Cogeco 2008 Annual Report Download - page 11

10 COGECO CABLE INC. 2008 Management’s Discussion and Analysis
forecasts and discounted by using a weighted average cost of capital rate. Considerable management judgement is necessary to
estimate future cash flows. Significant changes in assumptions could result in an impairment of these assets. 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 expense as well as future income tax liabilities. This process includes
estimating the actual amount of income taxes payable and evaluating income tax loss carryforwards 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 sufficient 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 liabilities are calculated according to enacted or substantively
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. Future income tax assets are recognized only to the extent that, in the opinion of management, it is more
likely than not that the future income tax assets will be realized. Accordingly, changes in assumptions will directly impact the
reported amount of income tax expens.
FOREIGN CURRENCY TRANSLATION
Financial statements of self-sustaining foreign subsidiaries are translated into Canadian dollars using the rate in effect at the
balance sheet date for asset and liability items, and using the average exchange rates during the period for revenue and expenses.
Adjustments arising from this translation are deferred and recorded in the foreign currency translation adjustment in accumulated
other comprehensive income and are included in income only when a reduction in the investment in these foreign subsidiaries is
realized.
Other assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates prevailing
at the balance sheet date for monetary items and at the transaction date for non-monetary items. Revenue and expenses are
translated at the average rates prevailing during the period except for transactions being hedged, which are translated using the
terms of the hedges. Amounts payable or receivable on cross-currency swap agreements, all of which are used to hedge foreign
currency debt obligations, are recorded concurrently with the unrealized gains and losses on the obligations being hedged. Other
foreign exchange gains and losses are included in net income, except for unrealized foreign exchange gains and losses on long-
term debt denominated in foreign currencies that is designated as a hedge of a net investment in a self-sustaining foreign
subsidiaries, which are included in the foreign currency translation adjustment in accumulated other comprehensive income, net of
income taxes.
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 reasonably estimated based on currently available information. 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 Inc. (“COGECO”) which holds 32.3% of the Corporation’s equity shares, representing
82.7% of the votes attached to the Corporation’s voting 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 22,683 stock options to its officers, who also are COGECO’s officers, during
the 2008 fiscal year, compared to 319,647 in the 2007 fiscal year. During fiscal 2008, Cogeco Cable charged COGECO an amount
of $0.4 million with regards to Cogeco Cable’s options granted to COGECO’s employees compared to $0.3 million during
fiscal 2007.
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, 2008, the maximum amount of
$8.7 million was paid to COGECO, compared to $8.6 million in 2007, which represents about 0.8% of the Corporation’s total
revenue for fiscal 2008 compared to 0.9% for fiscal 2007. The Audit Committee of the Corporation can increase the cap under