Shaw 2010 Annual Report Download - page 29

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customers on the sale of equipment (the equipment is sold to the customer at a subsidized price).
The Company defers the entire cost of the equipment, including the subsidy portion, as it has
determined that this excess cost will be recovered from future subscription revenues and that the
investment by the customer in the equipment creates value through increased retention. Under US
GAAP, the Company is required to expense this excess immediately.
Shaw Tracking equipment revenue
Shaw Tracking equipment revenue is recognized over the period of the related service contract for
airtime, which is generally five years.
In conjunction with Shaw Tracking equipment revenue, the Company incurs incremental direct
costs which include equipment and related installation costs. These direct costs cannot be
separated from the undelivered tracking service included in the multiple deliverable arrangement.
Under CICA Handbook Section 3031 “Inventories”, these costs represent inventoriable costs and
are deferred and amortized over the period of five years, consistent with the recognition of the
related tracking equipment revenue.
Shaw Business Solutions
The Company also receives installation revenues in its Shaw Business Solutions operation on
contracts with commercial customers which are deferred and recognized as service revenue on a
straight-line basis over the related service contract, generally spanning two to ten years. Direct and
incremental costs associated with the service contract, in an amount not exceeding the upfront
installation revenue, are deferred and recognized as an operating expense on a straight-line basis
over the same period.
Subscriber connection and installation costs
The costs of physically connecting a new home are capitalized as part of the Company’s distribution
system as the service potential of the distribution system is enhanced by the ability to generate
future subscriber revenue. Costs of disconnections are expensed as incurred as the activity does not
generate future revenue.
Income statement classification
The Company distinguishes amortization of deferred equipment revenue and deferred equipment
costs from the revenue and expenses recognized from ongoing service activities on its income
statement. Equipment revenue and costs are deferred and recognized over the anticipated term of
the related future revenue (i.e., the monthly service revenue) with the period of recognition
spanning two to five years. As a result, the amortization of deferred equipment revenue and
deferred equipment costs are non-cash items on the income statement, similar to the Company’s
amortization of deferred IRU revenue, which the Company also segregates from ongoing revenue.
Further, within the lifecycle of a customer relationship, the customer generally purchases customer
premise equipment at the commencement of the customer relationship, whereas the subscription
revenue represents a continuous revenue stream throughout that customer relationship. Therefore,
the segregated presentation provides a clearer distinction within the income statement between
cash and non-cash activities and between up-front and continuous revenue streams, which assists
financial statement readers to predict future cash flows from operations.
ii) Allowance for doubtful accounts
The majority of the Company’s revenues are earned from selling on credit to individual subscribers.
Because there are some customers who do not pay their debts, selling on credit necessarily involves
25
Shaw Communications Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
August 31, 2010