2016 Annual Report for Norwegian Cruiseline Holdings - F-22

The effects on the consolidated financial statements of the interest rates swap contract which was not designated as a hedging instrument was as
follows (in thousands):
2016

Loss recognized in other income (expense), net

$

Year Ended December 31,
2015

-

$

2014

(2) $

(3)

Other
The carrying amounts reported in the consolidated balance sheets of all other financial assets and liabilities approximate fair value.
Long-Term Debt
As of December 31, 2016 and 2015, the fair value of our long-term debt, including the current portion, was $6,525.7 million and $6,495.5
million, respectively, which was $11.6 million higher and $6.6 million lower, respectively, than the carrying values. The difference between the
fair value and carrying value of our long-term debt is due to our fixed and variable rate debt obligations carrying interest rates that are above or
below market rates at the measurement dates. The fair value of our long-term debt was calculated based on estimated rates for the same or similar
instruments with similar terms and remaining maturities resulting in Level 2 inputs in the fair value hierarchy. Market risk associated with our
long-term variable rate debt is the potential increase in interest expense from an increase in interest rates. The calculation of the fair value of our
long-term debt is considered a Level 2 input.
Non-recurring Measurements of Non-financial Assets
Goodwill and other indefinite-lived assets, principally tradenames, are reviewed for impairment on an annual basis or earlier if there is an event or
change in circumstances that would indicate that the carrying value of these assets could not be fully recovered.
We believe our estimates and judgments with respect to our long-lived assets, principally ships, and goodwill and other indefinite-lived intangible
assets are reasonable. Nonetheless, if there was a material change in assumptions used in the determination of such fair values or if there is a
material change in the conditions or circumstances that influence such assets, we could be required to record an impairment charge. We estimate
fair value based on the best information available making whatever estimates, judgments and projections considered necessary. For our Step I
Test, the estimation of fair value measured by discounting expected future cash flows at discount rates commensurate with the risk involved are
considered Level 3 inputs. As of December 31, 2016, our annual review supports the carrying value of these assets.
10.

Employee Benefits and Share-Based Compensation
Management NCL Corporation Units
In 2009, we adopted a profits sharing agreement which authorized us to grant profits interests in the Company to certain key employees. These
interests generally vested with the holders based on a combination of performance-based and time-based vesting metrics, each as specified in the
profits sharing agreement and each holder's award agreement. Genting HK, the Apollo Holders and the TPG Viking Funds were entitled to
initially receive any distributions made by the Company, pro-rata based on their shareholdings in the Company. Once Genting HK, the Apollo
Holders and the TPG Viking Funds received distributions in excess of certain hurdle amounts specified in the profits sharing agreement and each
holder's award agreement, each vested profits interest award generally entitled the holder of such award to a portion of such excess distribution
amount. In connection with the Corporate Reorganization, NCLC's outstanding profits interests granted under its profits sharing agreement to
management (or former management) of NCLC were exchanged for an economically equivalent number of NCL Corporation Units. We refer to
the NCL Corporation Units exchanged for profits interests granted under the profits sharing agreement as "Management NCL Corporation Units."
The Management NCL Corporation Units received upon the exchange of outstanding profits interests were subject to the same time-based vesting
requirements and performance-based vesting requirements applicable to the profits interests for which they were exchanged.
We accounted for the exchange of the outstanding profits interests for the economically equivalent number of Management NCL Corporation
Units and share-based option awards as an award modification. An award modification requires that the fair value of the awards immediately
before the modification and immediately after the modification be determined. We engaged a third-party valuation firm to assist in the completion
of a valuation which was derived using a binomial lattice model. It was determined that the post-modification award value derived greater value
versus the pre-modification award value, resulting in the recognition of incremental compensation expense. At the date of award modification,
approximately $5.5 million of incremental cost associated with vested awards was charged to share-based compensation, with the remaining
unvested portion to be charged over the remaining vesting period.
The Management NCL Corporation Units, generally consisted of fifty percent of "Time-Based Units" ("TBUs") and fifty percent of
"Performance-Based Units" ("PBUs"). The TBUs generally vested over five years and upon a distribution event, the vesting amount of the PBUs
was based on the amount of proceeds that are realized above certain hurdles.
In the fourth quarter of 2014, all Management NCL Corporation Units were exchanged for NCLH ordinary shares and restricted shares under a
management exchange agreement (the "Management Exchange Agreement"). NCLH became the sole member and 100% owner of the economic
interests in NCLC and the non-controlling interest no longer exists as of December 31, 2014. Accordingly, NCLC is now treated as a disregarded
entity for U.S. federal income tax purposes. No new NCLC profits interests or Management NCL Corporation Units will be issued; however,
NCLH has granted, and expects to continue to grant, equity to its employees and members of its Board of Directors under its long-term incentive
F-22
Table of Contents for the Digital Edition of 2016 Annual Report for Norwegian Cruiseline Holdings
