Cogeco 2010 Annual Report Download - page 26

Management’s Discussion and Analysis (MD&A) COGECO CABLE INC. 2010 25
Impairment of goodwill and intangible assets
During fiscal 2009, the competitive position of Cabovisão, in Portugal further deteriorated due to the continuing difficult competitive environment
and recurring intense promotions and advertising initiatives from competitors in the Portuguese market. Please refer to “European operations”
section for further details. In accordance with applicable accounting standards, management considered that the continued customer, local
currency revenue and operating income before amortization decline were more severe and persistent than expected, resulting in a decrease in
the value of the Corporation’s investment in the Portuguese subsidiary. As a result, the Corporation tested goodwill and all long-lived assets for
impairment at February 28, 2009.
Goodwill is tested for impairment using a two step approach. The first step consists of determining whether the fair value of the reporting unit to
which goodwill is assigned exceeds the net carrying amount of that reporting unit, including goodwill. In the event that the net carrying amount
exceeds the fair value, a second step is performed in order to determine the amount of the impairment loss. The impairment loss is measured
as the amount by which the carrying amount of the reporting unit’s goodwill exceeds its fair value. The Corporation completed its impairment
tests on goodwill and concluded that goodwill was impaired at February 28, 2009. As a result, a non-cash impairment loss of $339.2 million was
recorded in the second quarter of the 2009 fiscal year. Fair value of the reporting unit was determined using the discounted cash flow method.
Future cash flows were based on internal forecasts and consequently, considerable management judgement was necessary to estimate future
cash flows. Significant future changes in circumstances could result in further impairments of goodwill.
Intangible assets with finite useful lives, such as customer relationships, must be tested for impairment by comparing the carrying amount of the
asset or group of assets to the expected future undiscounted cash flow to be generated by the asset or group of assets. The impairment loss is
measured as the amount by which the asset or group of assets’ carrying amount exceeds its fair value. Accordingly, the Corporation completed
its impairment test on customer relationships at February 28, 2009, and determined that the carrying value of customer relationships exceeded
its fair value. As a result, a non-cash impairment loss of $60.4 million was recorded in the second quarter of the 2009 fiscal year.
The impairment loss affected the Corporation’s financial results as follows during fiscal 2009:
(in thousands of dollars) $
Impairment of goodwill 339,206
Impairment of customer relationships 60,442
Future income taxes (16,018)
Impairment loss net of related income taxes 383,630
At August 31, 2010 and 2009, the Corporation tested the value of goodwill for impairment, and concluded that no impairment existed.
Income taxes
For fiscal 2010, income tax expense amounted to $29 million compared to $56.8 million in 2009. The decrease in income taxes is mainly due to
the reduction in corporate income tax rates announced on March 26, 2009 by the Ontario provincial government and considered substantively
enacted on November 16, 2009 (the “reduction of the Ontario provincial corporate income tax rates”). These lower corporate income tax rates
reduced future income tax expense by $29.8 million in fiscal 2010. The income tax expense for the prior year included a future income tax
recovery of $16 million related to the impairment loss recorded on the Corporation’s investment in the Portuguese subsidiary, partly offset by an
unfavourable impact of $6.1 million resulting from the recognition and subsequent utilization of Cabovisão’s pre-acquisition income tax losses
following the receipt of tax audit reports for the 2003, 2004 and 2005 fiscal years and an unfavourable impact of $6.4 million from the income
taxes resulting from the Part II licence fee favourable settlement agreement. Excluding these items, income tax expense would have amounted
to $58.8 million in fiscal 2010, $1.4 million, or 2.3%, less when compared to $60.2 million in fiscal 2009.
The Corporation’s subsidiary, Cabovisão, has income tax losses amounting to approximately €84.9 million ($114.8 million), the benefits of
which have not been recognized in the Corporation’s 2010 financial statements. These losses may be used to reduce future years’ taxable
income. In accordance with the Portuguese Companies Income Tax Code (“CIRC”), tax losses incurred in a financial year can be carried
forward and deducted from taxable profits of one or more of the following six taxation years for tax losses incurred before 2010 and for the
following four taxation years for tax losses incurred in 2010 and beyond. However, the CIRC provides for certain exceptions whereby the
general rule stated above ceases to apply. One such exception is that tax losses cannot be deducted if the ownership of at least 50% of the
social capital changes from the moment when the tax losses were generated, unless a request is filed before such change in the ownership
takes place, subject to approval by the Portuguese tax authorities. To this effect, a request for preservation of tax losses for the years
preceding the 2006 taxation year was filed by Cabovisão on July 28, 2006 and approved by the Portuguese tax authorities on
November 25, 2009. As part of their review, the Portuguese tax authorities have audited Cabovisão’s tax returns for the 2003, 2004 and 2005
taxation years, which have resulted in notices of assessment to reduce tax losses by €7.3 million, €29.6 million and €17.1 million, respectively.
However, Cabovisão does not agree with the assessments and has initiated legal proceedings against the Portuguese tax authorities. In
accordance with current legislation, tax returns are subject to review and correction by the tax authorities during a four-year period. These
periods can be extended or suspended when there are tax losses, tax benefits granted, tax inspections, claims or appeals in progress.
Consequently, Cabovisão’s tax returns for the taxation years 2006 to 2010 are still subject to review by the tax authorities and therefore, the
amount of available tax losses could be significantly reduced based on past experience.