Royal Caribbean Cruise Lines 2013 Annual Report Download - page 83
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 2013, we performed a
qualitative assessment of whether it was more-likely-
than-not that our Royal Caribbean International
reporting unit’s fair value was less than its carrying
amount before applying the two-step goodwill impair-
ment test. The qualitative analysis included assessing
the impact of certain factors such as general economic
conditions, limitations on accessing capital, changes
in forecasted operating results, changes in fuel prices
and fluctuations in foreign exchange rates. Based on
our qualitative assessment, we concluded that it was
more-likely-than-not that the estimated fair value
of the Royal Caribbean International reporting unit
exceeded its carrying value and thus, we did not pro-
ceed to the two-step goodwill impairment test. No
indicators of impairment exist primarily because the
reporting unit’s fair value has consistently exceeded
its carrying value by a significant margin, its financial
performance has been solid in the face of mixed
economic environments and forecasts of operating
results generated by the reporting unit appear suffi-
cient to support its carrying value.
We also performed our annual impairment review of
goodwill for Pullmantur’s reporting unit during the
fourth quarter of 2013. Various strategic decisions
regarding Pullmantur, such as the opening of a
regional head office in Panama and the agreement
for the sale of its non-core businesses, indicated
changes in its forecasted cash flows. Therefore,
we did not perform a qualitative assessment but
instead proceeded directly to the two-step goodwill
impairment test. We estimated the fair value of the
Pullmantur reporting unit using a probability-weighted
discounted cash flow model. The principal assump-
tions used in the discounted cash flow model are pro-
jected operating results, weighted-average cost of
capital, and terminal value. Significantly impacting
these assumptions are the transfer of vessels from
our other cruise brands to Pullmantur. The discounted
cash flow model used our 2014 projected operating
results as a base. To that base we added future years’
cash flows assuming multiple revenue and expense
scenarios that reflect the impact on Pullmantur’s
reporting unit of different global economic environ-
ments beyond 2014. We assigned a probability to
each revenue and expense scenario.
We discounted the projected cash flows using rates
specific to Pullmantur’s reporting unit based on its
weighted-average cost of capital. Based on the prob-
ability-weighted discounted cash flows, we deter-
mined the fair value of the Pullmantur reporting unit
exceeded its carrying value by approximately 8%
resulting in no impairment to Pullmantur’s goodwill.
Pullmantur is a brand targeted primarily at the Spanish,
Portuguese and Latin American markets, with an
increasing focus on Latin America. The persistent
economic instability in these markets has created sig-
nificant uncertainties in forecasting operating results
and future cash flows used in our impairment analyses.
We continue to monitor economic events in these
markets for their potential impact on Pullmantur’s
business and valuation. Further, 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, sell-
ing 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.
If there are relatively modest changes to the projected
future cash flows used in the impairment analyses,
especially in Net Yields or if certain transfers of vessels
from our other cruise brands to the Pullmantur fleet
do not take place, it is reasonably possible that an
impairment charge of Pullmantur’s reporting unit’s
goodwill and trademark and trade names may be
required. Of these factors, the planned transfers of
vessels to the Pullmantur fleet is most significant to
the projected future cash flows. If the transfers do not
occur, we will likely fail step one of the impairment test.
NOTE 4. INTANGIBLE ASSETS
Intangible assets are reported in Other assets in our
consolidated balance sheets and consist of the follow-
ing (in thousands):
Indefinite-life intangible asset—
Pullmantur trademarks and
trade names
Impairment charge — ()
Foreign currency translation
adjustment
Total
During the fourth quarter of 2013 and 2012, we per-
formed the annual impairment review of our trade-
marks and trade names 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. These trade-
marks and trade names relate to Pullmantur and we
have used a discount rate comparable to the rate used
in valuing the Pullmantur reporting unit in our good-
will impairment test. Based on the results of our test-
ing, we did not record an impairment of Pullmantur’s
tradenames and trademarks for the year ended
December 31, 2013 but for the year ended December
31, 2012, we recorded an impairment of $17.4 million.