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Notes to Consolidated Financial Statements
- 2011 Annual Report
- Management's Discussion and Analysis
- Report of independent registered chartered accountants
- Consolidated Financial Statements
- Notes to Consolidated Financial Statements
- Note 1: Corporate Information
- Note 2: Significant Accounting Policies
- Note 3: Segmented Information
- Note 4: Acquisitions
- Note 5: Operating Costs
- Note 6: Severance, Acquisition and Other Costs
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1 to 6)
BCE is incorporated and domiciled in Canada. BCE’s head office is located at 1, Carrefour Alexander-Graham Bell, Verdun, Québec, Canada. BCE is a communications and media company providing wireline, wireless, Internet and television (TV) services to residential, business and wholesale customers in Canada. Our Bell Media segment provides specialty TV, digital media, conventional TV and radio broadcasting entertainment services to customers across Canada. The consolidated financial statements (financial statements) were approved by BCE’s board of directors on March 8, 2012.
BASIS OF PRESENTATION
The financial statements were prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). These are our first annual financial statements prepared under IFRS and IFRS 1 – First-time Adoption of IFRS has been applied. We adopted IFRS effective January 1, 2010 and are required to provide only one year of comparative information.
An explanation of the impact of the changeover to IFRS on our reported financial position, financial performance and cash flows is provided in Note 28, First-time Adoption of IFRS.
The financial statements have been prepared on a historical cost basis, except for certain financial instruments that are measured at fair value as described in our accounting policies.
All amounts are in millions of Canadian dollars, except where noted.
The financial statements are presented in Canadian dollars, the company’s functional currency.
BASIS OF CONSOLIDATION
We consolidate the financial statements of all our subsidiaries. Subsidiaries are entities we control, where control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or sold during the year are consolidated from the date of acquisition and up to the date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to conform their accounting policies with ours. All intercompany transactions, balances, income and expenses are eliminated on consolidation.
Changes in BCE’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions, with no effect on net earnings or on other comprehensive income.
At December 31, 2011, BCE owned 44.1% of Bell Aliant, with the remaining 55.9% publicly held. BCE has the right to appoint a majority of the board of directors of Bell Aliant and, therefore, controls and consolidates Bell Aliant.
We recognize revenues from the sale of products or the rendering of services when they are earned; specifically when all the following conditions are met:
the significant risks and rewards of ownership are transferred to customers and we retain neither continuing managerial involvement nor effective control
there is clear evidence that an arrangement exists
the amount of revenue and related costs can be measured reliably
it is probable that the economic benefits associated with the transaction will flow to the company.
In particular, we recognize:
fees for local, long distance and wireless services when we provide the services
other fees, such as network access fees, licence fees, hosting fees, maintenance fees and standby fees, over the term of the contract
subscriber revenues when customers receive the service
advertising revenue, net of agency commissions, when advertisements are aired or delivered on the Internet
revenues from the sale of equipment when the equipment is delivered and accepted by customers
revenues on long-term contracts as services are provided, equipment is delivered and accepted, and contract milestones are met.
We measure revenues at the fair value of the arrangement consideration. We record payments we receive in advance, including upfront non-refundable payments, as deferred revenues until we provide the service or deliver the product to customers. Deferred revenues are presented in Trade payables and other liabilities or in Other non-current liabilities on the consolidated statements of financial position (statements of financial position).
Revenues are reduced for customer rebates and allowances and exclude sales and other taxes we collect from our customers.
We expense subscriber acquisition costs when the related services are activated.
We enter into arrangements that may include the sale of a number of products and services together, notably in our wireless and video product lines and to our business customers. When two or more products or services have value to our customers on a stand-alone basis, we separately account for each product or service according to the methods previously described. The total price to the customer is allocated to each product or service based on its relative fair value. When an amount allocated to a delivered item is contingent upon the delivery of additional items or meeting specified performance conditions, the amount allocated to that delivered item is limited to the non-contingent amount.
If the conditions to account separately for each product or service are not met, we recognize revenue proportionately over the term of the sale agreement.
We may enter into arrangements with subcontractors and others who provide services to our customers. When we act as the principal in these arrangements, we recognize revenue based on the amounts billed to our customers. Otherwise, we recognize the net amount that we retain as revenue.
Our equity-settled, share-based payment arrangements include stock option plans, restricted share units (RSUs), deferred share units (DSUs) and employee savings plans (ESPs).
We use a fair value-based method to measure the cost of our employee stock options, based on the number of stock options that are expected to vest. Compensation expense is adjusted for subsequent changes in management’s estimate of the number of stock options that are expected to vest.
We credit contributed surplus for stock option expense recognized over the vesting period. When stock options are exercised, we credit share capital for the amount paid and the amounts previously credited to contributed surplus.
