Cogeco 2011 Annual Report Download - page 78

Consolidated financial statements COGECO CABLE INC. 2011 77
Fair value
Fair value is the amount at which willing parties would accept to exchange a financial instrument based on the current market for instruments
with the same risk, principal and remaining maturity. Fair values are estimated at a specific point in time, by discounting expected cash flows at
rates for debts of the same remaining maturities and conditions. These estimates are subjective in nature and involve uncertainties and matters
of significant judgment, and therefore, cannot be determined with precision. In addition, income taxes and other expenses that would be
incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net
amounts that would be realized if these instruments were settled. The Corporation has determined the fair value of its financial instruments as
follows:
a) The carrying amount of cash and cash equivalents, accounts receivable and accounts payable and accrual liabilities approximates fair
value because of the short-term nature of these instruments.
b) Interest rates under the terms of the Corporation’s Term Revolving Facility are based on bankers’ acceptance, LIBOR, EURIBOR, bank
prime rate loan or US base rate loan plus the applicable margin. Therefore, the carrying value approximates fair value for the Term
Revolving Facility, since the Term Revolving Facility has conditions similar to those available to the Corporation.
c) The fair value of the Senior Secured Debentures Series 1 and 2, Senior Secured Notes Series A and B and Senior Unsecured Debenture
are based upon current trading values for similar financial instruments.
d) The fair values of obligations under capital leases are not significantly different from their carrying amounts.
The carrying value of all the Corporation’s financial instruments approximates fair value, except as otherwise noted in the following table:
2011 2010
Carrying
amount
Estimated fai
r
value
Carrying
amount
Estimated fai
r
value
(in thousands of dollars) $ $ $ $
Long-term debt 948,877 1,027,082 954,983 1,050,696
In accordance with CICA Handbook Section 3862, Financial instruments – disclosures, all financial instruments recognized at fair value on the
consolidated balance sheet must be classified based on the three fair value hierarchy levels, which are as follows:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices)
or indirectly (i.e., derived from prices); and
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Corporation considers that its derivative financial instruments are classified as Level 2 under the fair value hierarchy. The fair value of
derivative financial instruments is estimated using valuation models that reflect projected future cash flows over contractual terms of the
derivative financial instruments and observable market data, such as interest and currency exchange rate curves.
B) Capital management
The Corporation’s objectives in managing capital are to ensure sufficient liquidity to support the capital requirements of its various businesses,
including growth opportunities. The Corporation manages its capital structure and makes adjustments in light of general economic conditions,
the risk characteristics of the underlying assets and the Corporation’s working capital requirements. Management of the capital structure
involves the issuance of new debt, the repayment of existing debts using cash generated by operations and the level of distribution to
shareholders.
The capital structure of the Corporation is composed of shareholders’ equity, bank indebtedness, long-term debt, balance due on a business
acquisition and assets or liabilities related to derivative financial instruments.
The provisions under the Term Revolving Facility provide for restrictions on the operations and activities of the Corporation. Generally, the most
significant restrictions relate to permitted investments and dividends on multiple and subordinate voting shares, as well as incurrence and
maintenance of certain financial ratios primarily linked to the operating income before amortization, financial expense and total indebtedness. At
August 31, 2011 and 2010, the Corporation was in compliance with all of its debt covenants and was not subject to any other externally
imposed capital requirements.