Cogeco 2005 Annual Report Download - page 17

Impairment of Long-Lived Assets
The valuation of all long-lived assets is subject to annual
review for impairment or whenever significant events or changes
in circumstances occur, to determine if carrying value can be
recovered. In conducting impairment testing, the Corporation
compares the carrying value to the sum of undiscounted cash flows.
Future cash flows are based on internal forecasts and consequently,
considerable management judgment is necessary to estimate future
cash flows. Significant changes in assumptions could result
in impairment of these assets. The Corporation’s impairment
test is performed as at August 31 of each fiscal year.
Impairment of Customer Base
The valuation of customer base is subject to review for impairment
annually or whenever significant events or changes in circumstances
occur, to determine if carrying value can be recovered. In conducting
impairment testing, the Corporation compares the carrying value
to the sum of discounted cash flows. Future cash flows are based
on internal forecasts and discounted by using a weighted average
cost of capital rate. Considerable management judgment is necessary
to estimate future cash flows. Significant changes in assumptions
could result in impairment of this asset. The Corporation’s impairment
test is performed as at August 31 of each fiscal year.
Income Taxes
The Corporation uses assumptions to estimate income tax expenses
as well as future income tax liabilities. This process includes
estimating the actual amount of income taxes payable and evaluating
income tax loss carry-forwards and temporary differences as
a result of differences between the value of the items reported
for accounting and tax purposes. Realization of future income tax
assets is dependant upon generating sufficient taxable income
during the period in which temporary differences are deductible.
The likelihood of realization of future income tax assets is evaluated
by considering such factors as estimated future earnings based
on internal forecasts, prudent and feasible tax planning strategies
and reversal of temporary differences that result in future income
tax liabilities. Future income tax assets and liabilities are calculated
according to enacted or substantially enacted income tax rates
expected to be applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Accordingly, changes in assumptions will directly impact the reported
amount of income tax expenses.
Contingencies and Commitments
The Corporation is subject to various claims and contingencies
related to lawsuits, taxes and commitments under contractual
and other commercial obligations. The contractual and other
commercial obligations primarily relate to network fees and operating
lease agreements for use of transmission facilities. The Corporation
recognizes liabilities for contingencies and commitments when
a loss is probable and can be estimated. Significant changes
in assumptions as to the likelihood and estimates of a loss could
result in the recognition of an additional liability.
Related Party Transactions
Cogeco Cable is a subsidiary of COGECO which holds 39.2% of the
Corporation’s equity shares. As of September 1, 1992, Cogeco Cable
executed a management agreement with COGECO under which
the parent company agreed to provide certain executive,
administrative, 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 granted 38,397 stock options to its officers, who
also are COGECO’s officers, during the 2005 fiscal year, compared
to 48,037 in the 2004 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, 2005, the maximum amount of
$8.2 million was paid to COGECO, compared to $8 million in 2004,
which represents about 1.5% of the Corporation’s total revenue,
for both fiscal years. 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 to services
provided to the Corporation under the Management Agreement.
In fiscal 2006, the management fee will be increased, pursuant
to the Management Agreement, by 2.6% which is equal
to the increase in the Consumer Price Index in Canada.
Cogeco Cable Inc. 2005
15
Management’s Discussion and Analysis