our segments.

We aggregate the brands presented within our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environment of the brands and operations within each segment and our organizational and management reporting structure.

Revenues


*($ in millions)*	2009		2008		2007
North American Full-Service Segment	$	4,848	$	5,631	$	5,476
North American Limited-Service Segment		1,986		2,233		2,198
International Segment		1,145		1,544		1,594
Luxury Segment		1,413		1,659		1,576
Timeshare Segment		1,439		1,750		2,065

Total segment revenues		10,831		12,817		12,909
Other unallocated corporate		77		62		81

	$	10,908	$	12,879	$	12,990

(Loss) Income from Continuing Operations Attributable to Marriott


*($ in millions)*	2009			2008			2007
North American Full-Service Segment	$	272		$	419		$	478
North American Limited-Service Segment		265			395			461
International Segment		129			246			271
Luxury Segment		17			78			72
Timeshare Segment		(679	)		28			306

Total segment financial results		4			1,166			1,588
Other unallocated corporate		(318	)		(324	)		(304	)
Interest income and interest expense		(93	)		(124	)		(146	)
Income taxes		61			(359	)		(441	)

	$	(346	)	$	359		$	697

Net Losses Attributable to Noncontrolling Interests


*($ in millions)*	2009			2008			2007
International Segment	$	—		$	(1	)	$	(1	)
Luxury Segment		—			—			1
Timeshare Segment		11			25			1

Total segment net losses attributable to noncontrolling interests		11			24			1
Provision for income taxes		(4	)		(9	)		—

	$	7		$	15		$	1

Equity in (Losses) Earnings of Equity Method Investees


*($ in millions)*	2009			2008			2007
North American Full-Service Segment	$	1		$	3		$	3
North American Limited-Service Segment		(9	)		—			2
International Segment		(11	)		(2	)		3
Luxury Segment		(32	)		(12	)		(4	)
Timeshare Segment		(12	)		11			10

Total segment equity in (losses) earnings		(63	)		—			14
Other unallocated corporate		(3	)		15			(11	)

	$	(66	)	$	15		$	3

Depreciation and Amortization


*($ in millions)*	2009		2008		2007
North American Full-Service Segment	$	33	$	29	$	25
North American Limited-Service Segment		18		20		23
International Segment		25		24		23
Luxury Segment		17		16		17
Timeshare Segment		42		46		39

Total segment depreciation and amortization		135		135		127
Other unallocated corporate		50		55		62
Discontinued operations		—		—		8

	$	185	$	190	$	197

Assets


*($ in millions)*	At Year-End 2009		At Year-End 2008
North American Full-Service Segment	$	1,175	$	1,287
North American Limited-Service Segment		468		467
International Segment		849		832
Luxury Segment		653		715
Timeshare Segment		2,653		3,636

Total segment assets		5,798		6,937
Other unallocated corporate		2,135		1,966
Discontinued operations		—		—

	$	7,933	$	8,903

Equity Method Investments


*($ in millions)*	At Year-End 2009		At Year-End 2008
North American Full-Service Segment	$	14	$	16
North American Limited-Service Segment		100		97
International Segment		47		56
Luxury Segment		38		50
Timeshare Segment		2		80

Total segment equity method investments		201		299
Other unallocated corporate		7		10

	$	208	$	309

Goodwill


*($ in millions)*	North American Full-Service Segment			North American Limited-Service Segment			International Segment			Luxury Segment			Total Goodwill
Year-end 2007 balance:
Goodwill	$	461		$	86		$	310		$	192		$	1,049
Accumulated amortization		(55	)		(14	)		(37	)		(22	)		(128	)

		406			72			273			170			921
Deferred tax liability adjustment		(71	)		—			25			—			(46	)

	$	335		$	72		$	298		$	170		$	875

Year-end 2008 balance:
Goodwill	$	390		$	86		$	335		$	192			1,003
Accumulated amortization		(55	)		(14	)		(37	)		(22	)		(128	)

	$	335		$	72		$	298		$	170		$	875

Year-end 2009 balance:
Goodwill	$	390		$	86		$	335		$	192		$	1,003
Accumulated amortization		(55	)		(14	)		(37	)		(22	)		(128	)

	$	335		$	72		$	298		$	170		$	875

Capital Expenditures


*($ in millions)*	2009		2008		2007
North American Full-Service Segment	$	18	$	117	$	446
North American Limited-Service Segment		9		13		36
International Segment		33		45		44
Luxury Segment		1		6		35
Timeshare Segment		28		105		56

Total segment capital expenditures		89		286		617
Other unallocated corporate		58		71		54

	$	147	$	357	$	671

Segment expenses include selling expenses directly related to the operations of the businesses, aggregating $436 million in 2009, $629 million in 2008, and $616 million in 2007. Approximately 87 percent for 2009 and 89 percent for each of 2008 and 2007 of the selling expenses are related to our Timeshare segment.