For each RSU granted, we recognize compensation expense equal to the market value of a BCE common share at the date of grant based on the number of RSUs expected to vest, recognized over the term of the vesting period, with a corresponding credit to contributed surplus for equity-settled RSUs and a corresponding credit to a liability for cash-settled RSUs. Additional RSUs are issued to reflect dividends declared on the common shares.
Compensation expense is adjusted for subsequent changes in management’s estimate of the number of RSUs that are expected to vest and, for cash-settled RSUs, changes in the market value of BCE common shares. The effect of these changes is recognized in the period of the change. Upon settlement of the equity-settled RSUs, any difference between the cost of shares purchased on the open market and the amount credited to contributed surplus is reflected in the deficit. Vested RSUs are settled either in BCE common shares, in cash, in DSUs, or through a combination of these, depending on the terms of the grant.
DSUs issued are recognized at the fair value of the services received. Additional DSUs are issued to reflect dividends declared on the common shares. DSUs are settled in BCE common shares purchased on the open market following the cessation of employment or when a director leaves the board. We credit contributed surplus for the fair value of DSUs at the issue date. Upon settlement of the DSUs, any difference between the cost of shares purchased on the open market and the amount credited to contributed surplus is reflected in the deficit.
We recognize our contributions under our ESPs as compensation expense. Beginning in July 2010, employer ESP contributions accrue over a two-year vesting period. We credit contributed surplus for the ESP expense recorded over the vesting period, based on management’s estimate of the accrued contributions that are expected to vest. We adjust the deficit for any difference between the cost of shares purchased at the time of settlement and the amount previously credited to contributed surplus.
Income tax expense is comprised of current and deferred taxes. It is recognized in the income statements, except to the extent that the expense relates to items recognized in other comprehensive income or directly in equity.
A current or non-current tax liability/asset is the estimated tax payable/receivable on taxable earnings for the current and past periods. We also record future tax liabilities which is included in Other non-current liabilities.
We use the liability method to account for deferred tax assets and liabilities, which arise from:
temporary differences between the carrying amount of assets and liabilities recognized in the statements of financial position and their corresponding tax basis
the carryforward of unused tax losses and credits.
Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply when the asset or liability is recovered or settled. Both our current tax and deferred tax assets and liabilities are calculated using tax rates that have been enacted or substantively enacted at the end of the reporting date.
Deferred tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by us and it is probable that the temporary difference will not reverse in the foreseeable future.
Tax liabilities are, where permitted, offset against tax assets within the same taxable entity and tax jurisdiction.
INVESTMENT TAX CREDITS, OTHER TAX CREDITS AND GOVERNMENT GRANTS
We recognize investment tax credits (ITCs), other tax credits and government grants given on eligible expenditures when it is reasonably assured that they will be realized. They are presented as part of Trade and other receivables and Other non-current assets on the statements of financial position. We use the cost reduction method to account for ITCs and government grants, under which the credits are applied against the expense or asset to which the ITC or government grant relates.
Cash equivalents are comprised of highly liquid investments with original maturities of three months or less from the date of purchase.
SECURITIZATION OF TRADE RECEIVABLES
Proceeds on the securitization of trade receivables are recognized as a collateralized borrowing as we do not transfer control and substantially all the risks and rewards of ownership to another entity.
We measure inventory at the lower of cost and net realizable value. Inventory includes all costs to purchase, convert and bring the inventories to their present location and condition. We determine cost using specific identification for major equipment held for resale and the weighted-average cost formula for all other inventory items. We maintain inventory valuation reserves for inventory that is slow-moving or obsolete, calculated using an inventory ageing analysis.
PROPERTY, PLANT AND EQUIPMENT
We record property, plant and equipment at historical cost, except for certain assets which were valued at deemed cost on the changeover to IFRS. Historical cost includes expenditures that are attributable directly to the acquisition or construction of the asset, including the purchase cost, labour and overhead. Borrowing costs are capitalized for qualifying assets if the time to build or develop is in excess of one year. Deemed cost is the fair value of the assets as at January 1, 2010.
We initially measure and record asset retirement obligations at management’s best estimate using a present value methodology, adjusted subsequently for any changes to the timing or amount of the original estimate of cash flows and changes in discount rates. We capitalize asset retirement costs as part of the related assets and amortize them into earnings over time. We also increase the recorded asset retirement obligation and record a corresponding amount in interest expense to reflect the passage of time. Gains or losses on the sale or retirement of property, plant and equipment are recognized in Other income.
Leases of property, plant and equipment are classified as finance leases when we obtain substantially all the risks and rewards of ownership of the underlying assets. At the inception of the lease, we record an asset together with a corresponding long-term liability at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Thereafter, the asset is amortized over the shorter of its useful life and the lease term and the liability is measured at amortized cost using the effective interest method.
