Royal Caribbean Cruise Lines 2007 Annual Report Download - page 31

NOTE 1. GENERAL
Description of Business
We are a global cruise company. We own five cruise brands, Royal
Caribbean International, Celebrity Cruises, Pullmantur Cruises, and
Azamara Cruises with 21, eight, four and two ships, respectively, at
December 31, 2007, and CDF Croisières de France, which will begin
operating one ship in May 2008. Our ships operate on a selection
of worldwide itineraries that call on approximately 380 destinations.
In addition, we have a 50% investment in a joint venture with
TUI Travel PLC (“TUI Travel”), formerly First Choice Holidays PLC,
which operates the brand Island Cruises, and we charter one ship
to Island Cruises. We also lease one ship under a seasonal vessel
operating lease agreement for The Scholar Ship, our education
program at sea for graduate and undergraduate students.
Basis for Preparation of Consolidated Financial Statements
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States
of America. Estimates are required for the preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America. Actual results could
differ from these estimates. All significant intercompany accounts
and transactions are eliminated in consolidation. We consolidate
entities over which we have control, usually evidenced by a direct
ownership interest of greater than 50%. For affiliates where signif-
icant influence over financial and operating policies exists, usually
evidenced by a direct ownership interest from 20% to 50%, the
investment is accounted for using the equity method.
NOTE 2.SUMMARYOF SIGNIFICANT
ACCOUNTING POLICIES
Changein Accounting Principle Related to Drydocking Costs
In the third quarter of 2005, we changed our method of accounting
for drydocking costs from the accrual in advance to the deferral
method. Under the accrual in advance method, estimated drydock-
ing costs are accrued evenly over the period to the next scheduled
drydock. Under the deferral method, drydocking costs incurred
are deferred and charged to expense on a straight-line basis over
the period to the next scheduled drydock. The deferral method
is preferable because it only recognizes the liability when incurred
and does not require the use of estimates inherent in the accrual
in advancemethod. The cumulative effect of the change on prior
years of $52.5 million, or $0.22 per share on a diluted basis, was
included in net income for the year ended December 31, 2005.
Other than this one-time gain, the changedid not have a material
impact on our consolidated financial statements.
Revenues and Expenses
Deposits received on sales of passenger cruises are initially recorded
as customer deposit liabilities on our balance sheet. Customer
deposits are subsequently recognized as passenger ticket revenues,
together with revenues from onboard and other goods and services
and all associated direct costs of a voyage, upon completion of
voyages with durations of ten days or less, and on a pro rata basis
for voyages in excess of ten days.
Cash and Cash Equivalents
Cash and cash equivalents include cash and marketable securities
with original maturities of less than 90 days.
Inventories
Inventories consist of provisions, supplies and fuel carried at the
lower of cost (weighted-average) or market.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. We capitalize interest as part of
the cost of acquiring certain assets. Improvement costs that we
believe add value to our ships are capitalized as additions to the
ship and depreciated over the improvements’ estimated useful
lives. The estimated cost and accumulated depreciation of replaced
or refurbished ship components are written off and any resulting
losses are recognized in cruise operating expenses. Costs of
repairs and maintenance are charged to cruise operating expenses
as incurred and, commencing in 2005, drydocking costs are
deferred and charged to expense on a straight-line basis over
the period tothe next scheduled drydock.Deferred drydock
costs consist of the costs to drydock the vessel and other costs
incurred in connection with the drydock which are necessary
to maintain the vessel’s class certification. Liquidated damages
received from shipyards as a result of the late delivery of a new
ship arerecorded as reductions to the cost basis of the ship. We
review long-lived assets for impairment whenever events or changes
in circumstances indicate, based on estimated undiscounted
future cash flows, that the carrying amount of these assets may
not be fully recoverable.
Depreciation of property and equipment is computed using
the straight-line method over estimated useful lives of primarily
30 years for ships, net of a 15%projected residual value, and three
to 40 years for other property and equipment. Depreciation for
assets under capital leases and leasehold improvements is com-
puted using the shorter of the lease term or related asset life.
(See Note 4. Property and Equipment.)
Goodwill
Goodwill represents the excess of cost over the fair value of net
tangible and identifiable intangible assets acquired. We review
goodwill for impairment at the reporting unit level annually,
or when events or circumstances dictate, more frequently. The
impairment review for goodwill consists of a two-step process
of first determining the fair value of the reporting unit and
comparing it tothe carrying value of the net assets allocated
tothe reporting unit. If the fair value of the reporting unit exceeds
the carrying value, no further analysis or write-down of goodwill
is required. If the fair value of the reporting unit is less than the
carrying value of the net assets, the implied fair value of the report-
ing unit is allocated to all the underlying assets and liabilities,
including both recognized and unrecognized tangible and intangible
assets, based on their fair value. If necessary, goodwill is then
written down to its implied fair value.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS