Royal Caribbean Cruise Lines 2013 Annual Report Download - page 79
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Depreciation of property and equipment is computed
utilizing the following useful lives:
Years
Ships generally 30
Ship improvements 3–20
Buildings and improvements 10–40
Computer hardware and
software 3–5
Transportation equipment
and other 3–30
Leasehold improvements Shorter of remaining lease
term or useful life 3–30
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 esti-
mated useful lives and associated residual value was
accounted for prospectively as a change in account-
ing estimate. The 35-year useful life with a 10% asso-
ciated 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 revitalization 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. For the full
year 2013, this change increased operating income
and net income by approximately $11.0 million and
increased earnings per share by $0.05 per share on
a basic and diluted basis.
We review long-lived assets for impairment whenever
events or changes in circumstances indicate, based
on estimated undiscounted future cash flows, that
the carrying amount of these assets may not be fully
recoverable. For purposes of recognition and mea-
surement of an impairment loss, long-lived assets
are grouped with other assets and liabilities 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. If estimated future cash flows
are less than the carrying value of an asset, an impair-
ment charge is recognized to the extent its carrying
value exceeds fair value.
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 not otherwise routinely periodically performed to
maintain a vessel’s designed and intended operating
capability. Repairs and maintenance activities are
charged to expense as incurred.
Goodwill
Goodwill represents the excess of cost over the fair
value of net tangible and identifiable intangible assets
acquired. We review goodwill for impairment at the
reporting unit level annually or, when events or cir-
cumstances 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 is less than its carrying amount, and
if necessary, a two-step goodwill impairment test.
Factors to consider when performing the qualitative
assessment include general economic conditions, limi-
tations on accessing capital, changes in forecasted
operating results, changes in fuel prices and fluctua-
tions in foreign 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 per-
form the two-step goodwill impairment test. We may
elect to bypass the qualitative assessment and pro-
ceed 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. If the fair value of the
reporting unit exceeds its carrying value, no further
analysis or write-down of goodwill is required. If the