Answer 1)
The company recognize the amount received from hotel, tour and transportation at the time services are provided to the customers. Various sources of revenue for the company and their respective classification is as follows:
- Amount deposited by the customers on account of cruise deposits represents unearned revenue which are the then classified as cruise revenues along with revenue earned from onboard activities . These revenues are recognized on completed voyage or pro rata basis.
- Further, the revenue earned from sales to guests of air and other transportation to and from the ships is recorded in cruise passenger ticket revenues. However this revenue includes government taxes and fees which vary with head counts of the guests and the corresponding portion of fees and taxes is expensed as commission while the corresponding revenue is recognized.
- The fees collcted from sale of third party shore excursions and on behalf of onboard concessionaries, net of amounts remitted to them are recorded as concession revenues and are recognized on completed voyage or pro rata basis as like deposits from customers.
- Finally, as for the revenue earned from leased ships to unaffiliated third parties are recognized ratably over the term of charter agreement using straight line basis.
In terms of upcoming revenue recognition policy where the FASB and IASB has issued new rules in order to promote convergence between two accounting standards. This will surely change the way US Companies recognize their revenues and also revenue recognition policy of Carnival because as per proposed plans, companies which are likely to have contingent revenues may wait until the contingents amount are known and shall book the amount only when revenue is recognized.
However, as per new revenue recognition rules companies that have contingent revenues are required to make reasonable estimates that the company expects and shall aslo allocate contingent portion to upfront deliverables. Thus the companies will have to track the portion of contingent revenue over the life of revenue arrangement to estimate if adjustment to revenue is required after considering facts and circumstances relating to period of estimate.
Conclusion:
The new revenue recognition rules will affect Carnival as currently company recognize revenue on completed voyage or pro-rata basis and does not consider it material to financial statements. However, with new rules, the company will not be able to recognize full revenue on customer deposits and amount recorded as concession revenue revenue from sale of third party shore excursions.
Carnival’s Non-GAAP Information:
Since the cruise brands of the company utilize Euro, Sterlings and Australian Dollars to measure their results and financial condition, the currency transaltion of these operations to US Dollar will result in gains or losses from foreign currency translation depending upon appreciation or depreciation of US Dollar.
Thus in order to simplify the reporting quality, the company also reports these financial measures according to non-GAAP measures where it assumes constant exchange rate/constant dollar basis in order to remove the impact of changes in exchange rates on company’s non-US dollar cruise operations.
This reporting practice will be useful for an average/non-professional investor as it will facilitates a comparison over the growth of company’s business in a fluctuating currency exchange rate environment.
Analyzing Profitability and Cash Flow Trend:
In terms of profitability, the trend has been upside- down during 3 financial years of 2009, 2010 and 2011. The year 2011 was not good for the company probably after the company lost the customer faith after it displayed inferior on ship management after the disaster of Triumph Cruise in 2011.
Until 2010 everything seems fine and profitable for the company. The company recorded 7.50% increase in revenue from 2009 to 2010, which was supported by 10.50% increase in net profit and a $0.24 increase in earnings per share, as the company declared earning per share of $ 2.51.
Also the operating earnings of the company were increased by 9% during this period.
The year of 2011 was disastrous for the company and the same was evident in the company’s financial statements.
Though the revenue from customers deposits and on board sales and other sources were increased to $15793 during the year, showing increasing of 9.15% as compared to 2010, the operating income and net profit margins of the company went on decreasing trend.
The 3.91% decrease in operating earnings of the company from 2010 to 2011 was attributed to high operating expenses which increased by approx 11.5% and offset the increase in revenue recorded.
Cash Flow Analysis:
As like the trend in profitability of the company, the same trend can be seen in cash flow statement of the company.
For 2010, company experienced increase in cash flow from operating activities by 14.24%. With increase in investing activities relating to purchase of property, plant and equipment and financing activities company ended up with total cash $429 million a decrease of 20% from 2009.
However, the decrease was justifiable on the basis of increase in purchase of plant, property and equipment and an increase of 334% in financing actvity primarily for repayment of long term debt amounting to $1243.
Further low dividend payout of $237 millions in accordance to low cash available during the year, justifies that till now the company is not manipulating its financial statements.
This was the year of concern for the company and the same is evident in their cash flow statement. The company ended with net income of $1912 and low operating cash flow of $3766, a decrease of 1.36% as compared to 2010.