All other leases are classified as operating leases. Lease payments are expensed on a straight-line basis over the term of the lease.
FINITE-LIFE INTANGIBLE ASSETS
Finite-life intangible assets are carried at cost less accumulated amortization and accumulated impairment losses, if any.
We record internal-use software at historical cost. Cost includes expenditures that are attributable directly to the acquisition or development of the software, including the purchase cost, labour and overhead.
Research costs are expensed as incurred. Software development costs are capitalized when all the following conditions are met:
technical feasibility can be demonstrated
management has the intent and the ability to complete the asset for use or sale
it is probable that economic benefits will be generated
costs attributable to the asset can be measured reliably.
Customer relationship assets are acquired through business combinations and are recorded at fair value at the date of acquisition.
Program and Feature Film Rights
We account for program and feature film rights as intangible assets when these assets are acquired for the purpose of broadcasting. Program and feature film rights, which include producer advances and licence fees paid in advance of receipt of the program or film, are stated at acquisition cost less accumulated amortization and accumulated impairment losses. Programs and feature films under licence agreements are recorded as assets and liabilities for rights acquired and obligations incurred when:
the company receives a broadcast master and the cost is known or reasonably determinable for new program and feature film licences
the licence term commences for licence period extensions or syndicated programs.
Programs and feature films are classified as non-current assets with related liabilities classified as current or non-current, based on the payment terms. Amortization of program and feature film intangible assets is recorded in Operating costs in the income statements.
INDEFINITE-LIFE INTANGIBLE ASSETS
Brand assets, mainly comprised of the Bell and Bell Media brands, and broadcast licences are acquired through business combinations and are recorded at fair value at the date of acquisition. Wireless spectrum licences are recorded at acquisition cost, including borrowing costs when the time to build or develop the related network is in excess of one year.
Currently there are no legal, regulatory, competitive or other factors that limit the useful lives of our brands or spectrum licences.
DEPRECIATION AND AMORTIZATION
We depreciate property, plant and equipment and amortize finite-life intangible assets on a straight-line basis over their estimated useful lives. We review our estimates of useful lives on an annual basis and adjust depreciation and amortization on a prospective basis, if needed. Land and assets under construction or development are not depreciated.
|ESTIMATED USEFUL LIFE|
Property, plant and equipment
|2 to 50 years|
|10 to 50 years|
Finite-life intangible assets
|2 to 7 years|
|5 to 30 years|
|Up to 5 years|
INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
Our financial statements incorporate our share of the results of our associates and joint ventures using the equity method of accounting, except when the investment is classified as held for sale.
Investments in associates and joint ventures are recognized initially at cost and adjusted thereafter to include the company’s share of income or loss and comprehensive income on an after-tax basis. Investments are reviewed for impairment by comparing their recoverable amount to their carrying amount.
BUSINESS COMBINATIONS AND GOODWILL
Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value at the date of acquisition. Acquisition-related transaction costs are expensed as incurred.
Identifiable assets and liabilities, including intangible assets, of acquired businesses are recorded at their fair values at the date of acquisition. When we acquire control of a business, any previously-held equity interest also is remeasured to fair value. The excess of the purchase consideration and any previously-held equity interest over the fair value of identifiable net assets acquired is goodwill. If the fair value of identifiable net assets acquired exceeds the purchase consideration and any previously-held equity interest, the difference is recognized in earnings immediately as a bargain purchase gain.
Changes in our ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions. Any difference between the change in the carrying amount of non-controlling interest and the consideration paid or received is attributed to owner’s equity.
IMPAIRMENT OF NON-FINANCIAL ASSETS
Goodwill and indefinite-life intangible assets are tested for impairment annually or when there is an indication that the asset may be impaired. Property, plant and equipment and finite-life intangible assets are tested for impairment if events or changes in circumstances, assessed quarterly, indicate that their carrying amount may not be recoverable. For the purpose of impairment tests, assets are grouped at the lowest level for which there are separately identifiable cash inflows.
Impairment losses are recognized and measured as the excess of the carrying value of the assets over their recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use. Previously recognized impairment losses, other than those attributable to goodwill, are reviewed for possible reversal at each reporting date and, if the asset’s recoverable amount has increased, all or a portion of the impairment is reversed.
GOODWILL IMPAIRMENT TESTING
We perform an annual test for goodwill impairment for each of our cash generating units (CGUs) to which goodwill is allocated in the fourth quarter and whenever there is an indication that goodwill might be impaired.
A CGU is the smallest identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups of assets. We assess goodwill impairment at the level of each CGU or group of CGUs likely to benefit from acquisition-related synergies within an operating segment.
