Carnival Cruises 2011 Annual Report Download - page 42

could adversely impact our revenues, costs and expenses. You should read the above forward-looking statement
together with the discussion of these and other risks under “Cautionary Note Concerning Factors That May
Affect Future Results.”
Critical Accounting Estimates
Our critical accounting estimates are those which we believe require our most significant judgments about the
effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying
judgments and uncertainties used to make them and the likelihood that materially different estimates would be
reported under different conditions or using different assumptions is as follows:
Ship Accounting
Our most significant assets are our ships, ship improvements and ships under construction, which represent 80%
of our total assets. We make several critical accounting estimates with respect to our ship accounting. First, in
order to compute our ships’ depreciation expense, which represented 11% of our cruise costs and expenses in
2011, we have to estimate the average useful life of each of our ships as well as their residual values. Secondly,
we account for ship improvement costs by capitalizing those costs that we believe add value to our ships and
depreciate those improvements over their or the ships’ estimated remaining useful life, whichever is shorter,
while the costs of repairs and maintenance, including minor improvement costs and dry-dock expenses, are
charged to expense as 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 the net book value of the asset being retired in order to
remove it from the ship’s cost basis.
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 ships’ weighted-average
useful lives at 30 years and their average residual values at 15% of our original ship cost. Further, we determine
the useful life of ship improvements based on estimates of the period over which the assets will be of economic
benefit to us. In determining such lives, we consider factors, including but not limited to, physical deterioration,
obsolescence, regulatory constraints and maintenance policies.
Given the size and complexity 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 typically have to estimate the net book value of components
that are retired, based primarily upon their replacement cost, their age and their original estimated useful lives.
If materially different conditions existed, or if we materially changed our assumptions of ship lives and residual
values, our depreciation expense or loss on retirement 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 expense could
increase, which would be partially offset by a decrease in depreciation expense, resulting from a reduction in
capitalized costs. Our 2011 ship depreciation expense would increase by an estimated $37 million for every year
we reduce our estimated average 30 year ship useful life. In addition, if our ships were estimated to have no
residual value, our 2011 depreciation expense would increase by approximately $190 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 they are
used. In addition, we believe that the estimates we made are reasonable and our methods consistently applied in
41