Carnival Cruises 2009 Annual Report Download - page 40

record the retirement of a ship component that is included within the ship’s cost basis, we may have to estimate
the net book value of the asset being retired in order to remove it from the ship’s cost basis.
We determine the average useful life of our ships and their residual values based primarily on our estimates
of the weighted-average useful lives and residual values of the ships’ major component systems, such as cabins,
engines and hull. In addition, we consider, among other things, long-term vacation market conditions,
competition and historical useful lives of similarly-built ships. We have estimated our ships’ weighted-average
useful lives at 30 years and their average residual values at 15% of our original ship cost.
Given the size and complexity of our ships, ship accounting estimates require considerable judgment and are
inherently uncertain. We do not have cost segregation studies performed to specifically componentize our
ships. In addition, since we do not separately componentize our ships, we do not identify and track depreciation
of specific original ship components. Therefore, we have to estimate the net book value of components that are
retired, based primarily upon their replacement cost, their age and their original estimated useful lives.
If materially different conditions existed, or if we materially changed our assumptions of ship lives and
residual values, our depreciation expense or loss on retirement of ship components and net book value of our
ships would be materially different. In addition, if we change our assumptions in making our determinations as to
whether improvements to a ship add value, the amounts we expense each year as repair and maintenance costs
could increase, which would be partially offset by a decrease in depreciation expense, resulting from a reduction
in capitalized costs. Our fiscal 2009 ship depreciation expense would have increased by an estimated $32 million
for every year we reduced our estimated average 30 year ship useful life. In addition, if our ships were estimated
to have no residual value, our fiscal 2009 depreciation expense would have increased by approximately
$160 million.
We believe that the estimates we made for ship accounting purposes are reasonable and our methods are
consistently applied in all material respects and, accordingly, result in depreciation expense that is based on a
rational and systematic method to equitably allocate the costs of our ships to the periods during which they are
used. In addition, we believe that the estimates we made are reasonable and our methods consistently applied in
all material respects (1) in determining the average useful life and average residual values of our ships; (2) in
determining which ship improvement costs add value to our ships; and (3) in determining the net book value of
ship component assets being retired. Finally, we believe our critical ship accounting estimates are generally
comparable with those of other major cruise companies.
Asset Impairments
Impairment reviews of our ships and goodwill and trademarks require us to make significant estimates to
determine the fair values of these assets or reporting units. See Note 10 in the accompanying consolidated
financial statements.
The determination of fair value includes numerous uncertainties, unless a viable actively traded market
exists for the asset or for a comparable reporting unit, which is usually not the case for cruise ships, cruise lines
and trademarks. For example, our ship fair values are typically estimated based upon comparable ship sale prices
and other comparable ship values in inactive markets. In determining fair values of reporting units utilizing
discounted future cash flow analysis, significant judgments are made related to forecasting future operating
results, including net revenue yields, net cruise costs including fuel prices, capacity increases, weighted-average
cost of capital for comparable publicly-traded companies, terminal values, cruise itineraries, technological
changes, consumer demand, governmental regulations and the effects of competition, among others. In addition,
third party appraisers are sometimes used to help determine fair values of ships, trademarks and cruise lines, and
their valuation methodologies are also typically subject to uncertainties similar to those discussed above.
In addition, in determining our trademark fair values we also use discounted future cash flow analysis,
which requires some of the same significant judgments discussed above. Specifically, determining the estimated
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