Royal Caribbean Cruise Lines 2011 Annual Report Download - page 77

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ROYAL CARIBBEAN CRUISES LTD. 73
We review long-lived assets for impairment whenever
events or changes in circumstances indicate, based
on estimated undiscounted future cash flows, that
the carrying amount of these assets may not be fully
recoverable. We evaluate asset impairment for our
ships on an individual basis in accordance with ASC
360-10-35-23 (Property, Plant and Equipment), which
requires that, for purposes of recognition and mea-
surement of an impairment loss, long-lived assets be
grouped with other assets and liabilities at the lowest
level for which identifiable cash flows are largely inde-
pendent of the cash flows of other assets and liabilities.
The lowest level for which we maintain identifiable
cash flows that are independent of the cash flows of
other assets and liabilities is at the ship level.
We use the deferral method to account for drydocking
costs. Under the deferral method, drydocking costs
incurred are deferred and charged to expense on a
straight-line basis over the period to the next sched-
uled drydock, which we estimate to be a period of
thirty to sixty months based on the vessel’s age as
required by Class. Deferred drydock costs consist
of the costs to drydock the vessel and other costs
incurred in connection with the drydock which are
necessary to maintain the vessel’s Class certification.
Class certification is necessary in order for our cruise
ships to be flagged in a specific country, obtain liabil-
ity insurance and legally operate as passenger cruise
ships. The activities associated with those drydocking
costs cannot be performed while the vessel is in service
and, as such, are done during a drydock as a planned
major maintenance activity. The significant deferred
drydock costs consist of hauling and wharfage ser-
vices provided by the drydock facility, hull inspection
and related activities (e.g., scraping, pressure cleaning,
bottom painting), maintenance to steering propulsion,
stabilizers, thruster equipment and ballast tanks, port
services such as tugs, pilotage and line handling, and
freight associated with these items. We perform a
detailed analysis of the various activities performed
for each drydock and only defer those costs that are
directly related to planned major maintenance activi-
ties necessary to maintain Class. The costs deferred
are not otherwise routinely periodically performed to
maintain a vessel’s designed and intended operating
capability. Repairs and maintenance activities are
charged to expense as incurred.
Goodwill
Goodwill represents the excess of cost over the fair
value of net tangible and identifiable intangible assets
acquired. We review goodwill for impairment at the
reporting unit level annually or, when events or cir-
cumstances dictate, more frequently. The impairment
review for goodwill consists of a qualitative assess-
ment of whether it is more-likely-than-not that a
reporting unit’s fair value is less than its carrying
amount, followed by a two-step process of determining
the fair value of the reporting unit and comparing it to
the carrying value of the net assets allocated to the
reporting unit. Factors to consider when performing
the qualitative assessment include general economic
conditions, limitations on accessing capital, changes
in forecasted operating results, changes in fuel prices
and fluctuations in foreign exchange rates. If the quali-
tative assessment demonstrates that it is more-likely-
than-not that the estimated fair value of the reporting
unit exceeds its carrying value, it is not necessary to
perform the two-step goodwill impairment test. We
began performing this qualitative assessment in the
fourth quarter of 2011 as allowable per the newly
issued authoritative guidance described under the
heading Recently Adopted Accounting Standards
below. We may elect to bypass the qualitative assess-
ment and proceed directly to step one, for any report-
ing unit, in any period. We can resume the qualitative
assessment for any reporting unit in any subsequent
period. When performing the two-step process, if the
fair value of the reporting unit exceeds its carrying
value, no further analysis or write-down of goodwill is
required. If the fair value of the reporting unit is less
than the carrying value of its net assets, the implied
fair value of the reporting unit is allocated to all its
underlying assets and liabilities, including both recog-
nized and unrecognized tangible and intangible assets,
based on their fair value. If necessary, goodwill is then
written down to its implied fair value.
Intangible Assets
In connection with our acquisitions, we have acquired
certain intangible assets of which value has been
assigned to them based on our estimates. Intangible
assets that are deemed to have an indefinite life are
not amortized, but are subject to an annual impair-
ment test, or when events or circumstances dictate,
more frequently. The indefinite-life intangible asset
impairment test consists of a comparison of the fair
value of the indefinite-life intangible asset with its
carrying amount. If the carrying amount exceeds its
fair value, an impairment loss is recognized in an
amount equal to that excess. If the fair value exceeds
its carrying amount, the indefinite-life intangible asset
is not considered impaired.
Other intangible assets assigned finite useful lives are
amortized on a straight-line basis over their estimated
useful lives.
Contingencies—Litigation
On an ongoing basis, we assess the potential liabilities
related to any lawsuits or claims brought against us.
While it is typically very difficult to determine the tim-
ing and ultimate outcome of such actions, we use our
best judgment to determine if it is probable that we
will incur an expense related to the settlement or final
adjudication of such matters and whether a reason-
able estimation of such probable loss, if any, can be