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62 COGECO CABLE INC. 2011 Consolidated financial statements
6. Impairment of goodwill and fixed assets
2011 2010
(in thousands of dollars) $ $
Impairment of goodwill 29,344 –
Impairment of fixed assets 196,529 –
225,873 –
During the third quarter of fiscal year 2011, the economic environment in Portugal continued to deteriorate, with the Country ultimately requiring
financial assistance from the International Monetary Fund and the European Central Bank. As part of the negotiated financial assistance
package, the Portuguese government has committed to financial reforms which include increases in sales and income taxes combined with
reductions in government spending on social programs. These measures are expected to put further downwards pressure on consumer
spending capacity. The rate of growth for our services has diminished in this environment, with net customer losses and service downgrades by
customers in the European operations in the third quarter of fiscal year 2011. In accordance with current accounting standards, management
considered that this situation combined with net customer losses in the third quarter, which were significantly more important and persistent
than expected, will continue to negatively impact the financial results of the European operations and indicate 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
May 31, 2011.
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
test on goodwill and concluded that goodwill was impaired at May 31, 2011. As a result, a non-cash impairment loss of $29.3 million was
recorded in the third quarter of the 2011 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 judgment was necessary to estimate future
cash flows.
Long-lived assets with finite useful lives, such as fixed assets, are tested for impairment 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. The impairment loss is
measured as the amount by which the asset’s carrying amount exceeds its fair value. Accordingly, the Corporation completed its impairment
test on the fixed assets of the Portuguese subsidiary at May 31, 2011, and determined that the carrying value of these assets exceeded the
expected future undiscounted cash flows to be generated by these assets. As a result, a non-cash impairment loss of $196.5 million was
recognized in the third quarter of the 2011 fiscal year.