Royal Caribbean Cruise Lines 2005 Annual Report Download - page 21

industry. We do not identify and track depreciation by ship compo-
nent systems, but instead utilize these estimates to determine the
net cost basis of assets replaced or refurbished.
We believe we have made reasonable estimates for ship accounting
purposes. However, should certain factors or circumstances cause
us to revise our estimates of ship service lives or projected residual
values, depreciation expense could be materially higher or lower. If
circumstances cause us to change our assumptions in making deter-
minations as to whether ship improvements should be capitalized,
the amounts we expense each year as repairs and maintenance
costs could increase, partially offset by a decrease in depreciation
expense. If we had reduced our estimated average 30-year ship
service life by one year, depreciation expense for 2005 would have
increased by approximately $17 million. If our ships were estimated
to have no residual value, depreciation expense for 2005 would
have increased by approximately $77 million.
We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these
assets may not be fully recoverable. The assessment of possible
impairment is based on our ability to recover the carrying value of
our asset based on our estimate of its undiscounted future cash
flows. If these estimated future cash flows were less than the carry-
ing value of the asset, an impairment charge would be recognized
for the difference between the asset’s estimated fair value and its
carrying value.
The determination of fair value is based on quoted market prices in
active markets, if available. Such markets are often not available for
used cruise ships. Accordingly, we also base fair value on independ-
ent appraisals, sales price negotiations and projected future cash
flows discounted at a rate determined by management to be com-
mensurate with our business risk. The estimation of fair value utiliz-
ing discounted forecasted cash flows includes numerous uncertain-
ties which require our significant judgment when making assump-
tions of revenues, operating costs, marketing, selling and adminis-
trative expenses, interest rates, ship additions and retirements,
cruise vacation industry competition and general economic and
business conditions, among other factors.
Goodwill is reviewed annually or whenever events or changes in cir-
cumstances indicate that the carrying amount of goodwill may not
be fully recoverable. The impairment review consists of comparing
the fair value of goodwill to the carrying value. If the carrying value
exceeds the fair value, an impairment charge would be recognized
for the difference between the carrying value and the fair value. We
use the market capitalization method in determining the fair value of
our goodwill. If, under certain circumstances, this method is not rep-
resentative of fair value, we use a present value of future cash flows
approach.
We believe we have made reasonable estimates and judgments in
determining whether our long-lived assets and goodwill have been
impaired; however, if there is a material change in the assumptions
used in our determination of fair values or if there is a material
change in the conditions or circumstances influencing fair value, we
could be required to recognize a material impairment charge.
On an ongoing basis, we assess the potential liabilities related to
any lawsuits or claims brought against us. While it is typically very
difficult to determine the timing and ultimate outcome of such
actions, we use our best judgment to determine if it is probable that
we will incur an expense related to the settlement or final adjudica-
tion of such matters and whether a reasonable estimation of such
probable loss, if any, can be made. In assessing probable losses, we
take into consideration estimates of the amount of insurance recov-
eries, if any. We accrue a liability when we believe a loss is probable
and the amount of loss can be reasonably estimated. Due to the
inherent uncertainties related to the eventual outcome of litigation
and potential insurance recoveries, it is possible that certain matters
may be resolved for amounts materially different from any provi-
sions or disclosures that we have previously made.
Terminology and Non-GAAP Financial Measures
Available Passenger Cruise Days (“APCD”) are our measurement of
capacity and represent double occupancy per cabin multiplied by
the number of cruise days for the period.
Gross Cruise Costs represent the sum of total cruise operating
expenses plus marketing, selling and administrative expenses.
Gross Yields represent total revenues per APCD.
Net Cruise Costs represent Gross Cruise Costs excluding commis-
sions, transportation and other expenses and onboard and other
expenses (each of which is described below under the Overview
heading). In measuring our ability to control costs in a manner that
positively impacts net income, we believe changes in Net Cruise
Costs to be the most relevant indicator of our performance. A recon-
ciliation of historical Gross Cruise Costs to Net Cruise Costs is provid-
ed below under
Summary of Historical Results of Operations . We
have not provided a quantitative reconciliation of projected Gross
Cruise Costs to projected Net Cruise Costs due to the significant
uncertainty in projecting the costs deducted to arrive at this meas-
ure. Accordingly, we do not believe that reconciling information for
such projected figures would be meaningful.
Net Yields represent Gross Yields less commissions, transportation
and other expenses and onboard and other expenses (each of
which is described below under the Overview heading) per APCD.
We utilize Net Yields to manage our business on a day-to-day basis
and believe that it is the most relevant measure of our pricing per-
formance because it reflects the cruise revenues earned by us net of
our most significant variable costs. A reconciliation of historical
Gross Yields to Net Yields is provided below under
Summary of
Royal Caribbean Cruises Ltd. 19
Management’s Discussion and
Analysis of Financial Condition and
Results of Operations (continued)