Cogeco 2004 Annual Report Download - page 12

MANAGEMENT’S DISCUSSION AND ANALYSIS
10 Cogeco Cable Inc. 2004
Related Party Transactions
Cogeco Cable is a subsidiary of COGECO which holds 39.3% of the
Corporation’s equity shares. On September 1, 1992, Cogeco Cable
executed a management agreement with COGECO under which
the parent company agreed to provide certain executive, adminis-
trative, legal, regulatory, strategic and financial planning
services and additional services to the Corporation and its
subsidiaries (the “Management Agreement”). These services are
provided by COGECO’s officers, including the President and Chief
Executive Officer, the Vice President, Finance and Chief Financial
Officer and the Vice President, Corporate Affairs. No direct
remuneration is payable to such officers by the Corporation. The
Corporation however granted 48,037 stock options to COGECO’s
officers during the 2004 fiscal year, compared to 35,519 in the
2003 fiscal year.
Under the Management Agreement, the Corporation pays monthly
fees equal to 2% of its total revenue to COGECO for the above
mentioned services. In 1997, the management fee was capped at
$7 million per year, subject to annual upward adjustments based
on increases in the Consumer Price Index in Canada. Accordingly,
for the year ended August 31, 2004, the maximum amount of
$8 million was paid to COGECO, compared to $7.9 million in 2003,
which represents about 1.5% and 1.6% of the Corporation’s total
revenue, respectively. The Audit Committee of the Corporation
can increase the cap under certain circumstances upon request
to that effect by COGECO. In addition, the Corporation reimburses
COGECO’s out-of-pocket expenses incurred in respect of services
provided to the Corporation under the Management Agreement.
In fiscal 2005, the management fee will be increased, pursuant
to the Management Agreement, by 1.9% which is equal to the
increase in the Consumer Price Index in Canada.
Adoption of New Accounting Standards
Fiscal 2004
Stock-based Compensation
and Other Stock-based Payments
On September 1, 2003, Cogeco Cable early adopted the recom-
mendations of the CICA Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments, which defines,
among other things, recognition, measurement and disclosure
standards for stock-based compensation. The standard requires
the Corporation to use a fair-value-based method for all options
granted. Effective September 1, 2003, Cogeco Cable decided to
adopted the fair-value-based method on a prospective basis and
began accounting for stock options by measuring the compen-
sation cost for options granted on or after September 1, 2003
by using the binomial option pricing model. As a result of applying
these new recommendations, a compensation expense of $238,000
was recorded for fiscal 2004. Supplementary information required
under the new recommendations is presented in Note 9 on page 40.
Impairment of Long-lived Assets
In December 2002, the CICA issued Handbook Section 3063,
Impairment of Long-Lived Assets, which modifies existing guidance
on long-lived assets impairment measurements and establishes
standards for the recognition, measurement and disclosure of
the impairment of long-lived assets. The new standards require
that an impairment loss be recognized when the carrying amount
of an asset exceeds the sum of the undiscounted cash flows
expected from this asset. Cogeco Cable applied these new
recommendations and concluded that no impairment existed
as at August 31, 2004.
Hedging Relationships
In December 2001, the CICA issued Accounting Guideline 13
(“AcG-13”), Hedging Relationships, which establishes the criteria
for identification, designation, documentation and effectiveness
of hedging relationships for the purpose of applying hedge
accounting. Also, in June 2002, the Emerging Issues Committee
(EIC) issued EIC-128, Accounting for Trading Speculative or Non-
Hedging Derivative Financial Instruments. This EIC establishes that
a derivative financial instrument that does not qualify for hedge
accounting under AcG-13 should be recognized on the balance
sheet at fair value, with changes in fair value recognized in net
income. The Corporation adopted the recommendations of AcG-13
on September 1, 2003. Since Cogeco Cable is in compliance with
the requirements of AcG-13, the adoption of these new recom-
mendations had no impact on the Corporation’s consolidated
financial statements.
Generally Accepted Accounting Principles Hierarchy
In June 2003, the CICA issued Handbook Section 1100, Generally
Accepted Accounting Principles, which establishes standards for
financial reporting in accordance with GAAP and identifies other
sources to be consulted in selecting accounting policies and dis-
closures when a matter is not dealt with explicitly in the primary
source of GAAP. These new recommendations apply to fiscal years
beginning on or after October 1, 2003. Cogeco Cable examined
these new recommendations and concluded that, except for the
application of the new accounting policies on revenue recognition,
there was no impact on its financial statements.
Revenue Recognition
During fiscal 2004, Cogeco Cable adopted the CICA’s EIC Abstracts
141 and 142 issued in December 2003, regarding the timing of
revenue recognition and certain related costs and the classifi-
cation of certain items such as revenue, expense or capitalized
costs. Consequently, Cogeco Cable adopted the following changes:
• Installation revenues are now deferred and amortized over
the average life of a customer, which is four years. Previously,
these revenues were recognized immediately as they were
considered a partial recovery of direct selling costs incurred.
Upon billing, the portion of unearned revenue is now recorded
as deferred and prepaid income.