Carnival Cruises 2008 Annual Report Download - page 89

F-30
Secondly, we account for ship improvement costs by capitalizing those costs which we believe
will add value to our ships and depreciate those improvements over their estimated useful
lives, while expensing repairs and maintenance and minor improvement costs as they are
incurred. Finally, when we record the retirement of a ship component that is included within
the ship's cost basis, we may have to estimate its net book value.
We determine the average useful life of our ships and their residual values based
primarily on our estimates of the weighted-average useful lives and residual values of the
ships' major component systems, such as cabins, engines and hull. In addition, we consider,
among other things, long-term vacation market conditions, 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 original 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 ships. In addition, since we do not separately
componentize our ships, we do not identify and track depreciation of specific original ship
components. Therefore, we have to estimate the net book value of components that are
replaced, based primarily upon their replacement 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 of ship
components and net book value of our ships would be materially 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, which
would be partially offset by a decrease in depreciation expense, resulting from a reduction
in capitalized costs. Our fiscal 2008 ship depreciation expense would have increased by
approximately $30 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 2008
depreciation expense would have increased by approximately $150 million.
We believe that the estimates we made for ship accounting purposes are reasonable and
our methods are consistently applied in all material respects 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 in all material respects (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. 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 and goodwill and trademarks, 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 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 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, technological changes,
consumer demand, governmental regulations and the effects of competition. In addition, third
party appraisers are sometimes used to help determine fair values of ships and cruise lines
and some of their valuation methodologies are also subject to similar types of uncertainties.
Also, the determination of fair values of cruise line reporting units using a price earnings
multiple approach requires significant judgments, such as determining reasonable multiples.
Finally, determining trademark fair values also requires significant judgments in determining
both the estimated trademark cash flows, and the appropriate discount and 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