Reference no: EM132248039
Assignment -
You are an accounting student who has been hired as a co-op student with Howard Communication Ltd (HCL), a public company that operates as a diversified Canadian communication company with a calendar fiscal year-end. HCL's core business is providing cable television services, high-speed internet access, internet infrastructure services, and television services. The company has large investment in capital assets, and a high debt load. It has a history of operating losses, but positive cash flows from operations after material depreciation or amortization charges are added back. Cash flows from investing activities, representing the purchase of capital assets, are negative. HCL is gradually building the volume that it needed to break even in this high fixed cost business.
HCL reports the following in the draft 2018 financial statements.
Note 1: Significant accounting policies
Customer lists represent equipment subsidies granted to customers. These amounts are deferred and amortized straight-line over a 24-month period. These costs are incurred in order to expand the company's customer base, and represent the cost of equipment provided to subscription cable customers.
Note 7: Customer lists
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(amounts in thousands)
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2018
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2017
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Cost
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Accumulated Amortization
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Cost
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Accumulated Amortization
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Customer lists
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$418,742
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$270,908
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$191,600
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$117,277
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There were no disposal or write-offs of these assets during the year.
Statement of Cash Flows (excerpt) (amounts in thousands)
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2018
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2017
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Operating activities
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Total cash flows from operations
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$335,400
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$289,100
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Investing activities
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Total cash flows for investing
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($825,100)
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($1,107,200)
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It is now February 11, 2019. You have been asked by your supervisor to prepare a report that evaluates HCL's accounting policy for customer lists. This should include an analysis of the impact of this policy on the statement of cash flows.
In your talking with your supervisor, you understand that management of HCL feels that the customer base for a particular service product is critical. Once a customer is signed on, retention is high. The equipment subsidies are the results of BHL's policy, common in the industry, of providing needed hardware convertors to a customer far below cost. Once a customer is established, there is very low turnover, and the future revenue stream from the customer is secure. In fact, HCL's management is convinced that the 24-month amortization stream is very conservative, since the average customer stays for at least 10 years.