Carnival Cruises 2015 Annual Report Download - page 53

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 of 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 2015 ship depreciation expense would have increased by approximately $40 million
assuming we had reduced our estimated 30-year ship useful life estimate by one year at the time we took delivery
or acquired each of our ships. In addition, our 2015 ship depreciation expense would have increased by
approximately $210 million assuming we had estimated our ships to have no residual value at the time of their
delivery or acquisition.
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 we use
them. In addition, we believe that the estimates we made are reasonable and our methods consistently applied in
all material respects in determining (1) the useful life and residual values of our ships, including ship
improvements; (2) which 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 11 – “Fair Value Measurements, Derivative Instruments and Hedging Activities”
in the consolidated financial statements for a discussion of ship impairment charges recorded in 2014 and 2013.
We believe it is more-likely-than-not (“MLTN”) that each of our cruise brands’ estimated fair value that carry
goodwill at November 30, 2015 exceeded their carrying value. We also believe that it is MLTN that the
estimated fair value of each of our cruise brands’ trademarks recorded at November 30, 2015 exceeded their
carrying values. See Note 11 – “Fair Value Measurements, Derivative Instruments and Hedging Activities” in the
consolidated financial statements for additional discussion of our goodwill and trademark impairment reviews.
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