We identify any potential impairment by comparing the carrying value of a CGU to its recoverable amount. The recoverable amount of a CGU is the higher of its fair value less costs to sell and its value in use. Fair value less costs to sell is based on estimates of discounted future cash flows or other valuation methods. Cash flows are projected based on past experience, actual operating results and business plans. When the recoverable amount of a CGU is less than its carrying value, the recoverable amount is determined for all its identifiable assets and liabilities. The excess of the recoverable amount of the CGU over the total of the amounts assigned to its assets and liabilities is the recoverable amount of goodwill.
An impairment charge is deducted from earnings for any excess of the carrying value of goodwill over its recoverable amount. Goodwill impairment losses may not be reversed.
The value in use for our CGUs is determined by discounting five-year cash flow projections from business plans approved by senior management. The projections reflect management’s expectations of revenue, EBITDA, capital expenditures, working capital and operating cash flows, based on past experience and future expectations of operating performance.
Cash flows beyond the five-year period have been extrapolated using a perpetuity growth rate of up to 1%. None of the perpetuity growth rates exceed the long-term historical growth rates.
The pre-tax discount rates, ranging from 8.7% to 9.1%, are applied to the five-year pre-tax cash flow projections and are derived from the weighted average cost of capital for each CGU or group of CGUs.
DERIVATIVES USED AS ECONOMIC HEDGES
Derivatives not designated as hedging instruments are marked to market each reporting period. These derivatives are used to manage cash flow exposures related to RSUs and capital expenditures. The changes in fair value of these financial assets and liabilities are recognized in Other income in the income statements.
AVAILABLE-FOR-SALE (AFS) FINANCIAL ASSETS
Our portfolio investments in equity securities are classified as AFS and are presented in our statements of financial position as Other non-current assets. These securities are recorded at fair value on the date of acquisition, plus related transaction costs. Investments in publicly-traded and privately-held securities are adjusted to fair value at each reporting date. The corresponding unrealized gains and losses are recorded in other comprehensive income and are reclassified to Other income in the income statements when realized or when an impairment is determined. Income from investments is recorded in Other income in the income statements.
TRADE AND OTHER RECEIVABLES
Trade and other receivables, which include trade receivables and other short-term receivables, are measured at amortized cost using the effective interest method, net of any allowance for doubtful accounts.
OTHER FINANCIAL LIABILITIES
Other financial liabilities, which include trade payables and accruals, compensation payable, obligations imposed by the Canadian Radio-television and Telecommunications Commission (CRTC), interest payable and long-term debt, are recorded at amortized cost using the effective interest method.
COSTS OF ISSUING DEBT AND EQUITY
The cost of issuing debt is included as part of long-term debt and is accounted for at amortized cost using the effective interest method. The cost of issuing equity is reflected in the consolidated statements of changes in equity as a reduction of the proceeds received.
DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative financial instruments to manage interest rate risk and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes.
To qualify for hedge accounting, we document the relationship between the derivative and the exposure it hedges and our risk management objective and strategy. This includes associating each derivative to a specific asset or liability, a specific firm commitment, or a specific anticipated transaction.
We assess the effectiveness of a derivative in managing an identified risk when hedge accounting is initially applied, and on an ongoing basis thereafter. If a hedge becomes ineffective, we stop using hedge accounting.
Fair Value Hedges
Our fair value hedges primarily consist of interest rate swaps used to manage the effect of changes in interest rates relating to fixed-rate long-term debt. These swaps usually involve exchanging interest payments without exchanging the notional amount on which the payments are based. We record the exchange of payments as an adjustment to interest expense on the hedged debt. We include the related net receivable or payable from counterparties in Other current assets or Trade payables and other liabilities for swaps that mature within one year and in Other non-current assets or Other non-current liabilities for swaps that have a maturity of more than one year. Changes in the fair value of these derivatives and the related long-term debt are recognized in Other income in the income statements and offset, except for any ineffective portion of the hedging relationship.
Cash Flow Hedges
Our cash flow hedges are used to mitigate foreign currency risk on certain long-term debt instruments and purchase commitments. We use foreign currency forward contracts to manage the exposure to anticipated transactions denominated in foreign currencies. We use cross-currency swaps to hedge firm commitments to pay interest and/or principal amounts in a foreign currency. Changes in the fair value of these derivatives are recognized in our consolidated statements of comprehensive income (statements of comprehensive income), except for any ineffective portion, which is recognized immediately in earnings. Realized gains and losses in accumulated other comprehensive income are reclassified to Other income in the income statements in the same periods as the corresponding hedged items are recognized in earnings. Cash flow hedges that mature within one year are included in Other current assets or Trade payables and other liabilities, whereas hedges that have a maturity of more than one year are included in Other non-current assets or Other non-current liabilities.
EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT (DB) PLANS
We maintain DB plans that provide pension benefits for most of our employees. Benefits are based on the employee’s length of service and average rate of pay during the highest paid consecutive five years of service. Most employees are not required to contribute to the plans. The plans provide increasing pension benefits to help protect a portion of the income of retired employees against inflation.
We are responsible for adequately funding our DB pension plans. We make contributions to them based on various actuarial cost methods permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections and future service.
We provide other employee future benefits to some of our employees, including:
healthcare and life insurance benefits during retirement. The provision of such benefits is being phased out over a ten-year period ending on December 31, 2016. We do not fund most of these other employee future benefit plans.
other benefits, including various disability plans, workers’ compensation and medical benefits to former or inactive employees, their beneficiaries and dependants, from the time their employment ends until their retirement starts, under certain circumstances.
We accrue our obligations and related costs under employee benefit plans, net of the fair value of pension plan assets. Pension and other employee future benefit costs are determined using:
the projected unit credit method, prorated on years of service, which takes into account future pay levels
a discount rate based on market interest rates of high-quality corporate bonds with maturities that match the timing of benefits expected to be paid under the plans
management’s best estimate of the plans’ expected investment performance, pay increases, retirement ages of employees and expected healthcare costs.
The expected long-term rate of return is a weighted average rate of our forward-looking view of long-term returns on each of the major plan asset categories in our funds. We value pension plan assets at fair value using current market values.
The expense relating to our employee benefit plans is shown in operating costs, interest on our employee benefit obligations and expected return on pension plan assets. Pension current service cost is included in operating costs. The interest on our employee benefit obligations and the expected return on pension plan assets are recognized in net earnings and are displayed on the face of the income statements. Interest on our employee benefit obligations is the accretion of interest on the obligations under the employee benefit plans and the expected return on pension plan assets is based on conditions that existed at the beginning of the year.
Actuarial gains and losses for all employee benefit plans are recorded in other comprehensive income in the period in which they occur and recognized immediately in the deficit.
December 31 is the measurement date for our significant employee benefit plans. Our actuaries perform a valuation at least every three years to determine the actuarial present value of the accrued pension and other post-employment benefits. An actuarial valuation was last performed on our significant pension plans on December 31, 2010.
DEFINED CONTRIBUTION (DC) PENSION PLANS
We also maintain DC plans that provide certain employees with pension benefits. Under these plans, we are responsible for contributing a predetermined amount to an employee’s retirement savings, based on a percentage of that employee’s salary.
We recognize a pension current service cost for DC plans when the employee provides service to the company, essentially coinciding with our cash contributions.
Generally, new employees can participate only in the DC pension arrangements.
USING ESTIMATES AND KEY JUDGEMENTS
When preparing financial statements according to IFRS, management makes estimates and assumptions relating to:
reported amounts of revenues and expenses
reported amounts of assets and liabilities
disclosure of contingent assets and liabilities.
We base our estimates on a number of factors, including historical experience, current events and actions that the company may undertake in the future, and other assumptions that we believe are reasonable under the circumstances. By their nature, these estimates are subject to measurement uncertainty and actual results could differ. In particular, we use estimates when accounting for certain items such as revenues, allowance for doubtful accounts, useful lives of property, plant and equipment and intangible assets, asset impairments, legal and tax contingencies, share-based payment plans, employee benefit plans, deferred income taxes and goodwill impairment. We also use estimates when recording the fair values of assets acquired and liabilities assumed in a business combination.
Provisions are recognized when all the following conditions are met:
the company has a present legal or constructive obligation based on past events
it is probable that an outflow of economic resources will be required to settle the obligation
the amount can be reasonably estimated.
Provisions are measured at the present value of the estimated expenditures expected to settle the obligation, if the effect of the time value of money is material. The present value is determined using the current market assessments of the time value of money and risks specific to the obligation. The obligation increases as a result of the passage of time and is recorded as interest expense.
The estimates involving a higher degree of judgement or complexity are described below.
USEFUL LIVES OF PROPERTY, PLANT AND EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS
Property, plant and equipment represent a significant proportion of our total assets. Changes in technology or our intended use of these assets as well as changes in business prospects or economic and industry factors may cause the estimated useful lives of these assets to change.
We review estimates of the useful lives of property, plant and equipment and finite-life intangible assets on an annual basis and adjust depreciation or amortization on a prospective basis, if necessary.
PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS IMPAIRMENT
We make a number of estimates when calculating fair value using discounted future cash flows or other valuation methods. These estimates include the assumed growth rates for future cash flows, the number of years used in the cash flow model, and the discount rate.
