Royal Caribbean Cruise Lines 2011 Annual Report Download - page 78

2011 ANNUAL REPORT 74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
made. In assessing probable losses, we take into
consideration estimates of the amount of insurance
recoveries, if any. We accrue a liability when we believe
a loss is probable and the amount of loss can be rea-
sonably estimated. Due to the inherent uncertainties
related to the eventual outcome of litigation and
potential insurance recoveries, it is possible that cer-
tain matters may be resolved for amounts materially
different from any provisions or disclosures that we
have previously made.
Advertising Costs
Advertising costs are expensed as incurred except
those costs which result in tangible assets, such as
brochures, which are treated as prepaid expenses
and charged to expense as consumed. Advertising
costs consist of media advertising as well as brochure,
production and direct mail costs. Media advertising
was $193.7 million, $166.0 million and $152.2 million,
and brochure, production and direct mail costs were
$124.3 million, $104.1 million and $92.0 million for the
years 2011, 2010 and 2009, respectively.
Derivative Instruments
We enter into various forward, swap and option con-
tracts to manage our interest rate exposure and to
limit our exposure to fluctuations in foreign currency
exchange rates and fuel prices. These instruments are
recorded on the balance sheet at their fair value and
the vast majority are designated as hedges. We also
have non-derivative financial instruments designated
as hedges of our net investment in our foreign opera-
tions and investments. Our derivative instruments are
not held for trading or speculative purposes.
At inception of the hedge relationship, a derivative
instrument that hedges the exposure to changes in
the fair value of a recognized asset or liability, or a
firm commitment is designated as a fair value hedge.
A derivative instrument that hedges a forecasted
transaction or the variability of cash flows related to
a recognized asset or liability is designated as a cash
flow hedge.
Changes in the fair value of derivatives that are desig-
nated as fair value hedges are offset against changes
in the fair value of the underlying hedged assets,
liabilities or firm commitments. Gains and losses on
derivatives that are designated as cash flow hedges
are recorded as a component of accumulated other
comprehensive (loss) income until the underlying
hedged transactions are recognized in earnings.
The foreign currency transaction gain or loss of our
non-derivative financial instruments designated as
hedges of our net investment in our foreign opera-
tions or investments are recognized as a component
of accumulated other comprehensive (loss) income
along with the associated foreign currency translation
adjustment of the foreign operation.
On an ongoing basis, we assess whether derivatives
used in hedging transactions are “highly effective”
in offsetting changes in the fair value or cash flow of
hedged items. If it is determined that a derivative is
not highly effective as a hedge or hedge accounting
is discontinued, any change in fair value of the deriva-
tive since the last date at which it was determined to
be effective is recognized in earnings. In addition, the
ineffective portion of our highly effective hedges is
recognized in earnings immediately and reported in
other income (expense) in our consolidated statements
of operations.
Cash flows from derivative instruments that are desig-
nated as fair value or cash flow hedges are classified
in the same category as the cash flows from the
underlying hedged items. In the event that hedge
accounting is discontinued, cash flows subsequent to
the date of discontinuance are classified within invest-
ing activities. Cash flows from derivative instruments
not designated as hedging instruments are classified
as investing activities.
Foreign Currency Translations and Transactions
We translate assets and liabilities of our foreign
subsidiaries whose functional currency is the local
currency, at exchange rates in effect at the balance
sheet date. We translate revenues and expenses at
weighted-average exchange rates for the period.
Equity is translated at historical rates and the result-
ing foreign currency translation adjustments are
included as a component of accumulated other com-
prehensive (loss) income, which is reflected as a sepa-
rate component of shareholders’ equity. Exchange
gains or losses arising from the remeasurement of
monetary assets and liabilities denominated in a cur-
rency other than the functional currency of the entity
involved are immediately included in our earnings,
except for certain liabilities that have been designated
to act as a hedge of a net investment in a foreign
operation or investment. Exchange losses were $1.6
million, $9.5 million and $21.1 million for the years
2011, 2010 and 2009, respectively, and were recorded
within other income (expense). The majority of our
transactions are settled in United States dollars. Gains
or losses resulting from transactions denominated in
other currencies are recognized in income at each
balance sheet date.
Concentrations of Credit Risk
We monitor our credit risk associated with financial
and other institutions with which we conduct signifi-
cant business and, to minimize these risks, we select
counterparties with credit risks acceptable to us and
we limit our exposure to an individual counterparty.
Credit risk, including but not limited to counterparty