Carnival Cruises 2010 Annual Report Download - page 40

year we reduce our estimated average 30 year ship useful life. In addition, if our ships were estimated to have no
residual value, our fiscal 2010 depreciation expense would increase by approximately $175 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 cruise ships, goodwill and trademarks require us to make significant estimates to
determine the fair values of these assets or cruise brands. We believe the estimated fair value of each of our
cruise brands that carry goodwill significantly exceeds the carrying value of their allocated assets, except for
Ibero. See Note 10 in the accompanying consolidated financial statements for additional discussion of our
goodwill and trademark impairment tests and further details related to Ibero’s goodwill.
The determination of fair value includes numerous uncertainties, unless a comparable, viable actively-traded
market exists, which is usually not the case for cruise ships, cruise brands and trademarks. Our ship fair values
are typically estimated based on comparable ship sale prices and other comparable ship values in inactive
markets. In determining fair values of cruise brands 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 changes, including the expected deployment of vessels into, or out of, the cruise
brand, 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 cruise ships,
cruise brands and trademarks, 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 amount
of royalties avoided by our ownership of the trademark is based on forecasted cruise revenues and royalty rates
estimated primarily using comparable royalty agreements for similar industries.
We believe that we have made reasonable estimates and judgments in determining whether our cruise ships,
goodwill and trademarks have been impaired. However, if there is a material change in assumptions used in our
determination of fair values, or if there is a material change in the conditions or circumstances influencing fair
values, then we may need to recognize a material impairment.
Contingencies
We periodically assess the potential liabilities related to any lawsuits or claims brought against us, as well as for
other known unasserted claims, including environmental, legal, guest and crew, and tax matters. While it is
typically very difficult to determine the timing and ultimate outcome of these matters, we use our best judgment
to determine if it is probable, or more likely than not (“MLTN”) for income tax matters, that we will incur an
expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of
such probable or MLTN loss, if any, can be made. In assessing probable losses, we make estimates of the amount
of probable insurance recoveries, if any, which are recorded as assets. We accrue a liability when we believe a
loss is probable or MLTN for income tax matters, and the amount of the loss can be reasonably estimated in
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