Carnival Cruises 2003 Annual Report Download - page 35

32 Carnival Corporation & plc
change our assumptions in making our determinations
as to whether improvements to a ship add value, the
amounts we expense each year as repair and mainte-
nance costs could increase, partially offset by a decrease
in depreciation expense, as less costs would have been
initially capitalized to our ships. Our fiscal 2003 ship
depreciation expense would have increased by approxi-
mately $18 million for every year we reduced our esti-
mated average 30 year ship useful life. In addition, if
our ships were estimated to have no residual value, our
fiscal 2003 depreciation expense would have increased
by approximately $78 million. Some ships in our fleet
are over 30 years old.
We believe that the estimates we made for ship
accounting purposes are reasonable and our methods
are consistently applied and, accordingly, result in
depreciation expense that is based on a rational and
systematic method to equitably allocate the costs of
our ships to the periods during which services are
obtained from their use. In addition, we believe that the
estimates we made are reasonable and our methods
consistently applied (1) in determining the average use-
ful life and residual values of our ships; (2) in determin-
ing which ship improvement costs add value to our
ships; and (3) in determining the net cost basis of ship
component assets being replaced or refurbished.
Finally, we believe our critical ship accounting esti-
mates are generally comparable with those of other
major cruise companies.
Asset Impairment
The impairment reviews of our ship and trademark
assets and of our goodwill, which has been allocated
to our reporting units, such as our cruise lines, require
us to make significant estimates to determine the fair
values, including the cash flows, of these assets or
reporting units.
The determination of fair value includes numerous
uncertainties, unless a viable actively traded market
exists for the asset or for a comparable reporting unit,
which is usually not the case for cruise ships, cruise
lines and trademarks. For example, in determining fair
values of ships and cruise lines utilizing discounted
forecasted cash flows, significant judgments are made
concerning, among other things, future net revenue
yields, net cruise costs per ALBD, interest and discount
rates, cruise itineraries, ship additions and retirements,
technological changes, consumer demand, governmen-
tal regulations and the effects of competition. In addi-
tion, third party appraisers are sometimes used to
determine fair values and some of their valuation
methodologies are also subject to similar types of
uncertainties. Also, the determination of fair values of
reporting units using a price earnings multiple approach
also requires significant judgments, such as determining
reasonably comparable multiples. Finally, determining
trademark fair values also requires significant judgments
in determining both the estimated trademark cash
flows, and the appropriate royalty rates to be applied
to those cash flows to determine their fair value. We
believe that we have made reasonable estimates and
judgments in determining whether our ships, goodwill
and trademarks have been impaired. However, if there
is a material change in the assumptions used in our
determination of fair value or if there is a material
change in the conditions or circumstances influencing
fair value, we could be required to recognize a material
impairment charge.
Contingencies
We periodically assess the potential liabilities related
to any lawsuits or claims brought against us, as well as
for other known unasserted claims, including environ-
mental, legal and tax matters. While it is typically very
difficult to determine the timing and ultimate outcome
of these matters, we use our best judgment to deter-
mine if it is probable that we will incur an expense
related to the settlement or final adjudication of such
matters and whether a reasonable estimation of such
probable loss, if any, can be made. In assessing proba-
ble losses, we make estimates of the amount of insur-
ance recoveries, if any. We accrue a liability when we
believe a loss is probable and the amount of the loss can
be reasonably estimated, in accordance with the provi-
sions of SFAS No. 5, “Accounting for Contingencies,” as
amended. Such accruals are typically based on develop-
ments to date, management’s estimates of the out-
comes of these matters, our experience in contesting,
litigating and settling other similar matters and any
related insurance coverage. See Notes 9 and 14 in the
accompanying financial statements for additional infor-
mation concerning our contingencies.
Given the inherent uncertainty related to the even-
tual outcome of these matters and potential insurance
recoveries, it is possible that all or some of these mat-
ters may be resolved for amounts materially different
from any provisions or disclosures that we may have
made with respect to their resolution. In addition, as
new information becomes available, we may need to
reassess the amount of probable liability that needs to
be accrued related to our contingencies. All such revi-
sions in our estimates could materially impact our
results of operations and financial position.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)