However, the company managed to end up with cash flow of $450 by the end of 2011. This was mainly attributed to increase in cash flow from proceeds received from issuance of long term debt securities amounting to $1696 million.
Another interesting analyzes from company’s cash flow was the increase in dividend payment. Despite the company had disastrous financial year and reduced net profits, company increased its dividend payout by 183% from 2010 to 2011. This is surely a point of analysis for the investors as company might be manipulating its financial statements for the sake of its shareholders in order to show them a vague picture of the company financial position and keeping them satisfied with high dividends.
Is Carnival manipulating its financial statements?
Analyzing the financial statements of the company, we can conclude that the company is manipulating its accounts to show a vague image to its shareholders. The accident of Triumph Cruise during January 2011 posed both financial and customer satisfaction risk to the company. Thus in order to keep the shareholders satisfied company issued a high dividend during 2011 despite it was not profitable for the company to do so and also not enough cash was available and amount so issued as dividend could have been retained as reserves so as to meet the probable tough times after the accident.
Low net profits, low operating profits, low operating cash flows-this all indicates that the financial health of the company was deeply affected during 2011, despite of it, the announcement of high dividend is surely a sign of unfair practice.
Also the current revenue recognition policy of the company where it recognized the customer deposits on completed voyage versus pro rata basis allows early revenue reognition which increases the revenue amount of the company.
However, with upcoming new revenue rules, revenue recognition figures of the company are surely to be affected.
Next 5 year expectations:
On the basis of current financial news and the corporate image of Carnival Corporation, the upcoming couple of financial years of the giant cruise company does not seem to be good. However, in a combined average of 5 years, the company is expected to have a growth in its revenue and earnings of 14.72%.
The reason for current and some more years of tough times for Carnival is primarily because of low trust of customers in the company after 2011 accident and then the long list of pending litigation and lawsuist by the customers. However, with continued efforts of the management of Carnival Cruise, company is likely to be in profitable figures in coming years.
Although as of now, the bookings have been really low for the company and the one which the company have is at old prices
CEO of the company Arnold Donald says that despite those facts, progress is being made. “During the past few months, Carnival Cruise Lines has seen a steady improvement in brand perception among U.S. consumers based on national market research data.”
The expansion the expansion plan in Asia where the company is increasing their offices in China after a new office in Singapore along with heavy expenditure on consumer advertisement, new bonus plans etc are the factors being employed by the company to get back on track.
Credit and Bankruptcy Risk:
The credit rating agency Moody has maintained the credit rating of Baa1 for the company’s note issue and also with Carnival Cruise sailing on rough tides, the market expects the company to announce bankruptcy.
At first the tragedy of 2011 triumph cruise and then during 2012, one of the luxury ship of the company was capsized near Italy coast and the crew members were ordered to deploy the ship and thus some serious injuries and deaths were reported.
The company is losing the trust of its customers and is also low on booking for 2014 and whatever booking it has is at old prices. The company’s stock is also not going good with a negative return of -12.12% since past one year and negative fundamentals in terms of revenue and earnings growth of -2.60% and -17.57% respectively.
However, with new expansion plans and expected earning growth of 14.72% in next 5 years, it is expected that company shall survive and will not be forced to declare bankruptcy.
Works Cited
Carnival Cruise Limited. Annual Report. Annual Report. USA, 2011.
CNN Money. Carnival Corp. 11 October 2013. 13 October 2013 <http://money.cnn.com/quote/quote.html?symb=CCL>.
OpenJaw. Carnival Q3 Beats Expectations Despite Earnings Decline. 2013. 13 October 2013 <http://www.openjaw.com/stories/story.php?id=3511/Carnival_Q3_Beats_Expectations_Despite_Earnings_Decline>.
Price Waterhouse Coopers. Accounting for revenue recognition: More critical than ever. 13 October 2013 <http://www.pwc.com/us/en/audit-assurance-services/accounting-advisory/revenue-recognition.jhtml>.
Seeking Alpha. Carnival Cruise Lines Will Survive, But Investors Should Monitor The Situation. 16 January 2012. 13 October 2013 <http://seekingalpha.com/article/319759-carnival-cruise-lines-will-survive-but-investors-should-monitor-the-situation>.
Turnage, James. Carnival Cruise Headed for Bankruptcy? 14 March 2013. 13 October 2013 <http://guardianlv.com/2013/03/carnival-cruise-headed-for-bankruptcy/>.