We make a number of estimates when calculating the recoverable amount of goodwill using discounted future cash flows or other valuation methods. These estimates include the assumed growth rates for future cash flows, the number of years used in the cash flow model, and the discount rate.
A provision for onerous contracts is recognized when the unavoidable costs of meeting our obligations under the contract exceed the expected benefits to be received from the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of completing the contract.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain financial instruments, such as investments in equity securities, derivative financial instruments and certain elements of borrowings, are carried in the statements of financial position at fair value, with changes in fair value reflected in the income statements. Fair values are estimated by reference to published price quotations or by using other valuation techniques that may include inputs that are not based on observable market data.
We become involved in various litigation and regulatory matters as a part of our business. Pending litigation, regulatory initiatives or regulatory proceedings represent a potential cost to our business.
We accrue a potential loss if we believe the loss is probable and can be reasonably estimated, based on information that is available at the time. Any accrual would be charged to earnings and included in Trade payables and other liabilities or Other non-current liabilities. Any cash settlement would be deducted from cash from operating activities. We estimate the amount of the loss by analyzing potential outcomes and assuming various litigation and settlement strategies.
The calculation of income taxes requires judgement in interpreting tax rules and regulations. There are transactions and calculations for which the ultimate tax determination is uncertain. Our tax filings are also subject to audits, the outcome of which could change the amount of current and deferred tax assets and liabilities. Management believes that it has sufficient amounts accrued for outstanding tax matters based on the information that currently is available.
Deferred tax assets/liabilities and future tax liabilities require management judgement in determining the amounts to be recognized. In particular, judgement is required when assessing the timing of the reversal of temporary differences to which future income tax rates are applied. Further, the amount of deferred tax assets, which is limited to the amount that is probable to be realized, is estimated with consideration given to the timing, sources and amounts of future taxable income.
EMPLOYEE BENEFIT PLANS
The amounts reported in the financial statements relating to DB pension plans and other employee future benefits are determined using actuarial calculations that are based on several assumptions.
The actuarial valuation uses management’s assumptions for, among other things, the discount rate, the expected long-term rate of return on pension plan assets, the rate of compensation increase, trends in healthcare costs and expected average remaining years of service of employees.
The two most significant assumptions used to calculate the net employee benefit plans cost are the discount rate used to value the employee benefit obligation and the expected long-term rate of return on pension plan assets.
A discount rate is used to determine the present value of the future cash flows that we expect will be needed to settle employee benefit obligations. It is based on the yield on long-term high-quality corporate fixed income investments, with maturities matching the estimated cash flows from the pension plan. A lower discount rate results in a higher employee benefit obligation and a higher pension deficit.
Expected Long-Term Rate of Return
The expected long-term rate of return is a weighted average of estimated long-term returns on each of the major plan asset categories in our pension funds. Poor fund performance results in a lower fair value of plan assets and a higher pension deficit.
FUTURE CHANGES TO ACCOUNTING STANDARDS
In November 2009, the IASB issued IFRS 9 – Financial Instruments, introducing new requirements for classifying and measuring financial assets. In October 2010, the IASB reissued IFRS 9, incorporating new requirements on accounting for financial liabilities, and carrying over from IAS 39 the requirements for derecognition of financial assets and financial liabilities. In December 2011, the IASB amended IFRS 9, deferring the mandatory effective date to annual periods beginning on or after January 1, 2015. The amendment also provides relief from restating comparative information and required disclosure in IFRS 7 – Financial Instruments: Disclosures.
In October 2010, the IASB amended IFRS 7 – Financial Instruments: Disclosures to require quantitative and qualitative disclosures for transfers of financial assets where the transferred assets are not derecognized in their entirety or the transferor retains continuing managerial involvement. The amendment also requires disclosure of supplementary information if a substantial portion of the total amount of the transfer activity occurs in the closing days of a reporting period. This amendment to IFRS 7 must be applied for annual periods beginning on or after July 1, 2011, with early adoption permitted. In December 2011, the IASB further amended IFRS 7 to require disclosures to better assess the effect or potential effect of offsetting arrangements in the statements of financial position. This amendment to IFRS 7 must be applied retrospectively for annual periods beginning on or after January 1, 2013.
In May 2011, the IASB issued IFRS 10 – Consolidated Financial Statements, which establishes principles for the presentation and preparation of consolidated financial statements. Under IFRS 10, control is identified as the single basis of consolidation for all types of entities. IFRS 10 must be applied retrospectively for annual periods beginning on or after January 1, 2013, with early adoption permitted.
