Tucows 2014 Annual Report Download - page 166

(l) Derivative Financial Instruments
During Fiscal 2014 and Fiscal 2013, the Company used derivative financial instruments to manage foreign
currency exchange risk. The Company accounts for these instruments in accordance with ASC Topic 815, “Derivatives
and Hedging” (ASC Topic 815), which requires that every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value as of the reporting date. ASC Topic 815 also requires that changes in
our derivative financial instruments’ fair values be recognized in earnings, unless specific hedge accounting and
documentation criteria are met (i.e. the instruments are accounted for as hedges). The Company recorded the effective
portions of the gain or loss on derivative financial instruments that were designated as cash flow hedges in accumulated
other comprehensive income in our accompanying Consolidated Balance Sheets. Any ineffective or excluded portion of a
designated cash flow hedge, if applicable, is recognized in net income.
For certain contracts, the Company has not complied with the documentation standards required for its forward
foreign exchange contracts to be accounted for as hedges and has, therefore, accounted for such forward foreign exchange
contracts at their fair values with the changes in fair value recorded in net income.
The fair value of the forward exchange contracts are determined using an estimated credit adjusted mark-to-
market valuation which takes into consideration the Company and the counterparty credit risk. The valuation technique
used to measure the fair values of the derivative instruments is a discounted cash flow technique, with all significant
inputs derived from or corroborated by observable market data, as no quoted market prices exist for the derivative
instruments. This discounted cash flow technique uses observable market inputs, such as foreign currency spot and
forward rates.
(m) Product development costs
Product development costs are expensed as incurred. The Company accounts for the costs of computer software
developed or obtained for internal use as follows: costs that are incurred in the preliminary stage of software development
are expensed as incurred. Costs incurred during the application and development stage are capitalized and generally
include external direct costs of materials and services consumed in the development and payroll and payroll- related costs
for employees who are directly associated with the development project. Costs incurred in the post implementation and
operation stage are expensed as incurred. During the years ended December 31, 2014, 2013 and 2012, the Company did
not capitalize any amounts of such costs relating to the development of internal use software. The capitalized costs of
computer software developed for internal use are amortized on a straight-line basis over one year from the date the
software is put into use.
(n) Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in net income in the year that includes the
enactment date. A valuation allowance is recorded if it is not “more likely than not” that some portion of or all of a
deferred tax asset will be realized.
The Company recognizes the impact of an uncertain income tax position at the largest amount that is more-
likely-than-not to be sustained upon audit by the relevant taxing authority and includes consideration of interest and
penalties. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The liability for unrecognized tax benefits is classified as non-current unless the liability is expected to be settled in cash
within 12 months of the reporting date.
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