Cogeco 2007 Annual Report Download - page 14

12 COGECO CABLE INC. 2007 Management’s Discussion and Analysis
Cogeco Cable capitalizes direct labour and direct overhead costs incurred to construct new assets, enhance existing assets
and connect new customers. Although capitalization of fi nancial expense is permitted for construction activities, it is the
Corporation’s policy not to capitalize them.
AMORTIZATION POLICIES AND USEFUL LIVES
Cogeco Cable amortizes fi xed assets and intangible assets with defi nite lives over the estimated useful lives of the items.
In estimating useful lives, the Corporation considers such factors as life expectancy of the assets, changing technologies
and cable industry trends. The Corporation reviews its useful lives estimates on a regular basis. If changes in the above-
mentioned factors happen more quickly than anticipated, Cogeco Cable might have to shorten the estimated lives of
certain
assets, which could result in a higher amortization expense in future periods.
CAPITALIZATION OF LAUNCH COSTS, COSTS TO ACQUIRE CUSTOMERS AND SUBSIDIES ON EQUIPMENT
The Corporation incurs signifi cant marketing costs during the launch of new services, such as new digital tiers, VOD, HSI
and Telephony services. These costs are capitalized and amortized over a period of fi ve years, the estimated period during
which these costs are to provide benefi t. Cogeco Cable’s experience indicates that it takes approximately fi ve years for the
new services to reach a certain maturity level.
In addition, signifi cant costs are incurred to reconnect customers and to attract new Basic Cable, HSI and Telephony
customers. These costs include material and labour costs incurred to reconnect customers as well as subsidies given to
customers on the sale of home terminal devices. Reconnect costs are capitalized up to a maximum amount not exceeding
the revenue generated by the reconnect activity. These costs are amortized over the average life of a customer’s subscription,
not exceeding four years, since no term is specifi ed for which the customer will receive the services. The average life of a
customer’s subscription is reviewed annually and changes could have a signifi cant impact on the amortization expense.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS WITH DEFINITE LIVES
The Corporation reviews, when a triggering event occurs, the carrying values of its long-lived assets and intangible assets
with defi nite lives by comparing the carrying amount of the asset or group of assets to the expected future undiscounted
cash fl ows to be generated by the asset or group of assets. An impairment loss is recognized when the carrying amount of
an asset or group of assets held for use exceeds the sum of the undiscounted cash fl ow expected from its use and eventual
disposal. The impairment loss is measured as the amount by which the asset carrying amount exceeds its fair value.
Future c ash fl ow is based on internal forecasts and consequently, considerable management judgement is necessary to
estimate future cash fl ow. Signifi cant changes in assumptions could result in impairment of these assets.
IMPAIRMENT OF INTANGIBLE ASSETS WITH INDEFINITE LIVES AND GOODWILL
The valuation of customer base and goodwill is subject to annual review for impairment or whenever signifi cant events or
changes in circumstances occur, to determine if the carrying value can be recovered. In conducting impairment testing,
the Corporation compares the carrying value to the sum of discounted cash fl ow. Future cash fl ow are based on internal
forecasts and discounted by using a weighted average cost of capital rate. Considerable management judgement is necessary
to estimate future cash fl ow. Signifi cant changes in assumptions could result in impairment of this asset. The Corporation’s
impairment test is performed as at August 31 of each fi scal 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 values of the items reported for accounting and tax purposes. Realisation
of future income tax assets is dependent upon generating suffi cient taxable income during the period in which temporary
differences are expected to be recovered or settled. The likelihood of realisation 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