Royal Caribbean Cruise Lines 2013 Annual Report Download - page 81
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
data relevant to the hedge horizon of each hedge
relationship. 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 report-
ing 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 deriva-
tive since the last date at which it was determined
to be effective is recognized in earnings. In addition,
the ineffective portion of our highly effective hedges
is immediately recognized in earnings and reported
in Other income (expense) in our consolidated state-
ments 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
underlying hedged items. In the event that hedge
accounting is discontinued, cash flows subsequent to
the date of discontinuance are classified within invest-
ing activities. Cash flows from derivative instruments
not designated as hedging instruments are classified
as investing activities.
We consider the classification of the underlying hedged
item’s cash flows in determining the classification for
the designated derivative instrument’s cash flows. We
classify derivative instrument cash flows from hedges
of benchmark interest rate or hedges of fuel expense
as operating activities due to the nature of the hedged
item. Likewise, we classify derivative instrument cash
flows from hedges of foreign currency risk on our
newbuild ship payments as investing activities. Cash
flows from derivative instruments not designated
under hedge accounting, such as our fuel call options,
are classified as investing activities.
Foreign Currency Translations and Transactions
We translate assets and liabilities of our foreign
subsidiaries whose functional currency is the local
currency, at exchange rates in effect at the balance
sheet date. We translate revenues and expenses at
weighted-average exchange rates for the period.
Equity is translated at historical rates and the result-
ing foreign currency translation adjustments are
included as a component of Accumulated other com-
prehensive income (loss), which is reflected as a sepa-
rate component of Shareholders’ equity. Exchange
gains or losses arising from the remeasurement of
monetary assets and liabilities denominated in a cur-
rency other than the functional currency of the entity
involved are immediately included in our earnings,
except for certain liabilities that have been designated
to act as a hedge of a net investment in a foreign
operation or investment. Exchange gains (losses)
were $13.4 million, $(11.8) million and $(1.6) million
for the years 2013, 2012 and 2011, respectively, and
were recorded within Other (expense) income. The
majority of our transactions are settled in United
States dollars. Gains or losses resulting from transac-
tions denominated in other currencies are recognized
in income at each balance sheet date.
Concentrations of Credit Risk
We monitor our credit risk associated with financial
and other institutions with which we conduct signifi-
cant business and, to minimize these risks, we select
counterparties with credit risks acceptable to us and
we seek to limit our exposure to an individual counter-
party. Credit risk, including but not limited to counter-
party nonperformance under derivative instruments,
our credit facilities and new ship progress payment
guarantees, is not considered significant, as we pri-
marily conduct business with large, well-established
financial institutions, insurance companies and export
credit agencies with which we have long-term rela-
tionships and which have credit risks acceptable to us
or where the credit risk is spread out among a large
number of counterparties. In addition, our exposure
under foreign currency forward contracts, foreign
currency collar options, fuel call options, interest
rate and fuel swap agreements was approximately
$92.5 million and $60.8 million as of December 31,
2013 and 2012, respectively, and was limited to the
cost of replacing the contracts in the event of non-
performance by the counterparties to the contracts,
all of which are currently our lending banks. We do
not anticipate nonperformance by any of our signifi-
cant counterparties. In addition, we have established
guidelines regarding credit ratings and instrument
maturities that we follow to manage our counterparty
exposure and credit risk. We do not normally require
collateral or other security to support credit relation-
ships; however, in certain circumstances this option
is available to us.
Earnings Per Share
Basic earnings per share is computed by dividing net
income by the weighted-average number of shares of
common stock outstanding during each period. Diluted
earnings per share incorporates the incremental shares
issuable upon the assumed exercise of stock options
and conversion of potentially dilutive securities. (See
Note 10. Earnings Per Share.)
Stock-Based Employee Compensation
We measure and recognize compensation expense
at the estimated fair value of employee stock awards.
Compensation expense for awards and the related tax
effects are recognized as they vest. We use the esti-
mated amount of expected forfeitures to calculate
compensation costs for all outstanding awards.