Carnival Cruises 2006 Annual Report Download - page 39

Carnival฀Corporation฀&฀plc฀|฀page฀35
major฀component฀systems,฀such฀as฀cabins,฀main฀diesels,฀main฀
electric,฀superstructure฀and฀hull.฀In฀addition,฀we฀consider,฀
among฀other฀things,฀long-term฀vacation฀market฀conditions฀and฀
competition฀and฀historical฀useful฀lives฀of฀similarly-built฀ships.฀
We฀have฀estimated฀our฀new฀ships’฀average฀useful฀lives฀at฀฀
30฀years฀and฀their฀average฀residual฀values฀at฀15%฀of฀our฀origi-
nal฀ship฀cost.
Given฀the฀very฀large฀and฀complex฀nature฀of฀our฀ships,฀ship฀
accounting฀estimates฀require฀considerable฀judgment฀and฀are฀
inherently฀uncertain.฀We฀do฀not฀have฀cost฀segregation฀studies฀
performed฀to฀specifically฀componentize฀our฀ship฀systems.฀In฀
addition,฀since฀we฀do฀not฀separately฀componentize฀our฀ships,฀
we฀do฀not฀identify฀and฀track฀depreciation฀of฀specific฀compo-
nent฀systems.฀Therefore,฀we฀have฀to฀estimate฀the฀net฀book฀
value฀of฀components฀that฀are฀replaced฀or฀refurbished,฀based฀
primarily฀upon฀their฀replacement฀or฀refurbishment฀cost฀and฀
their฀age.
If฀materially฀different฀conditions฀existed,฀or฀if฀we฀materially฀
changed฀our฀assumptions฀of฀ship฀lives฀and฀residual฀values,฀our฀
depreciation฀expense฀or฀loss฀on฀replacement฀or฀refurbishment฀
of฀ship฀assets฀and฀net฀book฀value฀of฀our฀ships฀would฀be฀mate-
rially฀different.฀In฀addition,฀if฀we฀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฀maintenance฀costs฀could฀increase,฀partially฀offset฀by฀a฀
decrease฀in฀depreciation฀expense,฀as฀less฀costs฀would฀have฀
been฀initially฀capitalized฀to฀our฀ships.฀Our฀fiscal฀2006฀ship฀
depreciation฀expense฀would฀have฀increased฀by฀approximately฀
$25฀million฀for฀every฀year฀we฀reduced฀our฀estimated฀average฀
30฀year฀ship฀useful฀life.฀In฀addition,฀if฀our฀ships฀were฀estimated฀
to฀have฀no฀residual฀value,฀our฀fiscal฀2006฀depreciation฀expense฀
would฀have฀increased฀by฀approximately฀$125฀million.
We฀believe฀that฀the฀estimates฀we฀made฀for฀ship฀account-
ing฀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฀allo-
cate฀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฀consis-
tently฀applied฀(1)฀in฀determining฀the฀average฀useful฀life฀and฀
average฀residual฀values฀of฀our฀ships;฀(2)฀in฀determining฀which฀
ship฀improvement฀costs฀add฀value฀to฀our฀ships;฀and฀(3)฀in฀
determining฀the฀net฀book฀value฀of฀ship฀component฀assets฀
being฀replaced฀or฀refurbished.฀Finally,฀we฀believe฀our฀critical฀
ship฀accounting฀estimates฀are฀generally฀comparable฀with฀
those฀of฀other฀major฀cruise฀companies.
Asset฀Impairment
The฀impairment฀reviews฀of฀our฀ships,฀trademarks฀and฀
goodwill,฀which฀has฀been฀allocated฀to฀our฀cruise฀line฀reporting฀
units,฀require฀us฀to฀make฀significant฀estimates฀to฀determine฀
the฀fair฀values฀of฀these฀assets฀or฀reporting฀units.
The฀determination฀of฀fair฀value฀includes฀numerous฀uncer-
tainties,฀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฀judg-
ments฀are฀made฀concerning,฀among฀other฀things,฀future฀net฀
revenue฀yields,฀net฀cruise฀costs฀per฀ALBD,฀interest฀and฀dis-
count฀rates,฀cruise฀itineraries,฀ship฀additions฀and฀retirements,฀
technological฀changes,฀consumer฀demand,฀governmental฀
regulations฀and฀the฀effects฀of฀competition.฀In฀addition,฀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฀deter-
mining฀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฀impair-
ment฀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฀environmental,฀legal,฀
passenger฀and฀crew,฀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฀determine฀if฀it฀฀
is฀probable฀that฀we฀will฀incur฀an฀expense฀related฀to฀the฀settle-
ment฀or฀final฀adjudication฀of฀such฀matters฀and฀whether฀a฀
reasonable฀estimation฀of฀such฀probable฀loss,฀if฀any,฀can฀be฀
made.฀In฀assessing฀probable฀losses,฀we฀make฀estimates฀of฀
the฀amount฀of฀probable฀insurance฀recoveries,฀if฀any,฀which฀are฀
recorded฀as฀assets.฀We฀accrue฀a฀liability฀when฀we฀believe฀a฀