• Note 23: Share Capital
• Note 24: Share-Based Payments
• Note 25: Commitments and Contingencies
• Note 26: Related Party Transaction
• Note 27: Supplemental Disclosure for Consolidated Statements of Cash Flows
• Note 28: First-Time Adoption of IFRS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (23 to 28)

We, us, our, BCE and the company mean either BCE Inc. or, collectively, BCE Inc., its subsidiaries, joint ventures and associates; Bell means our Bell Wireline, Bell Wireless and Bell Media segments on an aggregate basis; and Bell Aliant means either Bell Aliant Inc. or, collectively, Bell Aliant Inc. and its subsidiaries.

NOTE 23 | SHARE CAPITAL 

PREFERRED SHARES

BCE’s articles of amalgamation provide for an unlimited number of First Preferred Shares and Second Preferred Shares, all without par value. The terms set out in the articles authorize BCE’s directors to issue the shares in one or more series and to set the number of shares and conditions for each series.
The following table is a summary of the principal terms of BCE’s First Preferred Shares. There were no Second Preferred Shares issued and outstanding at December 31, 2011. BCE’s articles of amalgamation, as amended, describe the terms and conditions of these shares in detail.

VOTING RIGHTS

All of the issued and outstanding preferred shares at December 31, 2011 are non-voting, except under special circumstances, when the holders are entitled to one vote per share.

ENTITLEMENT TO DIVIDENDS

Holders of Series R, T, Z, AA, AC, AF, AG, AI and AK shares are entitled to fixed cumulative quarterly dividends. The dividend rate on these shares is reset every five years, as set out in BCE’s articles of amalgamation, as amended.
Holders of Series S, Y, AB, AD, AE, AH and AJ shares are entitled to floating adjustable cumulative monthly dividends. The floating dividend rate on these shares is calculated every month, as set out in BCE’s articles of amalgamation, as amended.
If Series Q and AL shares are issued, their holders will be entitled to floating adjustable cumulative monthly dividends and quarterly dividends, respectively.

CONVERSION FEATURES

All of the issued and outstanding preferred shares at December 31, 2011 are convertible at the holder’s option into another associated series of preferred shares on a one-for-one basis according to the terms set out in BCE’s articles of amalgamation, as amended.

REDEMPTION FEATURES

BCE may redeem each of Series R, T, Z, AA, AC, AF, AG, AI and AK shares at $25.00 per share on the applicable redemption date and every five years after that date. BCE may redeem each of Series Q, if issued, and Series S, Y, AB, AD, AE, AH and AJ shares at $25.50 per share at any time.

