Carnival Cruises 2013 Annual Report Download - page 96

Table of Contents
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 2013 ship depreciation expense would
increase by approximately $40 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 2013 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 in
determining (1) the average useful life and average residual values of our ships, including ship improvements; (2) which ship improvement costs add value to
our ships and (3) 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 and
cruise brands.
For our cruise ships, we perform our impairment reviews, if required, at the individual cruise ship level, which is the lowest level for which we maintain
identifiable cash flows that are independent of the cash flows of other assets and liabilities. See Note 10 – “Fair Value Measurements, Derivative Instruments
and Hedging Activities” in the accompanying consolidated financial statements for a discussion of ship impairment charges recorded in 2013, 2012 and 2011.
We believe it is more-likely-than-not (“MLTN”) that each of our cruise brands’ estimated fair values that carry goodwill at November 30, 2013 exceeded their
carrying values. We also believe that it is MLTN that the estimated fair values of each of our cruise brands’ trademarks recorded at November 30, 2013
exceeded their carrying values. 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 reviews.
The determination of fair value includes numerous assumptions that are subject to various risks and uncertainties, unless a comparable, viable actively-
traded market exists, which is usually not the case for cruise ships, cruise brands and trademarks. Our ships’ fair values are typically estimated based either
on ship sales price negotiations or discounted future cash flows.
In performing qualitative assessments of our cruise brands that carry goodwill, qualitative factors that we consider to determine their effect on each of the
cruise brands’ estimated fair values include industry and market conditions, macroeconomic conditions, changes to WACC, overall financial performance,
changes in fuel prices and capital expenditures. In determining the estimated fair values of cruise brands utilizing discounted future cash flow analysis for our
quantitative goodwill impairment tests, if any, 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, capital expenditures,
WACC of market participants, adjusted for the risk attributable to the geographic region in which the cruise brand operates and terminal values. 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 performing our qualitative assessments of our cruise brands’ significant trademarks, qualitative factors that we consider to determine their
effect on each of the cruise brands recorded trademarks’ estimated fair values include industry and market conditions, macroeconomic conditions, changes to
the WACC, changes to the royalty rates and overall financial performance. In determining our trademark estimated fair values for our quantitative impairment
tests, if any, 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 change in assumptions used or if there is a change in the conditions or circumstances influencing fair values, then we may
need to recognize an impairment charge.
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