Our consolidated financial statements include the following related to operations located outside the United States (which are predominately related to our International lodging segment):

Revenues of $1,700 million in 2009, $2,230 million in 2008, and $2,287 million in 2007;

Segment financial losses of $26 million in 2009 (losses of $42 million from Continental Europe, losses of $51 million from the Americas excluding the United States, $8 million of income from Asia, $29 million of income from the United Kingdom and Ireland, $27 million of income from the Middle East and Africa, and $3 million of income from Australia), and segment results of $253 million in 2008 and $341 million in 2007. Segment losses for 2009 reflect timeshare strategy impairment charges and restructuring costs, both for our Timeshare segment, totaling $176 million associated with the Americas excluding the United States, Europe, Asia and the United Kingdom and Ireland of $100 million, $47 million, $22 million, and $7 million, respectively. Segment results for 2008 reflect restructuring costs and other charges, for our Timeshare segment, totaling $12 million associated with the Americas excluding the United States and with Europe of $2 million and $10 million, respectively; and

Fixed assets of $325 million in 2009 and $314 million in 2008. At year-end 2009 and year-end 2008, fixed assets located outside the United States are included within the “Property and equipment” caption in our Consolidated Balance Sheets.

No individual country, other than the United States, constitutes a material portion of our revenues, financial results or fixed assets.

We estimate that, for the 20-year period from 2010 through 2029, the cost of completing all phases of our existing portfolio of owned timeshare properties will be approximately $2.9 billion. This estimate is based on our current development plans, which remain subject to change.

TIMESHARE STRATEGY - IMPAIRMENT CHARGES

12 Months Ended

Jan. 01, 2010

20.

TIMESHARE STRATEGY – IMPAIRMENT CHARGES

In response to the difficult business conditions that the Timeshare segment’s timeshare, luxury residential, and luxury fractional real estate development businesses continued to experience, we evaluated our entire Timeshare portfolio in the 2009 third quarter. In order to adjust the business strategy to reflect current market conditions at that time, on September 22, 2009, we approved plans for our Timeshare segment to take the following actions: (1) for our luxury residential projects, reduce prices, convert certain proposed projects to other uses, sell some undeveloped land, and not pursue further Marriott-funded residential development projects; (2) reduce prices for existing luxury fractional units; (3) continue short-term promotions for our U.S. timeshare business and defer the introduction of new projects and development phases; and (4) for our European timeshare and fractional resorts, continue promotional pricing and marketing incentives and not pursue further development. We designed these plans, which primarily relate to luxury residential and fractional resorts, to stimulate sales, accelerate cash flow, and reduce investment spending.

As a result of these decisions, in 2009 we recorded pretax charges totaling $752 million in our Consolidated Statements of Income ($502 million after-tax), including $614 million of pretax charges impacting operating income under the “Timeshare strategy-impairment charges” caption, and $138 million of pretax charges impacting non-operating income under the “Timeshare strategy-impairment charges (non-operating)” caption. The $752 million of pretax impairment charges were non-cash, other than $27 million of charges associated with ongoing mezzanine loan fundings and $21 million of charges for purchase commitments that we expected to fund in 2010.

Grouped by product type and/or geographic location, these impairment charges consist of $295 million associated with five luxury residential projects, $299 million associated with nine North American luxury fractional projects, $93 million related to one North American timeshare project, $51 million related to the four projects in our European timeshare and fractional business, and $14 million associated with two Asia Pacific timeshare resorts. The following table details the composition of these charges.


