Royal Caribbean Cruise Lines 2013 Annual Report Download - page 43
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PART II
and our knowledge of the cruise vacation industry.
We do not identify and track depreciation by ship
component systems, but instead utilize these estimates
to determine the net cost basis of assets replaced or
refurbished. Improvement costs that we believe add
value to our ships are capitalized as additions to the
ship and depreciated over the shorter of the improve-
ments’ estimated useful lives or that of the associated
ship. The estimated cost and accumulated deprecia-
tion of replaced or refurbished ship components are
written off and any resulting losses are recognized in
cruise operating expenses.
During the first quarter of 2013, we performed a review
of the estimated useful lives and associated residual
values of ships in our fleet approaching the last third
of their estimated useful lives. As a result, effective
January 1, 2013, we revised the estimated useful lives
of five ships from 30 years with a 15% associated
residual value, to 35 years with a 10% associated
residual value. The change in the estimated useful
lives and associated residual value was accounted for
prospectively as a change in accounting estimate.
The 35-year useful life with a 10% associated residual
value is based on revised estimates of the weighted-
average useful life of all major ship components for
these ships. The change in estimate is consistent with
our recent investments in and future plans to continue
to invest in the revitalizations of these ships and the
use of certain ship components longer than originally
estimated. The change allows us to better match
depreciation expense with the periods these assets
are expected to be in use. (See Note 2. Summary of
Significant Accounting Policies to our consolidated
financial statements under Item 8. Financial Statements
and Supplementary Data).
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 liabil-
ity insurance and legally operate as passenger cruise
ships. The activities associated with those drydocking
costs cannot be performed while the vessel is in ser-
vice and, as such, are done during a drydock as a
planned major maintenance activity. The significant
deferred drydock costs consist of hauling and wharf-
age services provided by the drydock facility, hull
inspection and related activities (e.g. scraping, pres-
sure cleaning, bottom painting), maintenance to steer-
ing propulsion, 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 related to activities not otherwise routinely peri-
odically performed to maintain a vessel’s designed
and intended operating capability. Repairs and main-
tenance activities are charged to expense as incurred.
We use judgment when estimating the period between
drydocks, which can result in adjustments to the esti-
mated amortization of drydock costs. If the vessel is
disposed of before the next drydock, the remaining
balance in deferred drydock is written-off to the gain
or loss upon disposal of vessel in the period in which
the sale takes place. We also use judgment when
identifying costs incurred during a drydock which are
necessary to maintain the vessel’s Class certification
as compared to those costs attributable to repairs and
maintenance which are expensed as incurred. (See
Note 2. Summary of Significant Accounting Policies to
our consolidated financial statements under Item 8.
Financial Statements and Supplementary Data).
We believe we have made reasonable estimates for
ship accounting purposes. However, should certain
factors or circumstances cause us to revise our esti-
mates of ship useful lives or projected residual values,
depreciation expense could be materially higher or
lower. If circumstances cause us to change our assump-
tions in making determinations as to whether ship
improvements should be capitalized, the amounts we
expense each year as repairs and maintenance costs
could increase, partially offset by a decrease in depre-
ciation expense. If we had reduced our estimated
average 30-year ship useful life by one year, depre-
ciation expense for 2013 would have increased by
approximately $42.6 million. If our ships were esti-
mated to have no residual value, depreciation expense
for 2013 would have increased by approximately
$168.2 million.
Valuation of Goodwill, Indefinite-Lived Intangible
Assets and Long-Lived Assets
We review goodwill, trademarks and trade names,
which are our most significant indefinite-lived intangi-
ble assets, for impairment at the reporting unit level
annually or, when events or circumstances 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