Tucows 2012 Annual Report Download - page 92

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F-16
The Company accounts for goodwill in accordance with FASB’s authoritative guidance, which requires that
goodwill and certain intangible assets are not amortized, but are subject to an annual impairment test. The Company
completes its goodwill and certain intangible assets impairment test on an annual basis, during the fourth quarter of its
fiscal year, or more frequently, if changes in facts and circumstances indicate that impairment in the value of goodwill
and certain intangible assets recorded on its balance sheet may exist. The Company determined the estimated fair value
for its reporting unit using the market approach that is based on the publicly traded common shares of the Company to
estimate fair value. The carrying value was greater than the fair value, therefore no impairment exists and the second
step was not performed.
With regards to property, equipment and definite life intangible assets, the Company continually evaluates
whether events or circumstances have occurred that indicate the remaining estimated useful lives of its definite-life
intangible assets may warrant revision or that the remaining balance of such assets may not be recoverable. The
Company measures recoverability of assets to be held and used by comparing the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the assets. Recoverability measurement and estimation of
undiscounted cash flows is done at the lowest possible levels for which there are identifiable cash flows. If such assets
fail the recoverability test, the impairment to be recognized is measured as the amount by which the carrying amount of
assets exceeds the fair value of the assets. Assets to be disposed of are recorded at the lower of the carrying amount or
fair value less costs to sell. Management must exercise judgment in determining whether an event has occurred that may
impair the value of the long-lived assets. Factors that could indicate that impairment may exist include significant
underperformance relative to a plan or long-term projections, significant changes in business strategy, significant
negative industry or economic trends or a significant decline in our stock price or in the value of our reporting units for a
sustained period of time. There was no impairment recorded on definite-life intangible assets and property and
equipment during 2012 and 2011. As of December 31, 2012, the Company had $16.4 million in intangible assets.
4. Derivative instruments and hedging activities:
Foreign currency forward contracts
In October 2012, the Company entered in to a hedging program with a Canadian chartered bank to limit the
potential foreign exchange fluctuations incurred on its future cash flows related to a portion of payroll, rent and
payments to a Canadian domain name registry supplier that are denominated in Canadian dollars and are expected to be
paid by its Canadian operating subsidiary. As part of its risk management strategy, the Company uses derivative
instruments to hedge a portion of the foreign exchange risk associated with these costs. The Company does not use these
forward contracts for trading or speculative purposes. These forward contracts typically mature between one and
eighteen months.
The Company has designated these transactions as cash flow hedges of forecasted transactions under ASC
Topic 815 “Derivatives and Hedging” (ASC Topic 815). As the critical terms of the hedging instrument, and of the
entire hedged forecasted transaction, are the same, in accordance with ASC Topic 815, the Company has been able to
conclude that changes in fair value or cash flows attributable to the risk of being hedged are expected to completely
offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of
these contracts have been included within other comprehensive income. The fair value of the contracts, as of
December 31, 2012, is recorded as derivative instrument assets and liabilities.
As of December 31, 2012, the notional amount of forward contracts that the Company held to sell U.S. dollars
in exchange for Canadian dollars was $29.3 million, of which $15.1 million met the requirements of ASC Topic 815 and
were designated as hedges (December 31, 2011 - $30.4 million of which none were designated as hedges).
Fair value of derivative instruments and effect of derivative instruments on financial performance
The effect of these derivative instruments on our consolidated financial statements as of, and for the year ended
December 31, 2012, were as follows (amounts presented do not include any income tax effects).