*($ in millions)*	Impairment Charge
2009 Operating Income Charge
Inventory impairment	$	529
Property and equipment impairment		64
Other impairments		21

Total operating income charge		614

2009 Non-Operating Income Charge
Joint venture impairment		71
Loan impairment		40
Funding liability		27

Total non-operating income charge		138

Total	$	752

In accordance with the guidance for accounting for the impairment or disposal of long-lived assets, we made these impairment adjustments to inventory, property and equipment and joint venture investment to adjust the carrying value of each underlying asset to our estimate of its fair value as of the end of the 2009 third quarter, including fully impairing the joint venture investment. We estimated the fair value of the underlying assets using probability-weighted cash flow models that reflected our expectations of future performance discounted at risk-free interest rates commensurate with the remaining life of the related projects using the procedures specified in the guidance for fair value measurements. We used Level 3 inputs for our discounted cash flow analyses. Our assumptions included: growth rate and sales pace projections, additional pricing discounts resulting from the business decisions we made, development cancellations resulting in shorter project life cycles, marketing and sales cost estimates, and in certain instances alternative uses to comply with the highest and best use provisions specified in the guidance for fair value measurements. In some instances, we took into account appraisals, which we deemed to be Level 3 inputs, for determining the fair value of the underlying assets.

We also determined that certain mezzanine loans made to the impaired joint venture we refer to in the preceding paragraph likely would not be repaid. As a result, we fully reserved those loans in accordance with the guidance for accounting by creditors for impairment of a loan, based on the present value of the loans’ expected cash flows discounted at the loans’ effective interest rates.

Our reported funding liability is related to our intention to provide ongoing financial support for this impaired joint venture in order to ensure the completion of this project based upon both completion of significant project milestones and our history of support for the entity’s operations. We do not anticipate repayment from this joint venture, which is a variable interest entity (See Footnote No. 22, “Variable Interest Entities”), and have accordingly expensed these amounts. The funding liability met the criteria of probable and reasonably estimable, in accordance with the guidance for accounting for contingencies.

Other impairments primarily related to our anticipated fundings in conjunction with certain purchase commitments, a portion of which we do not expect to recover because the projected fair value of the assets to be purchased under the commitments will be below the amount we expect to fund. We measured the projected fair value of the assets using probability-weighted cash flow models with Level 3 inputs, in accordance with the guidance for fair value measurements. Our assumptions included: growth rate and sales pace projections, additional pricing discounts as a result of the business decisions made, marketing and sales cost estimates, and in certain instances alternative uses to comply with the highest and best use provisions specified in the guidance for fair value measurements.

RESTRUCTURING COSTS AND OTHER CHARGES

12 Months Ended

Jan. 01, 2010

RESTRUCTURING COSTS AND OTHER CHARGES

21.

RESTRUCTURING COSTS AND OTHER CHARGES

During the latter part of 2008, we experienced a significant decline in demand for hotel rooms both domestically and internationally as a result, in part, of the failures and near failures of a number of large financial service companies in the fourth quarter of 2008 and the dramatic downturn in the economy. Our capital intensive Timeshare business was also hurt both domestically and internationally by the downturn in market conditions and particularly the significant deterioration in the credit markets, which resulted in our decision not to complete a note sale in the fourth quarter of 2008 (although we did complete a note sale in the first quarter of 2009). These declines resulted in reduced management and franchise fees, cancellation of development projects, reduced timeshare contract sales, and anticipated losses under guarantees and loans. In the fourth quarter of 2008, we put certain company-wide cost-saving measures in place in response to these declines, with individual company segments and corporate departments implementing further cost saving measures. Upper-level management responsible for the Timeshare segment, lodging development, and above-property level management of the various corporate departments and brand teams individually led these decentralized management initiatives. The various initiatives resulted in aggregate restructuring costs of $55 million that we recorded in the fourth quarter of 2008. We also recorded $137 million of other charges in the 2008 fourth quarter. For information regarding the fourth quarter 2008 charges, see Footnote No. 20, “Restructuring Costs and Other Charges,” in our Annual Report on Form 10-K for 2008 (“2008 Form 10-K”).

