Royal Caribbean Cruise Lines 2012 Annual Report Download - page 81

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
perform worse than contemplated in our discounted
cash flow model, or if there are material changes to
the projected future cash flows used in the impair-
ment analyses, especially in Net Yields, an additional
impairment charge of Pullmantur’s trademarks and
trade names may be required.
Finite-life intangible assets and related accumulated
amortization are immaterial to our 2012, 2011, and
2010 consolidated financial statements.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following
(in thousands):
 
Ships  
Ship improvements  
Ships under construction  
Land, buildings and improve-
ments, including leasehold
improvements and port
facilities  
Computer hardware and soft-
ware, transportation equip-
ment and other  
Total property and equipment  
Less—accumulated deprecia-
tion and amortization () ()
 
Ships under construction include progress payments
for the construction of new ships as well as planning,
design, interest, commitment fees and other associ-
ated costs. We capitalized interest costs of $13.3
million, $14.0 million and $28.1 million for the years
2012, 2011 and 2010, respectively.
During 2012, Pullmantur delivered Ocean Dream to
an unrelated third party as part of a six year bareboat
charter agreement. The charter agreement provides
a renewal option exercisable by the unrelated third
party for an additional four years. The charter agree-
ment constitutes an operating lease and charter reve-
nue is being recognized on a straight-line basis over
the six year charter term. The charter revenue rec-
ognized during 2012 was not material to our results
of operations.
We review our long-lived assets for impairment when-
ever events or changes in circumstances indicate,
based on estimated undiscounted future cash flows.
As part of step two of our goodwill impairment analy-
sis, (see Note 3. Goodwill for further information),
we identified that the estimated fair values of certain
long-lived assets, consisting of three aircraft owned
and operated by Pullmantur Air, were less than their
carrying values. As a result, we proceeded to our
long-lived asset impairment test. Pullmantur’s strategy
to further diversify its passenger sourcing and reduce
its reliance on the Spanish market has led us to reduce
the number of years during which we expect to use
these aircraft when performing the undiscounted cash
flow test. The undiscounted cash flows for Pullmantur’s
aircraft were determined to be less than their carrying
value and an impairment charge of $48.9 million was
required. This impairment charge was recognized
in earnings during the fourth quarter of 2012 and
is reported within Impairment of Pullmantur related
assets within our consolidated statements of com-
prehensive income (loss). See Note 13. Fair Value
Measurements and Derivative Instruments for further
discussion.
In December 2012, we reached a conditional agree-
ment with STX France to build the third Oasis-class
ship for Royal Caribbean International. The agree-
ment is subject to certain closing conditions and is
expected to become effective in the first quarter of
2013. The ship will have a capacity of approximately
5,400 berths and is expected to enter service in the
second quarter of 2016. If the agreement becomes
effective, Pullmantur’s Atlantic Star, which has been
out of operation since 2009, will be transferred to an
affiliate of STX France as part of the consideration.
The transfer is not expected to result in a gain or a
loss. In addition, we have an option to construct a
fourth Oasis-class ship which will expire five days
prior to the first anniversary of the effective date
of the contract.
NOTE 6. OTHER ASSETS
Variable Interest Entities
A Variable Interest Entity (“VIE”), is an entity in which
the equity investors have not provided enough equity
to finance the entity’s activities or the equity investors
(1) cannot directly or indirectly make decisions about
the entity’s activities through their voting rights or
similar rights; (2) do not have the obligation to absorb
the expected losses of the entity; (3) do not have the
right to receive the expected residual returns of the
entity; or (4) have voting rights that are not propor-
tionate to their economic interests and the entity’s
activities involve or are conducted on behalf of an
investor with a disproportionately small voting
interest.
We have determined that Grand Bahama Shipyard
Ltd. (“Grand Bahama”), a ship repair and maintenance
facility in which we have a 40% noncontrolling inter-
est, is a VIE. The facility serves cruise and cargo ships,
oil and gas tankers, and offshore units. We utilize this
facility, among other ship repair facilities, for our reg-
ularly scheduled drydocks and certain emergency