Royal Caribbean Cruise Lines 2011 Annual Report Download - page 81

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ROYAL CARIBBEAN CRUISES LTD. 77
in the face of mixed economic environments and fore-
casts of operating results generated by the reporting
unit appear sufficient to support its carrying value.
In addition, during the fourth quarter of 2011, we per-
formed our annual impairment review of goodwill for
Pullmantur’s reporting unit. We did not perform a
qualitative assessment but instead proceeded directly
to the two-step goodwill impairment test. We estimated
the fair value of the Pullmantur reporting unit using
a probability-weighted discounted cash flow model.
The principal assumptions used in the discounted
cash flow model are projected operating results,
weighted- average cost of capital, and terminal value.
Significantly impacting these assumptions are the
transfer of vessels from our other cruise brands to
Pullmantur. Cash flows were calculated using our 2012
projected operating results as a base. To that base
we added future years’ cash flows assuming multiple
revenue and expense scenarios that reflect the impact
on Pullmantur’s reporting unit of different global
economic environments beyond 2012. We assigned
a probability to each revenue and expense scenario.
We discounted the projected cash flows using rates
specific to Pullmantur’s reporting unit based on its
weighted-average cost of capital. Based on the
probability-weighted discounted cash flows, we deter-
mined the fair value of the Pullmantur reporting unit
exceeded its carrying value. Therefore, we did not
proceed to step two of the impairment analysis and
we do not consider goodwill to be impaired.
The estimation of fair value utilizing discounted
expected future cash flows includes numerous uncer-
tainties which require our significant judgment when
making assumptions of expected revenues, operating
costs, marketing, selling and administrative expenses,
interest rates, ship additions and retirements as well
as assumptions regarding the cruise vacation industry’s
competitive environment and general economic and
business conditions, among other factors. Pullmantur
is a brand targeted primarily at the Spanish, Portuguese
and Latin American markets. European economies
continue to demonstrate instability in light of height-
ened concerns over sovereign debt issues as well as
the impact that proposed austerity measures will have
on certain markets. The Spanish economy has been
more severely impacted than many other economies
around the world where we operate and there is signif-
icant uncertainty as to whether or when it will recover.
In addition, the recent Costa Concordia incident is
having a near-term negative impact on our earnings
in 2012 while the impact in future years is uncertain.
If the Spanish economy weakens further or recovers
more slowly than contemplated in our discounted
cash flow model, if there are relatively modest changes
to our projected future cash flows used in the impair-
ment analyses, especially in Net Yields, or if certain
transfers of vessels from our other cruise brands to
the Pullmantur fleet do not take place, it is reasonably
possible that an impairment charge of Pullmantur’s
reporting unit’s goodwill may be required.
NOTE 4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
 
Indefinite-life intangible asset—
Pullmantur trademarks and
trade names  
Foreign currency translation
adjustment () ()
Total  
We performed the annual impairment review of our
trademarks and trade names during the fourth quarter
of 2011 using a discounted cash flow model and the
relief-from-royalty method. The royalty rate used is
based on comparable royalty agreements in the tour-
ism and hospitality industry. Since these trademarks
and trade names relates to Pullmantur, we have used
the same discount rate used in valuing the Pullmantur
reporting unit in our goodwill impairment test. Based
on the discounted cash flow model, we determined
the fair value of our trademarks and trade names
exceeded their carrying value. However, European
economies continue to demonstrate instability in light
of heightened concerns over sovereign debt issues as
well as the impact that proposed austerity measures
will have on certain markets. The Spanish economy
has been more severely impacted than many other
economies around the world where we operate and
there is significant uncertainty as to whether or when
it will recover. In addition, the recent Costa Concordia
incident is having a near-term negative impact on our
earnings in 2012 while the impact in future years is
uncertain. If the Spanish economy weakens further
or recovers more slowly than contemplated in our
discounted cash flow model, if there are relatively
modest changes to our projected future cash flows
used in the impairment analyses, especially in Net
Yields, or if certain transfers of vessels from our other
cruise brands to the Pullmantur fleet do not take
place, it is reasonably possible that an impairment
charge of Pullmantur’s trademark and trade names
may be required.
Finite-life intangible assets and related accumulated
amortization are immaterial to our 2011, 2010, and
2009 consolidated financial statements.