Restructuring Costs

As part of the restructuring actions we began in the fourth quarter of 2008, we initiated further cost savings measures in 2009 associated with our Timeshare segment, hotel development, above-property level management, and corporate overhead. These further measures resulted in additional 2009 restructuring costs of $51 million, which included: (1) $21 million in severance costs related to the reduction of 1,077 employees; (2) $29 million in facilities exit costs; and (3) $1 million related to the write-off of capitalized costs relating to development projects no longer deemed viable. The severance costs do not reflect amounts billed out separately to owners for property-level severance costs. The $21 million of 2009 severance costs consists of (1) $17 million of the expected $19 million in costs that, as disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended September 11, 2009 (the “2009 Third Quarter Form 10-Q”), we incurred through the third quarter of 2009 and expected to incur in the fourth quarter of 2009, and (2) $4 million of incremental costs that we incurred as a result of further cost savings measures we implemented in the 2009 fourth quarter. All of the $29 million of 2009 facilities exit costs reflects the expected $29 million to $30 million in costs that, as disclosed in our 2009 Third Quarter Form 10-Q, we incurred through the third quarter of 2009 and expected to incur in the fourth quarter of 2009.

As part of the restructuring efforts in our Timeshare segment, we reduced and consolidated sales channels in the United States and closed down certain operations in Europe in the fourth quarter of 2008. We recorded Timeshare restructuring costs of $28 million in the 2008 fourth quarter. We recorded further Timeshare restructuring costs in 2009 of $45 million including: (1) $15 million in severance costs; (2) $29 million in facility exit costs primarily associated with noncancelable lease costs in excess of estimated sublease income arising from the reduction in personnel, ceased use of certain lease facilities, and $9 million in fixed asset impairments; and (3) $1 million related to the write-off of capitalized costs relating to development projects no longer deemed viable. We completed this restructuring in 2009 and do not expect to incur additional expenses in connection with these initiatives.

As part of the hotel development restructuring efforts across several of our Lodging segments in the fourth quarter of 2008, we discontinued certain development projects that required our investment. We recorded restructuring costs in the 2008 fourth quarter of $24 million. We recorded further hotel development restructuring costs in 2009 of $2 million for severance and fringe benefit costs. We completed this restructuring in 2009 and do not expect to incur additional expenses in connection with these initiatives.

We also implemented restructuring initiatives by reducing above property-level lodging management personnel and corporate overhead. We incurred 2008 fourth quarter restructuring costs of $3 million, primarily reflecting severance and fringe benefit costs. We recorded further restructuring costs in 2009 of $4 million for severance and fringe benefit costs. We completed this restructuring in 2009 and do not expect to incur additional expenses in connection with these initiatives.

Other Charges

We also incurred $162 million of other charges in 2009 as detailed in the following paragraphs.

Security Deposit, Joint Venture, and Other Asset Impairments

We sometimes issue guarantees to lenders and other third parties in connection with financing transactions and other obligations. As a result of the continued downturn in the economy, certain hotels have experienced significant declines in profitability and accordingly, may experience cash flow shortfalls. In the fourth quarter of 2008, we concluded based on cash flow projections that we would fund certain cash flow shortfalls in two portfolios of hotels in order to prevent draws against the related security deposits and the potential conversion of the related management contracts to franchise agreements, even though the related guarantees had expired. We did not deem these fundings to be fully recoverable and recorded a corresponding charge of $16 million for the amount we expected to fund but not recover. However, in the first quarter of 2009 we decided not to continue funding, as the expected incremental funding levels had increased to unacceptable levels.

As a result of the Company’s decisions to stop funding these cash flow shortfalls and based on our internal analysis of expected future discounted cash flows, we determined that we may not recover two security deposits totaling $49 million. We used Level 3 inputs for our discounted cash flows analysis in accordance with the guidance for fair value measurements. Our assumptions included property level pro forma financial information, growth rates, and inflation. We recorded an impairment charge of $49 million in the first quarter of 2009 to fully reserve these security deposits in the “General, administrative, and other” expense caption in our Consolidated Statements of Income. In 2009, we applied the remaining $11 million of the $16 million liability established in the fourth quarter of 2008 against this impairment. In the tables that follow, see the “Impairment of investments and other” caption, which includes the $49 million impairment charge, and the “Reserves for expected fundings” caption, which includes the $11 million reduction in the liability.

We expect that one project in development, in which the Company has a joint venture investment, will generate lower operating results than we had previously anticipated due to the continued downturn in the economy, and have concluded that it is highly unlikely that we will receive a return on or of our investment without first fully funding potentially significant incremental capital, which we are not inclined to do. As a result, based on our internal analysis of expected discounted future cash flows using Level 3 inputs in accordance with the guidance for fair value measurements, we determined that our investment in that joint venture was fully impaired. The Level 3 inputs we used in our analysis were based on assumptions regarding property level pro forma financial information, fundings of debt service obligations, growth rates, and inflation. We recorded an impairment charge of $30 million in 2009 in the “Equity in (losses) earnings” caption in our Consolidated Statements of Income. See the “Impairment of investments and other” caption in the tables that follow that includes this charge.