In May 2011, the IASB issued IFRS 11 – Joint Arrangements, which establishes principles for financial reporting by parties to an arrangement that is jointly controlled by two or more parties. IFRS 11 clarifies that joint control only exists when decisions about the relevant activities of an arrangement require the unanimous consent of the parties that control the arrangement collectively. IFRS 11 requires a joint venturer to account for its investment using the equity method. IFRS 11 must be applied retrospectively for annual periods beginning on or after January 1, 2013, with early adoption permitted.
In May 2011, the IASB issued IFRS 12 – Disclosure of Interests in Other Entities, which integrates and enhances the disclosure requirements for entities that have an interest in a subsidiary, a joint arrangement, an associate or an unconsolidated structured entity. IFRS 12 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted.
In May 2011, the IASB issued IFRS 13 – Fair Value Measurement, which establishes a single source of guidance for fair value measurement under IFRS. IFRS 13 defines fair value, provides guidance on measurement and introduces certain disclosure requirements. IFRS 13 must be applied prospectively for annual periods beginning on or after January 1, 2013, with early adoption permitted.
In June 2011, the IASB amended IAS 1 – Presentation of Financial Statements, providing guidance on items contained in other comprehensive income and their classification within other comprehensive income. The amendments to IAS 1 must be applied retrospectively for annual periods beginning on or after July 1, 2012.
In December 2011, the IASB amended IAS 32 – Financial Instruments: Presentation, clarifying the application of the offsetting requirements of financial assets and financial liabilities. The amendments to IAS 32 must be applied retrospectively for annual periods beginning on or after January 1, 2014.
The adoption of IFRS standards and amendments outlined above is not expected to have a significant impact on our financial statements.
In June 2011, the IASB amended IAS 19 – Employee Benefits, eliminating the corridor approach for recognizing actuarial gains and losses. Annual finance expense for a funded benefit plan will include net interest expense or income, calculated by applying the discount rate to the net DB asset or liability, replacing the finance charge and expected return on plan assets. Entities will also need to segregate changes in the DB obligation and in the fair value of plan assets into three components: service costs, net interest on the net DB liabilities (assets) and remeasurements of the net DB liabilities (assets). The amendments also enhance disclosure about the risks arising from DB plans. The amendments to IAS 19 must be applied retrospectively (with certain exceptions) for annual periods beginning on or after January 1, 2013, with early adoption permitted.
The amendments to IAS 19 are expected to result in an increase in net financing costs related to employee benefit plans.
The accounting policies used in our segment reporting are the same as those we describe in Note 2, Significant Accounting Policies. Our net earnings are reported in four segments: Bell Wireline, Bell Wireless, Bell Media and Bell Aliant. Our segments reflect how we manage our business and how we classify our operations for planning and measuring performance. Accordingly, we operate and manage our segments as strategic business units organized by products and services. Segments negotiate sales with each other as if they were unrelated parties.
We measure the performance of each segment based on segment profit, which is equal to operating revenues less operating costs for the segment. We also allocate severance, acquisition and other costs and depreciation and amortization to the segments. Substantially all of our finance costs, expected return on pension plan assets and other income are managed on a total company basis and, accordingly, are not reflected in segment results. The inter-segment eliminations eliminate any intercompany transactions included in each segment’s results.
Our operations and most of our assets are located in Canada. The Bell Wireline segment provides local telephone, long distance, Internet, data, video and other services and products to Bell Canada’s residential, small and medium-sized business and large enterprise customers, primarily in the urban areas of Ontario and Québec. Satellite video services are provided nationwide. Also included in this segment is our wholesale business, which buys and sells local telephone, long distance, data and other services from or to resellers and other carriers.
On January 1, 2011, Bell acquired xwave, a division of Bell Aliant, specializing in IT professional services and advanced technology solutions. As a result, 2010 results for Bell Wireline and Bell Aliant reflect the change in ownership of xwave.
The Bell Wireless segment provides wireless voice and data communication products and services to Bell Canada’s residential, small and medium-sized business and large enterprise customers across Canada.
On April 1, 2011, BCE acquired the remaining 85% of CTV Inc. (CTV) common shares that it did not already own. CTV is reported as a new segment, Bell Media, which also includes certain assets that we transferred to it from our wireline business. The Bell Media segment provides specialty TV, digital media, conventional TV and radio broadcasting entertainment services to customers across Canada.
The Bell Aliant segment provides voice, data, Internet, video, wireless and value-added business solutions to residential and business customers in the Atlantic provinces and in rural and regional areas of Ontario and Québec.
|FOR THE YEAR ENDED DECEMBER 31, 2011||NOTE||BELL|
Total operating revenues
Severance, acquisition and other costs
Depreciation and amortization
Expected return on pension plan assets
Earnings before income taxes
Goodwill allocated by groups of CGUs
Indefinite-life intangible assets allocated by groups of CGUs
|FOR THE YEAR ENDED DECEMBER 31, 2010||NOTE||BELL|
Total operating revenues
Severance, acquisition and other costs
Depreciation and amortization
Expected return on pension plan assets
Earnings before income taxes
Goodwill allocated by groups of CGUs
Indefinite-life intangible assets allocated by groups of CGUs
The chief operating decision maker uses only one measure of profit to make decisions and assess performance, being operating revenues less operating costs for the segment.