CONVERSION OF PREFERRED SHARES

On November 1, 2011, 1,794,876 of BCE’s 5,720,209 Cumulative Redeemable First Preferred Shares, Series T (Series T Preferred Shares) were converted, on a one-for-one basis, into Cumulative Redeemable First Preferred Shares, Series S (Series S Preferred Shares). In addition, on November 1, 2011, 468,442 of BCE’s 2,279,791  Series  S Preferred Shares were converted, on a one-for-one basis, into Series T Preferred Shares. As a result, 4,393,775 Series T and 3,606,225 Series S Preferred Shares remain outstanding.
For the five-year period beginning on November 1, 2011, the Series T Preferred Shares will pay a quarterly fixed dividend based on an annual dividend rate of 3.393%. The Series S Preferred Shares will continue to pay a monthly floating adjustable cash dividend.
On August 1, 2011, 3,245,010 of BCE’s 14,000,000 Cumulative Redeemable First Preferred Shares, Series AI (Series AI Preferred Shares) were converted, on a one-for-one basis, into Cumulative Redeemable First Preferred Shares, Series AJ (Series AJ Preferred Shares). As a result, 10,754,990  Series AI Preferred Shares remain outstanding.
For the five-year period beginning on August 1, 2011, the Series AI Preferred Shares will pay a quarterly fixed dividend based on an annual dividend rate of 4.15%. The Series AJ Preferred Shares will pay a monthly floating cash adjustable dividend.
On May 1, 2011, 370,067 of BCE’s 10,051,751 Cumulative Redeemable First Preferred Shares, Series AG (Series AG Preferred Shares) were converted, on a one-for-one basis, into Cumulative Redeemable First Preferred Shares, Series AH (Series AH Preferred Shares). In addition, on May 1, 2011, 1,159,372 of BCE’s 3,948,249 Series AH Preferred Shares were converted, on a one-for-one basis, into Series AG Preferred Shares. As a result, 10,841,056 Series AG and 3,158,944 Series AH Preferred Shares remain outstanding.
For the five-year period beginning on May 1, 2011, the Series AG Preferred Shares will pay a quarterly fixed dividend based on an annual dividend rate of 4.50%. The Series AH Preferred Shares will continue to pay a monthly floating adjustable cash dividend.
On October 12, 2010, BCE notified holders of its Cumulative Redeemable First Preferred Shares, Series R (Series R Preferred Shares) that they could elect to convert their shares into Cumulative Redeemable First Preferred Shares, Series Q (Series Q Preferred Shares) subject to the terms and conditions attached to those shares. Only 71,965 of BCE’s 8,000,000 Series R Preferred Shares were tendered for conversion into Series Q Preferred Shares. As this would have resulted in less than one million Series Q Preferred Shares outstanding, no Series R Preferred Shares were converted on December 1, 2010 into Series Q Preferred Shares.
For the five-year period beginning on December 1, 2010, the Series R Preferred Shares will pay a quarterly fixed dividend based on the annual dividend rate of 4.49%.
On February 1, 2010, 592,772 of BCE’s 14,085,782 Cumulative Redeemable First Preferred Shares, Series AF (Series AF Preferred Shares) were converted, on a one-for-one basis, into Cumulative Redeemable First Preferred Shares, Series AE (Series AE Preferred Shares). In addition, on February 1, 2010, 1,084,090 of BCE’s 1,914,218 Series AE Preferred Shares were converted, on a one-for-one basis, into Series AF Preferred Shares. As a result, 1,422,900 Series AE and 14,577,100 Series AF Preferred Shares remain outstanding.
For the five-year period beginning on February 1, 2010, the Series AE Preferred Shares continue to pay a monthly floating adjustable cash dividend. The Series AF Preferred Shares will pay a quarterly fixed dividend based on an annual dividend rate of 4.541%.
Dividends on all series of preferred shares will be paid as and when declared by the board of directors of BCE.

ISSUANCE OF PREFERRED SHARES

On July 5, 2011, BCE issued 13,800,000 Cumulative Redeemable First Preferred Shares, Series AK (Series AK Preferred Shares) for total gross proceeds of $345 million. Issuance costs were $11 million. On January 4, 2012, BCE issued 11,200,000 additional Series AK Preferred Shares for total gross proceeds of $280 million. Issuance costs were $8 million.
For the period ending on December 30, 2016, the Series AK Preferred Shares will pay, as and when declared by the board of directors of BCE, a quarterly fixed dividend based on an annual dividend rate of 4.15%. The Series AK Preferred Shares will, subject to certain conditions, be convertible at the holder’s option into Cumulative Redeemable First Preferred Shares, Series AL, on December 31, 2016 and on December 31 every five years thereafter.

COMMON SHARES AND CLASS B SHARES

BCE’s articles of amalgamation provide for an unlimited number of voting common shares and non-voting Class B shares, all without par value. The common shares and the Class B shares rank equally in the payment of dividends and in the distribution of assets if BCE is liquidated, dissolved or wound up, after payments due to the holders of preferred shares. No Class B shares were outstanding at December 31, 2011 and 2010.

The following table provides details about the outstanding common shares of BCE.