Due to continued and projected losses at a joint venture, we evaluated our investment for impairment and determined that it was other than temporarily impaired. We recorded an impairment charge of $3 million in 2009 in the “Equity in (losses) earnings” caption in our Consolidated Statements of Income. We estimated the fair value of our joint venture investment using a market approach in accordance with the guidance for fair value measurements. The Level 3 inputs we used in our probability-weighted internal analysis were based on assumptions about market capitalization rates, growth rates, and inflation. See the “Impairment of investments and other” caption in the tables that follow that includes this charge.

We expect that a management agreement will likely be terminated for one property that is currently in receivership due to significant operating losses and an inability to meet debt service obligations. As a result, we have determined that previously capitalized contract acquisitions costs related to that property are not recoverable, and therefore, we recorded an impairment charge of $8 million in 2009 in the “General, administrative, and other” expense caption in our Consolidated Statements of Income. See the “Impairment of investments and other” caption in the tables that follow that includes this charge.

Accounts Receivable-Bad Debts and Charges for Guarantees

We expect to fund under cash flow guarantees for two properties that have experienced cash flow shortfalls. We do not deem these guarantee fundings to be recoverable, and have therefore recorded charges of $3 million in 2009 to reflect these obligations. We also reserved a $1 million accounts receivable balance in 2009, which, on analysis, we deemed to be uncollectible as a result of the unfavorable hotel operating environment. We have recorded these charges in the “General, administrative, and other” expense caption in our Consolidated Statements of Income. See the “Accounts receivable and guarantee charges” caption in the tables that follow that includes these charges.

Reserves for Loan Losses

From time to time, we advance loans to owners of properties that we manage. As a result of the continued downturn in the economy, certain hotels have experienced significant declines in profitability and the owners may not be able to meet debt service obligations to us or, in some cases, to third-party lending institutions. In 2009, we determined that two loans made by us may not be repaid. Due to the expected loan losses, we fully reserved these loans and recorded a charge of $43 million in 2009, which is reflected in the “General, administrative and other” expense caption in our Consolidated Statements of Income. See the “Reserves for loan losses” caption in the tables that follow, which includes this provision.

Timeshare Residual Interests Valuation

The fair market value of our residual interests in timeshare notes sold declined in the first half of 2009 primarily due to an increase in the market rate of interest at which we discount future cash flows to estimate the fair market value of the retained interests as well as certain previously securitized loan pools reaching performance triggers. The increase in the market rate of interest reflected an increase in defaults caused by the continued deteriorating economic conditions. As a result of this change, we recorded an $11 million charge in the 2009 first quarter, which was partially offset by a $6 million favorable impact from changes in assumptions related to discount rate, defaults and prepayments in the 2009 second and fourth quarters. Eight previously securitized loan pools reached performance triggers as a result of increased defaults; one pool in March 2009, six pools in April and May 2009, and one pool in December 2009. These performance triggers effectively redirected the excess spread we typically receive each month to accelerate returns to investors and resulted in $19 million in charges in the first half of 2009. In the 2009 second half, loan performance improved sufficiently in seven of the eight previously securitized loan pools to cure the performance triggers, resulting in a $4 million benefit to residual interest. We recorded these charges in the “Timeshare sales and services” caption in our Consolidated Statements of Income. See the “Residual interests valuation” caption in the tables that follow, which includes these charges. The tables summarizing the changes to our Level 3 assets and liabilities in Footnote No. 5, “Fair Value Measurements,” reflect the $20 million in total charges in 2009 on the “Included in earnings” line, which also reflects a partial offset due to other changes in the underlying assumptions that impact the fair value of the residual interests and the cure of the performance triggers in the 2009 second half.

