7. CRITICAL ASSUMPTIONS
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with Canadian GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. We constantly evaluate these estimates and assumptions.
We base our estimates and assumptions on past experience and other factors that are deemed reasonable under the circumstances. This involves varying degrees of judgment and uncertainty, thus the amounts currently reported in the financial statements could prove to be inaccurate in the future.
Business combination
YPG's acquisitions have been accounted for using the purchase method of accounting. Under the purchase method, the acquiring company adds to its balance sheet the estimated fair values of the acquired company's assets and liabilities.
There are various assumptions made by YPG in determining the fair values of the acquired company's assets and liabilities. The most significant assumptions, and those requiring the most judgment, involve the estimated fair values of trademarks. To determine the fair value of these trademarks, we adopted the relief from royalty approach, a valuation technique based on the concept that the Company owns the trademark. The amount of the notional royalty payment is used as a surrogate for income attributable to the trademark. The fair value of the trademark is based upon the present value of the expected after-tax royalty (cash flow) stream. Significant assumptions include, amongst others, the determination of royalty rates, discount rates, weighted average cost of capital and anticipated average income tax rates.
Intangibles and goodwill
Intangibles and goodwill represented 22.2% and 71.4% respectively, of the Company's consolidated assets as at December 31, 2005. If the Company's estimated useful lives of these assets were incorrect, the Company could experience increased or reduced charges for amortization of intangible assets with finite lives in the future. If the future were to adversely differ from management's best estimate of key economic assumptions and associated cash flows were to materially decrease, the Company could potentially experience future material impairment charges in respect of its intangible assets with indefinite lives. If intangible assets with indefinite lives were determined to have finite lives at some point in the future, the Company could experience increased charges for amortization of intangible assets. Such charges do not result in a cash outflow and would not affect the Company's liquidity.
Recoverability of intangible assets
Any potential intangible asset impairment is identified by comparing the fair value of the indefinite life intangible asset with its carrying value. If the fair value of the intangible asset exceeds its carrying value, the intangible asset is not considered to be impaired. If the carrying value of the intangible asset exceeds its fair value, impairment is identified as the difference between the fair value and the carrying value and will result in a reduction in the carrying value of the intangible assets on the consolidated balance sheet and in the recognition of a non-cash impairment charge in operating income. Consistent with current industry-specific valuation methods, the Company uses a discounted expected future cash flow model in determining the fair value of its intangible assets.
The most significant assumptions underlying the recoverability of intangible assets with indefinite lives include projected revenues and EBITDA, anticipated market share and projected renewal rates.
The Company performs indefinite life intangible assets impairment tests on an annual basis and has determined that there is no impairment to the carrying value.
Recoverability of goodwill
Goodwill is not amortized and is assessed for impairment at least annually. Any potential goodwill impairment is identified by comparing the fair value of the business to its carrying value. If the fair value exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds its fair value, a more detailed goodwill impairment assessment would have to be undertaken. A goodwill impairment loss would be recognized to the extent that the carrying value of goodwill exceeds the implied fair value. Fair value of goodwill is estimated in the same manner as goodwill is determined at the date of acquisition in a business acquisition, that is, the excess of the fair value of the business over the fair value of the identifiable net assets of the reporting unit. Any goodwill impairment will result in a reduction in the carrying value of goodwill on the consolidated balance sheet and in the recognition of a non-cash impairment charge in operating income. The Company determines fair value by using a discounted expected future cash flow model in accordance with recognized valuation methods.
The process of determining these fair values requires management to make estimates and assumptions including, but not limited to, projected future sales, cost of sales, earnings, market conditions and discount rates. The Company has determined that there is no impairment to goodwill.
Allowance for doubtful accounts
We expect that a certain portion of required customer payments will not be made, and we maintain an allowance for these doubtful accounts based on our estimate of the likelihood of recovering accounts receivable. It incorporates current and expected collection trends. Accounts receivable represented approximately 26.3% of the Company's consolidated tangible assets as at December 31, 2005. If economic conditions change or actual results or specific industry trends differ from our expectations, we will adjust our allowance for doubtful accounts and our bad debt expense accordingly. In addition, Bell Canada provides us with customer collection services with respect to advertisers who are also Bell Canada's customers. We rely on information provided by Bell Canada in determining the portion of required customer payments that will not be made, and we maintain an allowance for those accounts.
Employee future benefits
YPG provides eligible employees with pension benefits under a defined benefit pension plan. Certain actuarial and economic assumptions used in determining defined benefit pension costs, accrued pension benefit obligations and pension plan assets require significant judgment.
The accrued benefit obligation and expense are determined by independent actuaries on an annual basis, using the projected benefit method pro-rated on service, and based on management's best economic and demographic estimates and significant actuarial assumptions, including expected years of service of employees, retirement age and specified benefit levels. The discount rate, which is used to determine the accrued benefit obligation, is based on market interest rates on high-quality long-term bonds. Future increases in compensation are based upon current benefit policies and economic forecasts. Defined benefit pension costs are also affected by the quantitative methods used to determine estimated returns on pension plan assets.
The expected return on plan assets is determined by considering long-term historical returns, future estimates of long-term investment returns and asset allocation.
The significant actuarial assumptions adopted are internally consistent and reflect the long-term nature of employee future benefits. Significant changes in assumptions, because of updated historical information, or changes in the market conditions, for example, could materially affect the Company's employee benefit obligations and future expense, as well as its overall financial performance. Any immediate impact is lessened, however, as the net actuarial gains and losses in excess of 10% of the greater of the benefit obligation and the fair value of the plan assets would be amortized over the average remaining service period of active employees of the plan.
Income taxes
Management believes that it has adequately provided for income taxes based on all of the information that is currently available. The calculation of income taxes in many cases, however, requires significant judgment in interpreting tax rules and regulations, which are constantly changing. Our tax filings are also subject to audits, which could materially change the amount of current and future income tax assets and liabilities. Any change would be recorded as a change or a credit to income tax expense. Any cash payment or receipt would be included in cash from operating activities.
CHANGE IN ACCOUNTING POLICIES
Variable interest entities
Effective January 1, 2005, the Fund adopted the Canadian Institute of Chartered Accountants (“CICA”) Accounting Guideline 15 (“AcG-15”), Consolidation of Variable Interest Entities (“VIEs”). AcG-15 applies to interim periods beginning on or after November 1, 2004. VIEs are entities in which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. AcG-15 requires the consolidation of a VIE by its primary beneficiary (i.e., the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity's losses). Management of the Fund conducted a review of the ownership and contractual interest in entities and determined that the adoption of this guideline did not have any impact on the Fund's consolidated financial statements.
|
