Cogeco 2009 Annual Report Download - page 12

Management’s discussion and analysis COGECO CABLE INC. 2009 11
liabilities and revenue and expenses during the reporting year. A summary of the Corporation’s significant accounting policies is
presented in note 1 beginning on page 53 of the consolidated financial statements. The following accounting policies were identified
as critical to Cogeco Cable’s business operations.
REVENUE RECOGNITION
The Corporation considers revenue to be earned as services are rendered, provided that ultimately, collection is reasonably
assured. The Corporation earns revenue from several sources. The recognition of revenue from the principal sources is as follows:
• Revenue from Cable Television, HSI, Telephony and other telecommunication services are recognized when services are
rendered;
• Revenue generated from sales of home terminal devices is recorded as equipment revenue upon activation of services as
management considers the sale of home terminal devices as a single unit of accounting of a multiple element arrangement;
• Installation revenue is deferred and amortized over the average life of a customer’s subscription for residential customers,
which is four years, and over the term of the contract for business customers. Management considers that installation revenue
is part of a multiple element arrangement and has no standalone value. Accordingly, installation revenue is deferred and
amortized at the same pace as revenue from Cable Television, HSI, Telephony and other telecommunications services are
earned;
• Promotional offers are accounted for as deductions from revenue when customers take advantage of such offers.
Amounts received or invoiced that do not comply with these criteria are accounted for as deferred and prepaid revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The majority of the Corporation’s revenue is earned from residential and business customers. Accordingly, allowance for doubtful
accounts is calculated based on the specific credit risk of its customers by examining such factors as the number of overdue days of
the customer’s balance owing as well as the customer’s collection history with Cogeco Cable. As a result, conditions causing
fluctuations in the aging of customer accounts will directly impact the reported amount of bad debt expense.
ACCRUED LIABILITIES
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts
of accrued liabilities at the date of the financial statements and the reported amounts expensed during the year. Actual results could
differ from those estimates.
CAPITALIZATION OF DIRECT LABOUR AND OVERHEAD
Capitalization of costs includes the expenditures to acquire, construct, develop or improve an item of property, plant or equipment,
and includes all costs directly attributable to those activities. The cost of an item includes direct construction or software
development costs, such as materials, labour and overhead costs directly attributable to the construction or software development
activity. The cost to enhance the service potential of an item is considered an improvement and as a result is capitalized. Costs
incurred in the maintenance of service potential are expensed.
Cogeco Cable capitalizes direct labour and direct overhead costs incurred to construct new assets, enhance existing assets and
connect new customers. Although capitalization of financial expense is permitted for construction activities, it is the Corporation’s
policy not to capitalize financial expense for construction activities.
AMORTIZATION POLICIES AND USEFUL LIVES
Cogeco Cable amortizes fixed assets and intangible assets with finite useful lives over their estimated useful lives. In estimating
useful lives, the Corporation considers such factors as life expectancy of the assets, changing technologies and cable and
telecommunications 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 may have to shorten the estimated lives of certain assets,
which could result in a higher amortization expense in future periods.
CAPITALIZATION OF COSTS TO ACQUIRE CUSTOMERS
The Corporation incurs significant costs to reconnect or activate additional services for Basic Cable, HSI, Digital Television and
Telephony customers. These costs include material and labour costs incurred to reconnect or activate additional services for
customers. 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. The average life of
a customer’s subscription is reviewed annually and changes could have a significant impact on the amortization expense.