Carnival Cruises 2010 Annual Report Download - page 39

on fuel prices of $527 per metric ton and $526 per metric ton for the 2011 full year and first quarter, respectively.
In addition, this guidance was based on 2011 full year and first quarter currency rates of $1.32 to the euro, $1.58
to sterling and $0.99 to the Australian dollar. The currency and fuel assumptions used in our guidance change
daily and, accordingly, our forecasts change daily based on the changes in these assumptions.
The above forward-looking statements involve risks, uncertainties and assumptions with respect to us. There are
many factors that could cause our actual results to differ materially from those expressed above including, but not
limited to, economic and business conditions, foreign currency exchange rates, fuel prices, ship incidents,
adverse weather conditions, spread of contagious diseases, regulatory changes, geopolitical and other factors that
could adversely impact our revenues, costs and expenses. You should read the above forward-looking statement
together with the discussion of these and other risks under “Cautionary Note Concerning Factors That May
Affect Future Results.”
Critical Accounting Estimates
Our critical accounting estimates are those which we believe require our most significant judgments about the
effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying
judgments and uncertainties used to make them and the likelihood that materially different estimates would be
reported under different conditions or using different assumptions is as follows:
Ship Accounting
Our most significant assets are our ships and ships under construction, which represent 80% of our total assets.
We make several critical accounting estimates with respect to our ship accounting. First, in order to compute our
ships’ depreciation expense, which represented 12% of our cruise costs and expenses in fiscal 2010, we have to
estimate the average useful life of each of our ships as well as their residual values. Secondly, we account for
ship improvement costs by capitalizing those costs that we believe will add value to our ships and depreciate
those improvements over their or the ships’ estimated remaining useful life, whichever is shorter, while the costs
of repairs and maintenance, including minor improvement costs and dry-dock expenses, are charged to expense
as they are incurred. Finally, when we 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 typically 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 expense could
increase, which would be partially offset by a decrease in depreciation expense, resulting from a reduction in
capitalized costs. Our fiscal 2010 ship depreciation expense would increase by an estimated $35 million for every
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