Carnival Cruises 2015 Annual Report Download - page 32

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis
Sales and Impairments of Ships
In November 2014, we sold the 672-passenger capacity Ocean Princess for a total gain of $24 million, of which
$14 million was recognized in the fourth quarter of 2014 as a reduction in other ship operating expenses. We
provided $66 million of financing to the buyer, which is due in semi-annual installments through November
2019. Prior to the ship’s delivery in March 2016, we will continue to operate it under a bareboat charter
agreement. As a result of the sale-leaseback accounting for this transaction, the remaining gain of $10 million is
being recognized as a reduction in other ship operating expenses over the term of the bareboat charter agreement
through March 2016.
In November 2014, we entered into a bareboat charter/sale agreement under which the 1,440-passenger capacity
Grand Holiday was chartered to an unrelated entity in January 2015 through March 2025. Under this agreement,
ownership of Grand Holiday will be transferred to the buyer in March 2025. This transaction did not meet the
criteria to qualify as a sales-type lease and, accordingly, it was accounted for as an operating lease whereby we
recognize the charter revenue over the term of the agreement. As a result of this transaction, we performed a ship
impairment review and recognized a $31 million impairment charge in other ship operating expenses during the
fourth quarter of 2014. The estimated fair value of the ship was substantially all determined based on the
expected collectability of the bareboat charter payments, which is considered a Level 3 input.
Due to the expected absorption of Ibero Cruises’ (“Ibero”) operations into Costa in November 2014, and certain
ship specific facts and circumstances, such as size, age, condition, viable alternative itineraries and historical
operating cash flows, we performed an undiscounted future cash flow analysis of Ibero’s Grand Celebration as
of May 31, 2014 to determine if the ship was impaired. The principal assumptions used in our undiscounted cash
flow analysis consisted of forecasted future operating results, including net revenue yields and net cruise costs
including fuel prices, and the estimated residual value, which are all considered Level 3 inputs, and the then
expected transfer of Grand Celebration into Costa in November 2014. Based on its undiscounted cash flow
analysis, we determined that the net carrying value for Grand Celebration exceeded its estimated undiscounted
future cash flows. Accordingly, we then estimated the May 31, 2014 fair value of this ship based on its
discounted future cash flows and compared the estimated fair value to its net carrying value. As a result, we
recognized a $22 million ship impairment charge in other ship operating expenses during the second quarter of
2014.
In December 2014, we entered into a bareboat charter/sale agreement under which the 1,492-passenger capacity
Costa Celebration (formerly Grand Celebration) was chartered to an unrelated entity in December 2014 through
August 2021. Under this agreement, ownership of Costa Celebration will be transferred to the buyer in August
2021. This transaction did not meet the criteria to qualify as a sales-type lease and, accordingly, it is being
accounted for as an operating lease whereby we recognize the charter revenue over the term of the agreement.
During the third quarter of 2013, we recognized $73 million and $103 million of impairment charges related to
Costa Voyager and Costa Classica, respectively. In November 2013, Costa Voyager was taken out-of-service,
and during the second quarter of 2014 Costa Voyager was sold and we recognized a $37 million gain as a
reduction in other ship operating expenses. The estimated fair values of these ships at the time of impairment
were based on their undiscounted cash flow analyses, which included principal assumptions similar to most of
those discussed above for Grand Celebration.
We recognized $53 million in 2014 and $176 million in 2013 of ship impairment charges in other ship operating
expenses.
30