REVENUES BY PRODUCT
FOR THE YEAR ENDED DECEMBER 31
Local and access
Equipment and other
Total external revenues
ACQUISITION OF CTV
On April 1, 2011, BCE acquired the remaining 85% of the CTV common shares that we did not already own. We acquired CTV because it allows us to better leverage content across multiple platforms.
The purchase price allocation is complete and includes certain estimates. The following table summarizes the fair value of the consideration given and the fair value assigned to each major class of asset and liability.
Total cost to be allocated
Fair value of net assets acquired
The CRTC approved the acquisition and ordered BCE to spend $239 million over seven years to benefit the Canadian broadcasting system. The present value of this tangible benefits obligation, amounting to $164 million, net of $57 million assumed by CTV’s previous shareholders, was recorded as an acquisition cost in Severance, acquisition and other costs in 2011. Total acquisition costs relating to CTV, including the tangible benefits obligation, amounted to $160 million for the year ended December 31, 2011.
The acquisition date fair value of our previously held 15% AFS equity interest in CTV immediately before the acquisition was $221 million, resulting in a gain on remeasurement of $89 million, which was reclassified from Accumulated other comprehensive income to Other income in 2011.
Revenues of $1,507 million and net earnings of $165 million are included in the income statements in 2011 from the date of acquisition.
BCE’s consolidated operating revenues and net earnings for the year ended December 31, 2011 would have been $19,952 million and $2,557 million, respectively, had the CTV acquisition occurred on January 1, 2011. These pro forma amounts reflect the elimination of intercompany transactions, financing related to the acquisition, the amortization of certain elements of the purchase price allocation and related tax adjustments.
MAPLE LEAF SPORTS & ENTERTAINMENT LTD. (MLSE) INVESTMENT
On December 9, 2011, BCE announced it had, in a joint ownership arrangement with Rogers Communications Inc. (Rogers), agreed to purchase a net 75% ownership position in MLSE from Ontario Teachers’ Pension Plan Board. MLSE is a sports and entertainment company that owns the Toronto Maple Leafs, the Toronto Raptors, the Toronto Marlies and Toronto FC. BCE’s cash commitment will total $525 million (or $398 million assuming the completion of a leveraged recapitalization of MLSE), representing a 28% indirect equity interest in MLSE, to be funded at closing. Through a co-investment arrangement with BCE, the BCE Master Trust Fund, an independent trust that holds and manages pension fund investments for the BCE group pension plans, will contribute $135 million toward the MLSE acquisition. BCE and the BCE Master Trust Fund will own an aggregate 37.5% interest in MLSE, equal to Rogers’ interest. The transaction is expected to close in mid-2012 following required regulatory and sports league approvals.
Total labour costs
Cost of revenues(2)
Other operating costs(3)
Total operating costs
Included in operating costs is $229 million and $340 million of research and development expenses for 2011 and 2010, respectively.
FOR THE YEAR ENDED DECEMBER 31
Total severance, acquisition and other costs
Severance costs consist of employee termination charges related to involuntary and voluntary workforce reduction initiatives.
Acquisition costs consist of transaction costs, such as legal and bankers’ fees, employee severance costs related to the purchase or sale of a business and the costs to integrate acquired companies into Bell’s operations, when the integration costs are significant.
Acquisition costs for the year ended December 31, 2011 include $164 million relating to the CRTC tangible benefits obligation described in Note 4, Acquisitions, and a pension curtailment gain of $13 million recognized when certain employees were transferred to BCE from CTV.
Other costs consist of real estate costs for relocating employees and closing real estate facilities that are no longer needed because of workforce reduction initiatives, as well as other costs.
Other costs for the year ended December 31, 2011 include $18 million for real estate costs and $10 million relating to an administrative amount levied by the federal Competition Bureau.
Other costs for the year ended December 31, 2010 include $120 million related to the CRTC’s decision to include interest and other amounts in our deferral account balance. We also recognized an impairment charge of $62 million relating to certain Bell Aliant customer relationships as a result of a reduction in their estimated useful lives from 25 years to 10 years. The charge was determined by comparing the carrying value of the Bell Aliant customer relationships to its fair value less costs to sell, based on the sum of expected future discounted cash flows using discount rates from 8.62% to 8.89%..