Tucows 2013 Annual Report Download - page 85

During Fiscal 2103 and Fiscal 2012, we used derivative financial instruments to manage foreign currency exchange
risk. We account for these instruments in accordance with ASC Topic 815, “Derivatives and Hedging” (Topic 815), which
requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair
value as of the reporting date. Topic 815 also requires that changes in our derivative financial instruments’ fair values be
recognized in earnings, unless specific hedge accounting and documentation criteria are met (i.e. the instruments are
accounted for as hedges). We recorded the effective portions of the gain or loss on derivative financial instruments that were
designated as cash flow hedges in accumulated other comprehensive income in our accompanying Consolidated Balance
Sheets. Any ineffective or excluded portion of a designated cash flow hedge, if applicable, is recognized in net income.
For certain contracts, the Company has not complied with the documentation standards required for its forward
foreign exchange contracts to be accounted for as hedges and has, therefore, accounted for such forward foreign exchange
contracts at their fair values with the changes in fair value recorded in net income.
The fair value of the forward exchange contracts are determined using an estimated credit adjusted mark-to-market
valuation which takes into consideration the Company and the counterparty credit risk.
F-11
(m) Product development costs
Product development costs are expensed as incurred. The Company accounts for the costs of computer software
developed or obtained for internal use as follows: costs that are incurred in the preliminary stage of software development are
expensed as incurred. Costs incurred during the application and development stage are capitalized and generally include
external direct costs of materials and services consumed in the development and payroll and payroll- related costs for
employees who are directly associated with the development project. Costs incurred in the post implementation and operation
stage are expensed as incurred. During the years ended December 31, 2013, 2012 and 2011, the Company did not capitalize
any amounts of such costs relating to the development of internal use software. The capitalized costs of computer software
developed for internal use are amortized on a straight-line basis over one year from the date the software is put into use.
(n) Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in net income in the year that includes the enactment date. A valuation
allowance is recorded if it is not “more likely than not” that some portion of or all of a deferred tax asset will be realized.
The Company recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-
than-not to be sustained upon audit by the relevant taxing authority and includes consideration of interest and penalties. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The liability for
unrecognized tax benefits is classified as non-current unless the liability is expected to be settled in cash within 12 months of
the reporting date.
The Company is entitled to earn investment tax credits (“ITCs”), which are credits related to specific qualifying
expenditures as prescribed by Canadian Income Tax legislation. These ITCs relate primarily to research and development
expenses. The ITCs are recognized as a reduction in income tax expense once the Company has reasonable assurance that the
amounts will be realized.
(o) Stock-based compensation
Stock-based compensation expense recognized during the period is based on the value of the portion of stock-based
payment awards that is ultimately expected to vest. As stock-based compensation expense recognized in net income for 2013
is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
(p) Earnings per common share
Basic earnings per common share has been calculated on the basis of net income for the year divided by the
weighted average number of common shares outstanding during each year. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding at the end of the year assuming that they had been issued, converted or
exercised at the later of the beginning of the year or their date of issuance. In computing diluted earnings per share, the