Carnival Cruises 2011 Annual Report Download - page 43

all material respects (1) in determining the average useful life and average residual values of our ships, including
ship improvements; (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 retired. Finally, we believe our critical ship
accounting estimates are generally comparable with those of other major cruise companies.
Asset Impairments
Impairment reviews of our cruise ships, goodwill and trademarks require us to make significant estimates to
determine the fair values of these assets or cruise brands. For our cruise ships, we perform our impairment
reviews, if required, at the individual cruise ship level. See “Note 4 – Property and Equipment” in the
accompanying consolidated financial statements for additional discussion of certain ship impairment charges
recorded in 2011. We believe the estimated fair value of each of our cruise brands that carry goodwill
significantly exceeds the carrying value of their allocated net assets, except for Ibero. We believe the estimated
fair value of each of our recorded trademarks significantly exceeds its respective carrying value. See “Note 10 –
Fair Value Measurements, Derivative Instruments and Hedging Activities” in the accompanying consolidated
financial statements for additional discussion of our goodwill and trademark impairment tests and further details
related to Ibero’s goodwill.
The determination of fair value includes numerous uncertainties, unless a comparable, viable actively-traded
market exists, which is usually not the case for cruise ships, cruise brands and trademarks. Our ship fair values
are typically estimated based on individual or comparable ship sale prices and other comparable ship values in
inactive markets. In determining the estimated fair values of cruise brands utilizing discounted future cash flow
analysis, significant judgments are made related to forecasting future operating results, including net revenue
yields, net cruise costs including fuel prices, capacity changes, including the expected deployment of vessels
into, or out of, the cruise brand, weighted-average cost of capital for comparable publicly-traded companies,
terminal values, cruise itineraries, technological changes, consumer demand, governmental regulations and the
effects of competition, among others. In addition, third party appraisers are sometimes used to help determine
fair values of cruise brands and trademarks, and their valuation methodologies are also typically subject to
uncertainties similar to those discussed above.
In addition, in determining our trademark estimated fair values we also use discounted future cash flow analysis,
which requires some of the same significant judgments discussed above. Specifically, determining the estimated
amount of royalties avoided by our ownership of the trademark is based upon forecasted cruise revenues and
royalty rates that a market participant would use. The royalty rates are estimated primarily using comparable
royalty agreements for similar industries.
We believe that we have made reasonable estimates and judgments in determining whether our cruise ships,
goodwill and trademarks have been impaired. However, if there is a material change in assumptions used in our
determination of fair values, or if there is a material change in the conditions or circumstances influencing fair
values, then we may need to recognize a material impairment.
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, guest and crew, and tax matters. In addition, we
periodically assess the recoverability of our trade and other receivables and other counterparty credit exposures,
such as contractual nonperformance by financial and other institutions with which we conduct significant
business. Our credit exposure includes contingent obligations related to cash payments received directly by travel
agents and tour operators for cash collected by them on cruise sales in most of the European Union for which we
are obligated to provide credit in a like amount to these guests even if we do not receive payment from the travel
agents or tour operators. 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, or more likely than not (“MLTN”) for income
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