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Hannah Treadway is an analyst at Knight Investment Management (Knight). Knight holds Cooper Creek Cable Limited (CCCL) as part of its AFE (Australian and Far East) investment portfolio. CCCL is a diversified cable and communications company operating in Western Australia. The company consists of three divisions: Cable: Provides subscription television services and high-speed Internet to residential customers. Media: Owns and operates a group of radio stations and publishes several magazines. Wireless: Is engaged in wireless voice and data communications services.Treadway is just starting her annual review of the company based on its most recent financial statements, excerpts of which are in Exhibits 1 and 2. The financial statements for CCCL are prepared in accordance with Australian Accounting Standards (AASB), which complies with IFRS. All figures are in Australian dollars ($).  CCCL sustained substantial losses in its start-up period (1998 to 2002), from which it is still benefiting for tax purposes, but has been profitable since 2002, reporting a record profit after tax in 2011. However, Treadway is wondering if CCCL's revenues in general are supported by cash flows and if the company might be trying to increase the appearance of profitability in order to increase the share price, which remains low. The Wireless division was acquired by CCCL in a share purchase in late 2010. Treadway wants to review the accounting policies CCCL has adopted for both revenue and expenses incurred on long-term wireless contracts (Exhibit 3).Exhibit 3Excerpts of Accounting Policy Notes (all figures in 000s)Note 1 d) Long-Term Wireless ContractsCustomers who enter into long-term service contracts for wireless services can obtain their handsets for a nominal amount. Commencing in 2011, the discount offered on the handsets, relative to the regular price, is capitalized as a customer acquisition cost and amortized straightline over the life of the contract, or a minimum of three years.Note 1 g) Unearned RevenueUnearned revenue for subscriptions, or for services paid in advance, was historically recognized on a straight-line basis over the term of the contract or subscription. After reviewing the historical pattern of usage and cancellations for service contracts in 2011, the pattern of recognition was changed to recognize the majority of the revenues in the first 12 months after the service contract is signed and the remainder in the year following.Note 12) Broadcast LicensesDuring 2011 the company successfully disposed of broadcast licenses that were held for sale for $37,900 (net book value of $23,500). Based on the successful completion of that sale, the impairment losses taken in 2009 on other licenses have been reversed, restoring those intangible assets to their amortized historical cost.On reading the note about the broadcast licenses (Exhibit 3), Treadway realizes that the reversal of the impairment loss will require a reinterpretation of her 2010 analysis.Treadway notes that during 2011, CCCL acquired a 75% interest in MusicMusic (MM), a specialty cable music channel. Excerpts from the conference call CCCL held announcing the acquisition are in Exhibit 4.Exhibit 4Excerpts from CCCL’s Conference Call (all figures in 000s)• On January 1, 2011, we acquired 75% of MusicMusic for $24,000.• The book value of MusicMusic’s net assets on that date was $20,000.• MusicMusic has a strong viewership with the key 18- to 29-year-old demographic, and we believe this will help develop these consumers into viewers of other CCCL programming. The appraised value of the MusicMusic brand name is $2,000.• $5,500 of the purchase price will be assigned to the broadcast licenses |
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