Cogeco 2011 Annual Report Download - page 60

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Consolidated financial statements COGECO CABLE INC. 2011 59
M) Financial instruments
Classification, recognition and measurement
All of the Corporation's financial assets are classified as held-for-trading or loans and receivables. The Corporation has classified its cash and
cash equivalents as held-for-trading. Held-for-trading assets and liabilities are carried at fair value on the consolidated balance sheet, with
changes in fair value recorded in the consolidated statements of income. Accounts receivable have been classified as loans and receivables.
All of the Corporation’s financial liabilities are classified as other liabilities, except for the cross-currency swap and interest rate swap
agreements. Loans and receivables instruments and all financial liabilities, except for the cross-currency swap and interest rate swap
agreements, are carried at amortized cost using the effective interest rate method. The Corporation has determined that none of its financial
assets are classified as available-for-sale or held-to-maturity.
Transaction costs
Transaction costs are capitalized on initial recognition and presented as a reduction of the related financing, except for transaction costs on the
revolving loan and the swingline facility, which are presented as deferred charges. These costs are amortized over the term of the related
financing using the effective interest rate method, except for transaction costs on the revolving loan and the swingline facility, which are
amortized over the term of the related financing on a straight-line basis.
Derivative financial instruments and hedge accounting
The Corporation uses cross-currency swap and interest rate swap agreements as derivative financial instruments to manage risk of fluctuation
in interest and foreign exchange rates related to its long term debt. All derivatives are measured at fair value with changes in fair value
recorded in the consolidated statements of income unless they are effective cash flow hedging instruments. The changes in fair value of cash
flow hedging derivatives are recorded in other comprehensive income, to the extent effective, until the variability of cash flows relating to the
hedged asset or liability is recognized in the consolidated statements of income. Any hedge ineffectiveness is recognized in the consolidated
statements of income immediately. Accordingly, the Corporation’s cross-currency swap and interest rate swap agreements must be measured
at fair value in the consolidated financial statements. Since these cross-currency swap and interest rate swap agreements are used to hedge
cash flows on Senior Secured Notes Series A denominated in US dollars and a portion of Euro-denominated loans outstanding under the Term
Revolving Facility, and previously the Term Facility, the changes in fair value are recorded in other comprehensive income. The Corporation
does not hold or use any derivative financial instruments for speculative purposes. Net receipts or payments arising from cross-currency and
interest rate swap agreements are recognized as financial expense.
Embedded derivatives
All embedded derivatives that are not closely related to the host contracts are measured at fair value, with changes in fair value recorded in the
consolidated statements of income. At August 31, 2011 and 2010, there were no significant embedded derivatives or non-financial derivatives
that require separate fair value recognition on the consolidated balance sheets.
N) Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments that have an original maturity of three months or less.
O) Use of estimates
The preparation of consolidated financial statements in accordance with Canadian GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities and revenue and expenses during the
reporting year. Significant areas requiring the use of management estimates relate to the determination of pension plan liabilities and accrued
employee benefits, the determination of accrued liabilities, the determination of allowance for doubtful accounts, the determination of the fair
value of assets acquired and liabilities assumed in business combinations, the evaluation of the carrying amount of home terminal devices, the
useful lives of assets for amortization, the determination of whether a triggering event has occurred and of future cash flows for the purpose of
impairment testing on fixed assets, goodwill and intangible assets with finite and indefinite useful lives, the discount rate used for the purpose of
impairment testing on goodwill and intangible assets with indefinite useful lives, the provision for income taxes and determination of future
income tax assets and liabilities and utilization thereof, and the determination of the fair value of financial instruments, including all derivative
financial instruments. Actual results could differ from these estimates.