Royal Caribbean Cruise Lines 2013 Annual Report Download - page 46
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PART II
immediately recognized in earnings. 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 account
for derivative financial instruments in accordance with
authoritative guidance. Refer to Note 2. Summary of
Significant Accounting Policies and Note 14. Fair Value
Measurements and Derivative Instruments to our con-
solidated financial statements for more information on
related authoritative guidance, the Company’s hedging
programs and derivative financial instruments.
We enter into foreign currency forward contracts
and collars, interest rate, cross-currency and fuel
swaps and options with third-party institutions in
over-the-counter markets. We estimate the fair value
of our foreign currency forward contracts and interest
rate and cross-currency swaps using expected future
cash flows based on the instruments’ contract terms
and published forward curves for foreign currency
exchange and interest rates. We apply present value
techniques and LIBOR-based discount rates to con-
vert the expected future cash flows to the current fair
value of the instruments.
We estimate the fair value of our foreign currency
collars using standard option pricing models with
inputs based on the options’ contract terms, such
as exercise price and maturity, and readily available
public market data, such as foreign exchange curves,
foreign exchange volatility levels and discount rates.
We estimate the fair value of our fuel swaps using
expected future cash flows based on the swaps’ con-
tract terms and forward prices. We derive forward
prices from forward fuel curves based on pricing
inputs provided by third-party institutions that trans-
act in the fuel indices we hedge. We validate these
pricing inputs against actual market transactions and
published price quotes for similar assets. We apply
present value techniques and LIBOR-based discount
rates to convert the expected future cash flows to
the current fair value of the instruments. We also
corroborate our fair value estimates using valuations
provided by our counterparties.
We estimate the fair value for our fuel call options
based on the prevailing market price for the instruments
consisting of published price quotes for similar assets
based on recent transactions in an active market.
We adjust the valuation of our derivative financial
instruments to incorporate credit risk.
We believe it is unlikely that materially different
estimates for the fair value of our foreign currency
forward contracts and interest rate, cross-currency
and fuel swaps and options would be derived from
other appropriate valuation models using similar
assumptions, inputs or conditions suggested by
actual historical experience.
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
recoveries, if any, which are recorded as assets when
recoverability is probable. We accrue a liability when
we believe a loss is probable and the amount of loss
can be reasonably estimated. Due to the inherent
uncertainties related to the eventual outcome of litiga-
tion and potential insurance recoveries, it is possible
that certain matters may be resolved for amounts
materially different from any provisions or disclosures
that we have previously made.
SEASONALITY
Our revenues are seasonal based on demand for
cruises. Demand is strongest for cruises during the
Northern Hemisphere’s summer months and holidays.
In order to mitigate the impact of the winter weather
in the Northern Hemisphere and to capitalize on the
summer season in the Southern Hemisphere, our
brands have focused on deployment to Australia and
Latin America during that period.
FINANCIAL PRESENTATION
DESCRIPTION OF CERTAIN LINE ITEMS
Revenues
Our revenues are comprised of the following:
đƫƫPassenger ticket revenues, which consist of revenue
recognized from the sale of passenger tickets and the
sale of air transportation to and from our ships; and
đƫƫOnboard and other revenues, which consist primarily
of revenues from the sale of goods and/or services
onboard our ships not included in passenger ticket
prices, cancellation fees, sales of vacation protection
insurance, pre- and post-cruise tours, Pullmantur’s
travel agency network, land-based tours and air
charter business to third parties.