Timeshare Contract Cancellation Allowances

Our financial statements reflect 2009 net contract cancellation allowances of $9 million recorded in anticipation that a portion of contract revenue and costs previously recorded for certain projects under the percentage-of-completion method will not be realized due to contract cancellations prior to closing. We have an equity method investment in one of these projects, and accordingly, we reflected $6 million of the $9 million in the “Equity in (losses) earnings” caption in our Consolidated Statements of Income. The remaining net $3 million of contract cancellation allowances consisted of a reduction in revenue, net of adjustments to product costs and other direct costs and was recorded in Timeshare sales and services revenue, net of direct costs. See the “Contract cancellation allowances” caption in the tables that follow, which includes this net allowance.

Timeshare Software Development Write-off

In 2009, we recorded an impairment of $7 million for the write-off of capitalized software development costs related to a software project. We concluded that continued development of this software was not cost effective given continued cost savings initiatives associated with the challenging business environment and we will instead pursue alternative lower cost solutions.

Summary of Restructuring Costs and Other Charges

The following table summarizes our restructuring costs and other charges we recorded in and through 2009, as well as our remaining liability at year-end 2009:


*($ in millions)*	Restructuring Costs and Other Charges Liability at Fiscal Year-End 2008		Total Charge (Reversal) in 2009			Cash Payments in 2009		Restructuring Costs and Other Charges Liability at Fiscal Year-End 2009		Total Cumulative Restructuring Costs through 2009 ⁽³⁾
Severance-Timeshare	$	11	$	15		$	22	$	4	$	29
Facilities exit costs-Timeshare		5		29	⁽¹⁾		7		18		34
Development cancellations-Timeshare		—		1			—		—		10

Total restructuring costs-Timeshare		16		45			29		22		73

Severance-hotel development		2		2			3		1		4
Development cancellations-hotel development		—		—			—		—		22

Total restructuring costs-hotel development		2		2			3		1		26

Severance-above property-level management		2		4			4		2		7

Total restructuring costs-above property-level management		2		4			4		2		7

Total restructuring costs	$	20	$	51		$	36	$	25	$	106

Impairment of investments and other		—		90			—		—
Accounts receivable and guarantee charges		—		4			—		3
Reserves for expected fundings		16		(11	)		4		1
Reserves for loan losses		—		43			—		—
Residual interests valuation		—		20			—		—
Contract cancellation allowances		—		9			—		—
Software development write-off		—		7			—		—

Total other charges		16		162	⁽²⁾		4		4

Total restructuring costs and other charges	$	36	$	213		$	40	$	29

⁽¹⁾	Reflects $9 million of non-cash facilities exit costs related to fixed asset impairments.

⁽²⁾	Reflects $170 million of non-cash other charges, which exclude the $11 million reversal of reserves for expected fundings and $3 million of guarantee charges.

⁽³⁾	Includes charges recorded in the 2008 fourth quarter through year-end 2009.

The following tables provide further detail on the restructuring costs and other charges incurred in 2009 and cumulative restructuring costs incurred through year-end 2009, including a breakdown of these charges by segment:

2009 and Cumulative Operating Income Impact


*($ in millions)*	North American Full- Service Segment		North American Limited- Service Segment			Inter- national Segment		Luxury Segment		Timeshare Segment		Other Unallocated Corporate		Total
Restructuring Costs-2009:
Severance	$	—	$	—		$	2	$	—	$	15	$	4	$	21
Facilities exit costs		—		—			—		—		29		—		29
Development cancellations		—		—			—		—		1		—		1

Total restructuring costs- 2009	$	—	$	—		$	2	$	—	$	45	$	4	$	51

Restructuring Costs-Cumulative through 2009 ⁽¹⁾
Severance	$	—	$	—		$	2	$	1	$	29	$	8	$	40
Facilities exit costs		—		—			—		—		34		—		34
Development cancellations		—		—			—		—		10		22		32

Total restructuring costs-cumulative through 2009	$	—	$	—		$	2	$	1	$	73	$	30	$	106

Other Charges-2009:
Impairment of investments and other	$	15	$	42		$	—	$	—	$	—	$	—	$	57
Reserves for loan losses		—		—			—		—		—		43		43
Accounts receivable and guarantee charges		—		—			3		1		—		—		4
Reversal of charges related to expected fundings		—		(11	)		—		—		—		—		(11	)
Residual interests valuation		—		—			—		—		20		—		20
Contract cancellation allowances		—		—			—		—		3		—		3
Software development write-off		—		—			—		—		7		—		7

Total other charges-2009	$	15	$	31		$	3	$	1	$	30	$	43	$	123

⁽¹⁾	Includes charges recorded in the 2008 fourth quarter through year-end 2009.