NCIB PROGRAM

2011 NCIB Program

In December 2011, BCE announced its plan to repurchase up to $250 million of its outstanding common shares through a NCIB.
In December 2011, BCE repurchased and cancelled a total of 3,500,466 common shares for a total cost of $143 million. Of the total cost, $61 million represents stated capital and $4 million represents the reduction of the contributed surplus attributable to these common shares. The remaining $78 million was charged to the deficit.
In December 2011, we purchased 142,900 common shares for a total cost of $6 million that were cancelled in January 2012.
In December 2011, we entered into an agreement with a financial institution to purchase an additional 1,080,000 common shares. A corresponding $44 million liability was recorded in our statement of financial position. These common shares are included in outstanding common shares as at December 31, 2011. The liability was settled in January 2012 upon purchase and cancellation of the common shares.

2010 NCIB Program

In 2010, BCE repurchased and cancelled a total of 16,236,182 common shares for a total cost of $500 million. Of the total cost, $274 million represents stated capital and $18 million represents the reduction of the contributed surplus attributable to these common shares. The remaining $208 million was charged to the deficit.
This program was completed in December 2010.

CONTRIBUTED SURPLUS

Contributed surplus mainly resulted from the distribution of fund units to the holders of BCE common shares by way of a return of capital upon the conversion of Bell Aliant from a corporate structure to an income fund in 2006 and premium in excess of par value upon the issuance of BCE common shares.

NOTE 24 | SHARE-BASED PAYMENTS 

The following share-based payment amounts are included in the income statements as operating costs.

DESCRIPTION OF THE PLANS

ESPs

ESPs are designed to encourage employees of BCE and its participating subsidiaries to own shares of BCE. Each year, employees can choose to have a certain percentage of their eligible annual earnings withheld through regular payroll deductions in order to buy BCE common shares. In some cases, the employer also will contribute up to a maximum percentage of the employee’s eligible annual earnings to the plan. Beginning in July 2010, employer contributions to the plan are subject to employees holding their shares for a two-year vesting period. Dividends are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividends paid on BCE common shares. Dividends related to employer contributions are also subject to the two-year vesting period.
Each participating company decides on its maximum percentage contribution. For Bell Canada, employees can contribute up to 12% of their annual earnings. Bell Canada contributes up to 2%.
The trustee of the ESP buys BCE common shares for the participants on the open market, by private purchase or from treasury. BCE determines the method the trustee uses to buy the shares.
At December 31, 2011, 13,513,812 common shares were authorized for issuance under the ESP.
The following table summarizes the status of unvested ESPs at December 31, 2011 and 2010.

RSUs

RSUs are granted to executives and other key employees. The value of an RSU at the grant date is equal to the value of one BCE common share. Dividends in the form of additional RSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividend paid on BCE common shares. Executives and other key employees are granted a specific number of RSUs for a given performance period based on their position and level of contribution. Most of the outstanding RSUs vest after three years from the date of grant, provided that the holder is employed by Bell Canada or one of its subsidiaries at that time and, in certain cases, if performance objectives are met as determined by the board.
The following table summarizes outstanding RSUs at December 31, 2011 and 2010.

STOCK OPTIONS

Under BCE’s long-term incentive plans, BCE may grant options to executives to buy BCE common shares. The subscription price of a grant is based on the higher of:

• the volume-weighted average of the trading price on the trading day immediately prior to the effective date of the grant

• the volume-weighted average of the trading price for the last five consecutive trading days ending on the trading day immediately prior to the effective date of the grant.

At December 31, 2011, 31,221,844 common shares were authorized for issuance under these plans.
Most options granted in March 2007 vested evenly over a four-year period of continuous employment from the date of grant, unless a special vesting period applied. Options granted in December 2008 vested fully after two years of continuous employment from the date of the grant. Options granted in February 2011 vest fully after three years of continuous employment from the date of grant. All options become exercisable when they vest and can be exercised for a period of up to ten years from the date of grant. Special vesting provisions may apply if:

• there is a change in control of BCE and the option holder’s employment ends

• the option holder is employed by a designated subsidiary of BCE and BCE’s ownership interest in that subsidiary falls below the percentage set out in the plan.

