Carnival Cruises 2015 Annual Report Download - page 54

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. The principal assumptions used to calculate our discounted future cash flows
include forecasted future operating results over the expected period we believe the ships will have economic
benefit to us and their estimated residual values.
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 brand’s 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, significant judgments are made related to
forecasted operating results, including net revenue yields and net cruise costs including fuel prices; capacity
changes, including the expected rotation of vessels into, or out of, the cruise brand; WACC of market
participants, adjusted for the risk attributable to the geographic regions in which the cruise brand operates; capital
expenditures; proceeds from forecasted dispositions of ships and terminal values.
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 brand’s recorded trademarks’ estimated
fair values include industry and market conditions, macroeconomic conditions, changes to the WACC, changes
in royalty rates and overall financial performance. In determining our trademark estimated fair values for our
quantitative impairment tests, 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 that we are
relieved from having to pay for the use of the associated trademarks is based upon forecasted cruise revenues and
a market participant’s royalty rate. 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 in the future, then we may need to recognize an
impairment charge.
Contingencies
We periodically assess the potential liabilities related to any lawsuits or claims brought against us, as well as for
other known unasserted claims, including environmental, legal, regulatory, guest and crew and tax matters. In
addition, we periodically assess the recoverability of our trade and other receivables and our charter-hire and
other counterparty credit exposures, such as contractual nonperformance by our Asian ship charter tour operators
and financial and other institutions with which we conduct significant business. Our credit exposure also includes
contingent obligations related to cash payments received directly by travel agents and tour operators for cash
collected by them on cruise sales in Australia and most of Europe where we are obligated to honor our guests’
cruise payments made by them to their travel agents and tour operators regardless of whether we have received
these payments. While it is typically very difficult to determine the timing and ultimate outcome of these matters,
we use our best judgment to determine if it is probable, or MLTN for income tax matters, that we will incur an
expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of
such probable or MLTN loss, if any, can be made. In assessing probable losses, we make estimates of the amount
of probable insurance recoveries, if any, which are recorded as assets. We accrue a liability and establish a
reserve when we believe a loss is probable or MLTN for income tax matters, and the amount of the loss can be
reasonably estimated in accordance with U.S. GAAP. Such accruals and reserves are typically based on
developments to date, management’s estimates of the outcomes of these matters, our experience in contesting,
litigating and settling other similar non-income tax matters, historical claims experience, actuarially determined
estimates of liabilities and any related insurance coverages. See Note 8 – “Contingencies,” Note 9 – “Taxation”
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