Carnival Cruises 2014 Annual Report Download - page 50

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, geopolitical events, negative publicity and other factors that could
adversely impact our revenues, costs and expenses. You should read the above forward-looking statements
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 that 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 80% of our total assets at November 30, 2014. 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 2014, we have to estimate the 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 the
shorter of their or the ships’ estimated remaining useful life, 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 useful life of our ships and ship improvements based on our estimates of the period over which
the assets will be of economic benefit to us, including the impact of long-term vacation market conditions,
marketing and technical obsolescence, competition, physical deterioration, historical useful lives of similarly-
built ships, regulatory constraints and maintenance requirements. In addition, we consider estimates of the
weighted-average useful lives of the ships’ major component systems, such as the hull, cabins, main electric,
superstructure and engines. Taking all this into consideration, we have estimated our new ships’ useful lives at 30
years.
We determine the residual value of our ships based on our long-term estimates of their resale value at the end of
their useful life to us but before the end of their physical and economic lives to others, historical resale values of
our and other cruise ships and viability of the secondary cruise ship market. We have estimated our residual
values at 15% of our original ship cost.
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 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 useful 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 2014 ship depreciation expense would have increased by approximately $50 million
48