The following table summarizes BCE’s outstanding stock options at December 31, 2011 and 2010.

The following table provides additional information about BCE’s stock option plans at December 31, 2011.

Assumptions Used in Stock Option Pricing Model

The fair value of options granted was determined using a variation of a binomial option pricing model that takes into account factors specific to the share incentive plans, such as the vesting period. The following table shows the principal assumptions used in the valuation.

Expected volatilities are based on the historical volatility of BCE’s share price. The risk-free rate used is equal to the yield available on Government of Canada bonds at the date of grant with a term equal to the expected life of the options.

DSUs

Eligible bonuses and RSUs may be paid in the form of DSUs when executives or other key employees elect to or are required to participate in the plan. The value of a DSU at the issuance date is equal to the value of one BCE common share. For non-management directors, compensation is paid in DSUs until the minimum share ownership requirement is met or as elected by the directors thereafter. There are no vesting requirements relating to DSUs. Dividends in the form of additional DSUs are credited to the participant’s account on each dividend payment date and are equivalent in value to the dividends paid on BCE common shares. DSUs are settled when the holder leaves the company.
The following table summarizes the status of outstanding DSUs at December 31, 2011 and 2010.

NOTE 25 | COMMITMENTS AND CONTINGENCIES 

COMMITMENTS

The following table is a summary of our contractual obligations at December 31, 2011 that are due in each of the next five years and thereafter.

BCE’s significant operating leases are for office premises and retail outlets with lease terms ranging from 1 to 20 years. These leases are non-cancellable and are renewable at the end of the lease period. Rental expense relating to operating leases was $253 million in 2011 and $226 million in 2010.
Purchase obligations consist of contractual obligations under service and product contracts, for both operating and capital expenditures. Our commitments for capital expenditures include investments to expand and update our networks, and to meet customer demand.

CONTINGENCIES

We become involved in various legal proceedings as a part of our business. While we cannot predict the final outcome of the legal proceedings pending at December 31, 2011, based on the information currently available and management’s assessment of the merits of such legal proceedings, management believes that the resolution of these legal proceedings will not have a material and negative effect on our financial statements. We believe that we have strong defences and we intend to vigorously defend our positions.

NOTE 26 | RELATED PARTY TRANSACTIONS 

SUBSIDIARIES

The following table shows BCE’s significant subsidiaries at December 31, 2011. BCE has other subsidiaries which have not been included in the table as each represents less than 10% individually and less than 20% in aggregate of total consolidated revenues. These subsidiaries provide services to each other in the normal course of operations. The value of these transactions is eliminated on consolidation.

TRANSACTIONS WITH JOINT VENTURES AND ASSOCIATES

During 2011 and 2010, BCE provided and received services in the normal course of business and on an arm’s length basis from its joint ventures, Inukshuk Wireless Inc. and Enstream Inc., and its associates, Summerhill Ventures LLP and the Montréal Canadiens Hockey Club and the Bell Centre. BCE also provided and received services in the normal course of business and on an arm’s length basis from its joint venture Dome Productions Partnership and associates, Viewer’s Choice Canada Inc. and The NHL Network Inc., acquired through the CTV acquisition on April 1, 2011.
BCE recognized revenues and incurred expenses with our joint ventures and associates of $21 million (2010 – $18 million) and $78 million (2010 – $31 million), respectively.

BCE MASTER TRUST FUND

Bimcor Inc. (Bimcor), a wholly-owned subsidiary of Bell Canada, is the administrator of the BCE Master Trust Fund. Bimcor recognized management fees of $11 million and $12 million from the BCE Master Trust Fund for 2011 and 2010, respectively. The details of BCE’s employee benefit plans are set out in Note 20, Employee Benefit Plans. Additionally, in 2011, BCE announced a co-investment arrangement with the BCE Master Trust Fund for which the details are set out in Note 4, Acquisitions.