2009 Non-Operating Impact


*($ in millions)*	Equity in Earnings		Total
Other Charges:
Impairment of investments ⁽¹⁾	$	33	$	33
Contract cancellation allowances-Timeshare segment		6		6

Total	$	39	$	39

⁽¹⁾	Includes a $30 million impairment of a Luxury segment joint venture and $3 million impairment of an International segment joint venture.

VARIABLE INTEREST ENTITIES

12 Months Ended

Jan. 01, 2010

VARIABLE INTEREST ENTITIES

22.

VARIABLE INTEREST ENTITIES

In accordance with the guidance for the consolidation of variable interest entities, we analyze our variable interests, including loans, guarantees, and equity investments, to determine if the entity in which we have a variable interest is a variable interest entity. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the forecasted cash flows of the entity, and our qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability and financial agreements. We also use our quantitative and qualitative analyses to determine if we must consolidate a variable interest entity as the primary beneficiary.

We have an equity investment in and a loan receivable due from a variable interest entity that develops and markets fractional ownership and residential interests, and we consolidate the entity because we are the primary beneficiary. We concluded that the entity is a variable interest entity because the voting rights are not proportionate to the economic interests. The loan we provided to the entity replaced the original senior loan, and at year-end 2009, had a principal balance of $88 million and an accrued interest balance of $3 million. The variable interest entity uses the loan facility to fund its net cash flow. The loan’s outstanding principal balance increased by $20 million compared to year-end 2008. At year-end 2009, the carrying amount of consolidated assets included within our Consolidated Balance Sheet that are collateral for the variable interest entity’s obligations totaled $40 million and comprised $34 million of real estate held for development, property, equipment, and other assets and $6 million of cash. Further, at year-end 2009, the carrying amount of the consolidated liabilities and noncontrolling interests included within our Consolidated Balance Sheets for this variable interest entity totaled $13 million and the noncontrolling interest was reduced to zero. The creditors of this entity do not have general recourse to our credit. We have contracted to purchase the noncontrolling interest in the entity for less than $1 million. The acquisition will occur in stages, and commenced with our initial acquisition of 3 percent of the noncontrolling interest in the entity that occurred during the 2009 third quarter. The acquisition is expected to be completed in the 2010 third quarter.

Our Timeshare segment uses several special purpose entities to maintain ownership of real estate in certain jurisdictions in order to facilitate sales within the Asia Pacific Points Club (the “Asia Club”). In 2009, we established a special purpose entity to maintain ownership of real estate for sale of a Portfolio membership in The Ritz-Carlton Destination Club (“RCDC Club”). Although we have no equity ownership in the Asia or RCDC Clubs themselves, we absorb the variability in the assets of the Asia or RCDC Clubs to the extent that inventory has not been sold to the ultimate Asia or RCDC Club member. The Asia and RCDC Clubs are variable interest entities because the equity investment at risk is not sufficient to permit the entities to finance their activities without additional support from other parties. We determined that we were the primary beneficiary of these entities based upon the proportion of variability that we absorb compared to Asia or RCDC Club members. At year-end 2009, the carrying amount of inventory associated with the Asia Club was $53 million, of which $31 million resulted from the consolidation of these special purpose entities and $22 million resulted from inventory and deposits in wholly owned subsidiaries that will be transferred to the Asia Club structure in the future in order to facilitate the sale of the real estate interests. At year-end 2008, the carrying amount of inventory associated with the Asia Club was $78 million, of which $49 million resulted from the consolidation of these special purpose entities and $29 million resulted from inventory and deposits in wholly owned subsidiaries that will be transferred to the Asia Club structure in the future in order to facilitate the sale of the real estate interests. At year-end 2009, the carrying amount of inventory associated with the RCDC Club was $13 million, all of which resulted from the consolidation of the special purpose entity. The creditors of these entities do not have general recourse to our credit.

We have an equity investment in and a loan receivable due from a variable interest entity that develops and markets fractional ownership and residential interests, and we do not consolidate the entity because we are not the primary beneficiary. We concluded that the entity is a variable interest entity because the equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties. We have determined that we are not the primary beneficiary as another party, within a de facto agent group, is most closely associated with the entity. During 2009, we advanced $12 million in additional loans to fund progress toward completion of the project. We subsequently fully impaired our equity investment and certain loans receivable due from the entity. We will likely fund up to an additional $28 million, which we believe is our maximum exposure to loss, and do not expect to recover this amount, which has been accrued and is included in current liabilities. See Footnote No. 20, “Timeshare Strategy-Impairment Charges,” for additional information.

