Royal Caribbean Cruise Lines 2012 Annual Report Download - page 90

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Goodwill and indefinite-life intangible assets related
to Pullmantur with a carrying amount of $459.1 million
and $218.9 million, respectively, were written down
to its implied fair value of $145.5 million and its fair
value of $204.9 million, respectively. The impairment
charges, totaling approximately $336.6 million, were
recognized during the fourth quarter of 2012 and are
reported within Impairment of Pullmantur related
assets in our consolidated statements of comprehen-
sive income (loss). Pullmantur’s goodwill and indefi-
nite-life intangible assets are reported within goodwill
and other assets, respectively, in our consolidated
balance sheets.
Long-lived assets with a carrying amount of $116.3
million, were written down to their fair value of $62.3
million, resulting in a loss of $48.9 million which was
recognized during the fourth quarter of 2012 and is
reported within Impairment of Pullmantur related
assets in our consolidated statements of comprehen-
sive income (loss). Long-lived assets are reported
within property and equipment, net in our consoli-
dated balance sheets.
DERIVATIVE INSTRUMENTS
We are exposed to market risk attributable to changes
in interest rates, foreign currency exchange rates and
fuel prices. We manage these risks through a combi-
nation of our normal operating and financing activities
and through the use of derivative financial instruments
pursuant to our hedging practices and policies. The
financial impact of these hedging instruments is pri-
marily offset by corresponding changes in the under-
lying exposures being hedged. We achieve this by
closely matching the amount, term and conditions of
the derivative instrument with the underlying risk being
hedged. Although certain of our derivative financial
instruments do not qualify or are not accounted for
under hedge accounting, we do not hold or issue
derivative financial instruments for trading or other
speculative purposes. We monitor our derivative posi-
tions using techniques including market valuations
and sensitivity analyses.
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.
At inception of the hedge relationship, a derivative
instrument that hedges the exposure to changes in
the fair value of a firm commitment or a recognized
asset or liability 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 foreign operations and
investments are recognized as a component of accu-
mulated 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. We use the long-haul method to assess
hedge effectiveness using regression analysis for each
hedge relationship under our interest rate, foreign
currency and fuel hedging programs. We apply the
same methodology on a consistent basis for assessing
hedge effectiveness to all hedges within each hedging
program (i.e. interest rate, foreign currency and fuel).
We perform regression analyses over an observation
period commensurate with the contractual life of the
derivative instrument, up to three years for interest
rate and foreign currency relationships and four years
for fuel relationships. High effectiveness is achieved
when a statistically valid relationship reflects a high
degree of offset and correlation between the changes
in the fair values of the derivative instrument and the
hedged item. The determination of ineffectiveness
is based on the amount of dollar offset between the
change in fair value of the derivative instrument and
the change in fair value of the hedged item at the
end of the reporting period. 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 derivative since the last date at which it was
determined to be effective is recognized in earnings.
In addition, the ineffective portion of our highly effec-
tive hedges is recognized in earnings immediately and
reported in other income (expense) in our consoli-
dated statements of comprehensive income (loss).
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 under-
lying hedged items. In the event that hedge account-
ing is discontinued, cash flows subsequent to the
date of discontinuance are classified within investing
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS