Cogeco 2009 Annual Report Download - page 13

12 COGECO CABLE INC. 2009 Management’s discussion and analysis
PURCHASE PRICE ALLOCATION
The allocation of the purchase prices for the Corporation’s acquisitions involves considerable judgement in determining the fair
values assigned to the tangible and intangible assets acquired and the liabilities assumed on acquisition. Among other things, the
determination of these fair values involves the use of discounted cash flow analyses, estimated future margins and estimated future
customers. Should actual rates and cash flows differ from these estimates, revisions to the carrying value of the related assets and
liabilities acquired may be required, including revisions that may impact net income in future periods.
IMPAIRMENT OF FIXED ASSETS AND INTANGIBLE ASSETS WITH FINITE USEFUL LIVES
The Corporation reviews, when a triggering event occurs, the carrying values of its fixed assets and intangible assets with finite
useful lives by comparing the carrying amount of the asset or group of assets to the expected future undiscounted cash flows 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 flows expected from its use and eventual disposal. The impairment
loss is measured as the amount by which the asset’s carrying amount exceeds its fair value. Future cash flows are based on internal
forecasts and consequently, considerable management judgement is necessary to estimate future cash flows. Significant changes in
assumptions could result in an impairment of these assets.
IMPAIRMENT OF INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES AND GOODWILL
The valuation of customer base and goodwill is subject to review for impairment annually or whenever significant 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 the expected future discounted cash flows. Future cash flows 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 flows. Significant changes in assumptions could result in an impairment of these assets. The Corporation’s
impairment tests are 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 expense.
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 recognized as financial expense, except for unrealized foreign exchange gains and losses
on foreign-denominated long-term debt that is designated as a hedge of a net investment in self-sustaining foreign subsidiaries,
which are included in the foreign currency translation adjustment in accumulated other comprehensive income, net of income taxes.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses cross-currency swap and interest rate swap agreements as derivative financial instruments to manage risks
from fluctuations in interest and foreign exchange rates related to its long-term debt. On September 1, 2007, the Corporation
classified all of its derivative financial instruments as held-for-trading. Held-for-trading assets and liabilities are carried at fair value