Royal Caribbean Cruise Lines 2004 Annual Report Download - page 25

NOTE 1. GENERAL
DESCRIPTION OF BUSINESS
We are a global cruise company. We operate two cruise
brands, Royal Caribbean International and Celebrity Cruises,
with 19 and 10 cruise ships, respectively, at December 31,
2004. Our ships operate on a selection of worldwide itineraries
that call on approximately 160 destinations.
BASIS FOR PREPARATION OF CONSOLIDATED FINANCIAL
STATEMENTS
The consolidated financial statements are prepared in accor-
dance with accounting principles generally accepted in the
United States and are presented in United States dollars.
Estimates are required for the preparation of financial state-
ments in accordance with generally accepted accounting prin-
ciples. Actual results could differ from these estimates. All
significant intercompany accounts and transactions are elimi-
nated in consolidation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
REVENUES AND EXPENSES
Deposits received on sales of passenger cruises represent
unearned revenue and are initially recorded as customer
deposit liabilities on our balance sheet. Customer deposits are
subsequently recognized as passenger ticket revenues,
together with revenues from onboard and other goods and
services and all associated direct costs of a voyage, upon com-
pletion of voyages with durations of ten days or less and on a
pro rata basis for voyages in excess of ten days.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and marketable secu-
rities with original maturities of less than 90 days.
INVENTORIES
Inventories consist of provisions, supplies and fuel carried at
the lower of cost (weighted-average) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulat-
ed depreciation and amortization. We capitalize interest as
part of the cost of acquiring certain assets. Improvement
costs that we believe add value to our ships arecapitalized
as additions to the ship and depreciated over the improve-
ments’ estimated useful lives. Costs of repairs and mainte-
nance are charged to cruise operating expenses as incurred
and drydocking costs are accrued evenly over the period to
the next scheduled drydocking. The estimated cost and
accumulated depreciation of refurbished or replaced ship
components are written-off and any resulting gain or loss is
recognized in cruise operating expenses. Liquidated dam-
ages received from shipyards as a result of late delivery of
new ships are deferred and amortized in other income over
the period to which they relate, net of related expenses. We
review long-lived assets for impairment whenever events or
changes in circumstances indicate, based on estimated
future cash flows, that the carrying amount of these assets
may not be fully recoverable.
Depreciation of property and equipment, which includes amor-
tization of ships under capital leases, is computed using the
straight-line method over estimated useful lives of primarily 30
years for ships, net of a 15% projected residual value, the
shorter of the lease termor related asset life for leasehold
improvements and three to forty years for other property and
equipment. (See Note 4.
Property and Equipment .)
GOODWILL
Goodwill represents the excess of cost over the fair value
of net assets acquired. Wereview goodwill for impairment
annually or whenever events or changes in circumstances
indicate that the carrying amount of goodwill may not be
fully recoverable.
ADVERTISING COSTS
Advertising costs are expensed as incurred except those
costs which result in tangible assets, such as brochures,
which aretreated as prepaid expenses and charged to
expense as consumed. Advertising costs consist of media
advertising as well as brochure, production and direct mail
costs. Media advertising was $133.2 million, $119.2 million
and $97.9 million, and brochure, production and direct mail
costs were $82.2 million, $73.5 million and $69.5 million for
the years 2004, 2003 and 2002, respectively.
DERIVATIVE INSTRUMENTS
We enter into various forward, swap and option contracts to
manage our interest rate exposure and to limit our exposure to
fluctuations in foreign currency exchange rates and fuel prices.
Generally these instruments are designated as hedges and are
recorded on the balance sheet at their fair value. Our derivative
instruments arenot held for trading or speculative purposes.
At inception of the hedge relationship, a derivative instrument
that hedges the exposureto changes in the fair value of a rec-
ognized asset or liability, or a firm commitment is designated as
afair value hedge. A derivative instrument that hedges a fore-
ROYAL CARIBBEAN CRUISES LTD. 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS