Royal Caribbean Cruise Lines 2013 Annual Report Download - page 44
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PART II
is less than its carrying amount, and if necessary, a
two-step goodwill impairment test. Factors to con-
sider when performing the qualitative assessment
include general economic conditions, limitations on
accessing capital, changes in forecasted operating
results, changes in fuel prices and fluctuations in for-
eign 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 perform the two-
step goodwill impairment test. We may elect to bypass
the qualitative assessment and proceed 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
allocated to the reporting unit. We estimate the fair
value of our reporting units using a probability-
weighted discounted cash flow model. The estimation
of fair value utilizing discounted expected future cash
flows includes numerous uncertainties 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 con-
ditions, among other factors. The principal assump-
tions used in the discounted cash flow model are
projected operating results, weighted-average cost
of capital, and terminal value. The discounted cash
flow model uses our 2014 projected operating results
as a base. To that base we add future years’ cash flows
assuming multiple revenue and expense scenarios
that reflect the impact of different global economic
environments beyond 2014 on the reporting unit. We
discount the projected cash flows using rates specific
to the reporting unit based on its weighted-average
cost of capital. 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 carrying 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 unrecognized tangible
and intangible assets, based on their fair value. If nec-
essary, goodwill is then written down to its implied
fair value.
The impairment review for indefinite-life intangible
assets consists of a comparison of the fair value of the
asset with its carrying amount. We estimate the fair
value of our indefinite-life intangible assets, which
consist of trademarks and trade names related to
Pullmantur, using a discounted cash flow model and
the relief-from-royalty method. The royalty rate used
is based on comparable royalty agreements in the
tourism and hospitality industry. The discount rate
used is comparable to the rate used in valuing the
Pullmantur reporting unit in our goodwill impairment
test. 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 con-
sidered impaired. Other intangible assets assigned
finite useful lives are amortized on a straight-line basis
over their estimated useful lives.
We review our ships, aircraft and other long-lived
assets for impairment whenever events or changes in
circumstances indicate, based on estimated undis-
counted future cash flows, that the carrying amount
of these assets may not be fully recoverable. We eval-
uate asset impairment 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 independent 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. (See
Note 2. Summary of Significant Accounting Policies to
our consolidated financial statements under Item 8.
Financial Statements and Supplementary Data). If esti-
mated future cash flows are less than the carrying
value of an asset, an impairment charge is recognized
to the extent its carrying value exceeds fair value.
We estimate fair value based on quoted market prices
in active markets, if available. If active markets are not
available we base fair value on independent apprais-
als, sales price negotiations and projected future cash
flows discounted at a rate estimated by management
to be commensurate with the business risk. Quoted
market prices are often not available for individual
reporting units and for indefinite-life intangible assets.
Accordingly, we estimate the fair value of a reporting
unit and an indefinite-life intangible asset using an
expected present value technique.
Pullmantur
During the fourth quarter of 2013, we performed 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. As a result of the
test, we determined the fair value of the Pullmantur
reporting unit exceeded its carrying value by approxi-
mately 8% resulting in no impairment to Pullmantur’s
goodwill. We also performed the annual impairment