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S
haw
C
ommunications Inc
.
MANA
G
EMENT’
S
DI
SCUSS
I
O
N AND ANALY
S
I
S
August
,
Di
rect labour and overhead costs are ca
pi
tal
i
zed
i
n three
p
r
i
nc
ip
al areas
:
1
.
C
or
p
orate de
p
artments such as en
gi
neer
i
n
g
and
i
n
f
ormat
i
on technolo
gy (“
IT”
)
:
Engineering is primarily involved in overall planning and development of the cable
/
Internet/Di
g
ital Phone infrastructure. Labour and overhead costs directl
y
related to thes
e
act
i
v
i
t
i
es are ca
pi
tal
i
zed as the act
i
v
i
t
i
es d
i
rectl
y
relate to the
p
lann
i
n
g
and des
ig
no
f
the
c
onstruction of the distribution system. The IT department devotes considerable effort
s
towards the development of systems to support Digital Phone, WiFi, and projects relate
d
to new customer mana
g
ement, b
i
ll
i
n
g
and o
p
erat
i
n
g
su
pp
ort s
y
stems. Labour costs
d
irectly related to these and other projects are capitalized
.
2. Cable regional construction departments, which are principally involved in constructing
,
rebuilding and upgrading the cable/Internet/Digital Phone infrastructure: Labour and
o
verhead costs d
i
rectl
y
related to the construct
i
on act
i
v
i
t
y
are ca
pi
tal
i
zed as the act
i
v
i
t
i
es
di
rectly relate to the construct
i
on or upgrade o
f
the d
i
str
i
but
i
on system.
C
ap
i
tal pro
j
ect
s
i
nclude, but are not limited to, projects such as the new subdivision builds, increasing
network ca
p
ac
i
t
yf
or Internet, D
igi
tal Phone and V
O
Db
y
reduc
i
n
g
the number o
f
homes
f
ed
f
rom each node, and upgrades o
f
plant capac
i
ty,
i
nclud
i
ng the DNU pro
j
ect, and the
W
iFi build
.
3. Subscriber-related activities such as installation of new drops and Internet and Digita
l
P
hone serv
i
ces: The labour and overhead d
i
rectl
y
related to the
i
nstallat
i
on o
f
ne
w
serv
i
ces are cap
i
tal
i
zed as the act
i
v
i
ty
i
nvolves the
i
nstallat
i
on o
f
cap
i
tal assets
(i
.e.
,
wiring, software, etc.) which enhance the service potential of the distribution system
throu
g
h the ab
i
l
i
t
y
to earn
f
uture revenues.
C
osts assoc
i
ated w
i
th serv
i
ce calls
,
c
ollect
i
ons, d
i
sconnects and reconnects that do not
i
nvolve the
i
nstallat
i
on o
f
a cap
i
tal
asset are expensed.
Amounts of direct labour and direct overhead capitalized fluctuate from year to year depending
o
n the level o
f
customer
g
rowth and
p
lant u
pg
rades
f
or new serv
i
ces. In add
i
t
i
on, the level o
f
cap
i
tal
i
zat
i
on
f
luctuates depend
i
ng on the proport
i
on o
fi
nternal labour versus external
contractors used in construction projects.
The percentage of direct labour capitalized in many cases is determined by the nature o
f
em
p
lo
y
ment
i
nas
p
ec
ifi
cde
p
artment. For exam
p
le, a s
ig
n
ifi
cant
p
ort
i
on o
f
labour and d
i
rec
t
o
verhead of the cable regional construction departments is capitalized as a result of the nature
o
f the activity performed by those departments. Capitalization is also based on piece rate work
p
er
f
ormed b
y
un
i
t-based em
p
lo
y
ees wh
i
ch
i
s tracked d
i
rectl
y
. In some cases, the amount o
f
capitalization depends on the level of maintenance versus capital activity that a departmen
t
performs. In these cases, an analysis of work activity is applied to determine this percentag
e
s
p
l
i
t.
iv) Amortization policies and useful live
s
The
C
om
p
an
y
amort
i
zes the cost o
fp
ro
p
ert
y
,
p
lant and e
q
u
ip
ment and other
i
ntan
gi
bles ove
r
t
h
e est
im
ated use
f
u
l
se
rvi
ce
liv
es o
f
t
h
e
i
te
m
s
.Th
ese est
im
ates o
f
use
f
u
l liv
es
inv
o
lv
e
considerable judgment. In determining these estimates, the Company takes into account
i
ndustr
y
trends and com
p
an
y
-s
p
ec
ifi
c
f
actors,
i
nclud
i
n
g
chan
gi
n
g
technolo
gi
es and ex
p
ectat
i
ons
f
or the in-service period of these assets. On an annual basis, the Company reassesses its
existing estimates of useful lives to ensure they match the anticipated life of the technolog
y
f
rom a revenue-
p
roduc
i
n
gp
ers
p
ect
i
ve. I
f
technolo
gi
cal chan
g
eha
pp
ens more
q
u
i
ckl
y
or
i
n
a
d
ifferent way than the Company has anticipated, the Company may have to shorten the
27