In conjunction with the transaction with CTF described more fully in Footnote No. 8, “Acquisitions and Dispositions,” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2007, under the caption “2005 Acquisitions,” we manage 12 hotels on behalf of four tenant entities 100 percent owned by CTF, which lease the hotels from third-party owners. Due to certain provisions in the management agreements, we account for these contracts as operating leases. The entities have minimal equity and minimal assets comprised of hotel working capital and furniture, fixtures, and equipment. In conjunction with the 2005 transaction, CTF had placed money in a trust account to cover cash flow shortfalls and to meet rent payments. In turn, we released CTF from their guarantees fully in connection with eight of these properties and partially in connection with the other four properties. At year-end 2009, the trust account held approximately $9 million. The tenant entities are variable interest entities because the holder of the equity investment at risk, CTF, lacks the ability through voting rights to make key decisions about the entities’ activities that have a significant effect on the success of the entities. We do not consolidate the entities because we do not bear the majority of the expected losses. We are secondarily liable (after exhaustion of funds from the trust account) for rent payments for eight of the 12 hotels in the event that there are cash flow shortfalls. Future minimum lease payments through the end of the lease term for these eight hotels totaled approximately $72 million. In addition, we are secondarily liable for rent payments of up to an aggregate cap of $20 million for the four other hotels in the event that there are cash flow shortfalls. Our maximum exposure to loss is limited to the rent payments and certain other tenant obligations under the lease for which we are secondarily liable.

RELATED PARTY TRANSACTIONS

Disclosure of variable interest entities (VIE), including, but not limited to the nature, purpose, size, and activities of the VIE, the carrying amount and classification of consolidated assets that are collateral for the VIE's obligations, lack of recourse if creditors (or beneficial interest holders) of a consolidated VIE have no recourse to the general credit of the primary beneficiary. An enterprise that holds a significant variable interest in a VIE but is not the primary beneficiary may disclose the nature of its involvement with the VIE and when that involvement began, the nature, purpose, size, and activities of the VIE and the enterprise's maximum exposure to loss as a result of its involvement with the VIE.

+ References+ Details

RELATED PARTY TRANSACTIONS

12 Months Ended

Jan. 01, 2010

24.

RELATED PARTY TRANSACTIONS

Equity Method Investments

We have equity method investments in entities that own properties for which we provide management and/or franchise services and receive fees. 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 49 percent. The amount of our consolidated retained earnings that represents undistributed earnings attributable to our equity investments totaled $2 million at year-end 2009.

The following tables present financial data resulting from transactions with these related parties:

Income Statement Data


*($ in millions)*	2009			2008			2007
Base management fees	$	44		$	49		$	56
Franchise fees		—			—			1
Incentive management fees		2			11			26
Cost reimbursements		260			340			510

Total revenue	$	306		$	400		$	593

General, administrative, and other	$	(1	)	$	(1	)	$	(4	)
Reimbursed costs		(260	)		(340	)		(510	)
Gains and other income		6			12			25
Interest expense-capitalized		4			4			1
Interest income		8			3			4
Equity in (losses) earnings		(66	)		15			3
Timeshare strategy-impairment charges (non-operating)		(138	)		—			—
Provision for income taxes		—			1			—

Balance Sheet Data


*($ in millions)*	At Year-End 2009			At Year-End 2008
Current assets-accounts and notes receivable	$	10		$	23
Deferred development		2			3
Contract acquisition costs		26			28
Equity and cost method investments		208			309
Notes receivable		10			50
Other		1			7
Current liabilities:
Other		(31	)		(9	)
Other long-term liabilities		(13	)		(15	)

Summarized information for the entities in which we have equity method investments is as follows:

Income Statement Data


*($ in millions)*	2009			2008		2007
Sales	$	850		$	1,342	$	1,622

Net (loss) income	$	(241	)	$	122	$	134

Balance Sheet Summary


*($ in millions)*	At Year-End 2009		At Year-End 2008
Assets (primarily comprised of hotel real estate managed by us)	$	3,228	$	3,669

Liabilities	$	2,339	$	2,532