Royal Caribbean Cruise Lines 2012 Annual Report Download - page 76

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. We evaluate asset impairment in accord-
ance with ASC 360-10-35-23 (Property, Plant and
Equipment), which requires that, for purposes of rec-
ognition and measurement of an impairment loss,
long-lived assets be grouped with other assets and
liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of
other assets and liabilities. The lowest level for which
we maintain identifiable cash flows that are indepen-
dent of the cash flows of other assets and liabilities is
at the ship level for our ships and at the aggregated
asset group level for our aircraft.
We use the deferral method to account for drydocking
costs. Under the deferral method, drydocking costs
incurred are deferred and charged to expense on a
straight-line basis over the period to the next sched-
uled drydock, which we estimate to be a period of
thirty to sixty months based on the vessel’s age as
required by Class. 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.
Class certification is necessary in order for our cruise
ships to be flagged in a specific country, obtain liability
insurance and legally operate as passenger cruise ships.
The activities associated with those drydocking costs
cannot be performed while the vessel is in service
and, as such, are done during a drydock as a planned
major maintenance activity. The significant deferred
drydock costs consist of hauling and wharfage ser-
vices provided by the drydock facility, hull inspection
and related activities (e.g. scraping, pressure cleaning,
bottom painting), maintenance to steering propulsion,
stabilizers, thruster equipment and ballast tanks, port
services such as tugs, pilotage and line handling, and
freight associated with these items. We perform a
detailed analysis of the various activities performed
for each drydock and only defer those costs that are
directly related to planned major maintenance activi-
ties necessary to maintain Class. The costs deferred
are not otherwise routinely periodically performed to
maintain a vessel’s designed and intended operating
capability. Repairs and maintenance activities are
charged to expense as incurred.
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 cir-
cumstances dictate, more frequently. The impairment
review for goodwill consists of a qualitative assessment
of whether it is more-likely-than-not that a reporting
unit’s fair value is less than its carrying amount, and if
necessary, a two-step goodwill impairment test.
Factors to consider when performing the qualitative
assessment include general economic conditions,
limitations on accessing capital, changes in forecasted
operating results, changes in fuel prices and fluctu-
ations in foreign exchange rates. If the qualitative
assessment demonstrates that it is more-likely-than-
not that the estimated fair value of the reporting unit
exceeds its carrying value, it is not necessary to per-
form the two-step goodwill impairment test. We may
elect to bypass the qualitative assessment and pro-
ceed directly to step one, for any reporting unit, in
any period. We can resume the qualitative assessment
for any reporting unit in any subsequent period. When
performing the two-step goodwill impairment test,
the fair value of the reporting unit is determined and
compared to the carrying value of the net assets allo-
cated to the reporting unit. If the fair value of the
reporting unit exceeds its carrying value, no further
analysis or write-down of goodwill is required. If the
fair value of the reporting unit is less than the carry-
ing value of its net assets, the implied fair value of the
reporting unit is allocated to all its underlying assets
and liabilities, including both recognized and unrec-
ognized tangible and intangible assets, based on their
fair value. If necessary, goodwill is then written down
to its implied fair value.
Intangible Assets
In connection with our acquisitions, we have acquired
certain intangible assets of which value has been
assigned to them based on our estimates. Intangible
assets that are deemed to have an indefinite life are
not amortized, but are subject to an annual impair-
ment test, or when events or circumstances dictate,
more frequently. The indefinite-life intangible asset
impairment test consists of a comparison of the fair
value of the indefinite-life intangible asset with its
carrying amount. If the carrying amount exceeds
its fair value, an impairment loss is recognized in an
amount equal to that excess. If the fair value exceeds
its carrying amount, the indefinite-life intangible asset
is not considered impaired.
Other intangible assets assigned finite useful lives are
amortized on a straight-line basis over their estimated
useful lives.
Contingencies—Litigation
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 adjudication of such matters and whether a rea-
sonable estimation of such probable loss, if any, can
be made. In assessing probable losses, we take into
consideration estimates of the amount of insurance