Carnival Cruises 2012 Annual Report Download - page 101

Table of Contents
The above forward-looking statements involve risks, uncertainties and assumptions with respect to us. There are many factors that could cause our actual
results to differ materially from those expressed above including, but not limited to, general economic and business conditions, increases in fuel prices,
incidents, spread of contagious diseases, adverse weather conditions, geo-political events, negative publicity and other factors that 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, including ship improvements and ships under construction, which represent 79% of our total assets at
November 30, 2012. We make several critical accounting estimates with respect to our ship accounting. First, in order to compute our ships’ depreciation
expense, which represented 10% of our cruise costs and expenses in 2012, 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 have a useful life
greater than one year, 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, superstructure, main electric, 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 also consider factors, including but not limited to,
physical deterioration, obsolescence, regulatory constraints and maintenance requirements.
Given the large 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, 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 2012 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 2012 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 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
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