COMPENSATION OF KEY MANAGEMENT PERSONNEL AND BOARD OF DIRECTORS

The following table includes compensation of the key management personnel and board of directors for the years ended December 31, 2011 and 2010 included in our income statements. Key management personnel are the company’s Chief Executive Officer (CEO) and the executives who report directly to the CEO.

NOTE 27 | SUPPLEMENTAL DISCLOSURE FOR CONSOLIDATED STATEMENTS OF CASH FLOWS 

NOTE 28 | FIRST-TIME ADOPTION OF IFRS 

Our accounting policies presented in Note  2, Significant Accounting Policies, have been applied in preparing the financial statements for the year ended December 31, 2011, the comparative information for the year ended December 31, 2010 and the opening statements of financial position at January 1, 2010, our date of changeover to IFRS.
We have applied IFRS  1  – First-time Adoption of IFRS in preparing the statements of financial position at January 1, 2010. The effects of the changeover to IFRS on equity and total comprehensive income are presented in this note.
Certain reclassification adjustments have been made to our opening statements of financial position and the notes thereto as at January 1, 2010 that were included in our first quarter shareholder report.
Prior to January 1, 2010, our financial statements were prepared in accordance with previous Canadian GAAP.

FIRST-TIME ADOPTION ELECTIONS

MANDATORY EXCEPTIONS TO RETROSPECTIVE APPLICATION OF IFRS

We have applied all of the mandatory exceptions to full retrospective application of IFRS required under IFRS 1 other than the exception relating to the derecognition of financial assets. Our securitized trade receivables do not qualify for derecognition under IFRS. As permitted under IFRS 1, we have recognized our securitized trade receivables on a retrospective basis given that the information was available at the time of the initial accounting for these transactions. As a result, total current assets and total current liabilities increased by $1,305 million as at January 1, 2010.

ELECTIVE EXEMPTIONS

We have chosen the following elective exemptions to full retrospective application as permitted under IFRS 1.

Business Combinations

We have elected not to apply IFRS 3 – Business Combinations retrospectively to business combinations that occurred before the date of changeover to IFRS.

Employee Benefit Plans

We have elected to charge all of our deferred actuarial gains and losses in our DB pension plans under previous Canadian GAAP to the opening deficit as at January 1, 2010.

Deemed Cost

We have elected to use fair value as deemed cost as at January 1, 2010 for certain items of property, plant and equipment.

RECONCILIATION OF PREVIOUS CANADIAN GAAP TO IFRS

RECONCILIATION OF EQUITY

Total equity at January 1, 2010 and December 31, 2010 under previous Canadian GAAP is reconciled below to the amounts reported under IFRS. All amounts are after tax.

RECONCILIATION OF TOTAL COMPREHENSIVE INCOME

Total net earnings and comprehensive income for the year ended December 31, 2010 under previous Canadian GAAP are reconciled below to the amounts reported under IFRS.

RECONCILIATION OF THE CONSOLIDATED STATEMENTS OF CASH FLOWS

There were no material changes to the consolidated statements of cash flows on adoption of IFRS, except for the cash provided by or used in our investment in joint ventures. Under previous Canadian GAAP, increases and decreases in cash and cash equivalents in joint ventures were proportionately consolidated. Under IFRS, we account for joint ventures using the equity method and increases and decreases in cash and cash equivalents are presented in cash from investing activities.

EXPLANATORY NOTES

 a. Employee Benefit Plans

Under previous Canadian GAAP, we amortized actuarial gains and losses to earnings over employees’ expected average remaining service life (EARSL) using the corridor method relating to our DB pension and other employee future benefit plans. We deducted 10% of the greater of the employee benefit obligation or the market-related value of pension plan assets from the unamortized net actuarial gains or losses on a market-related value basis. Any excess was amortized to earnings on a straight-line basis over EARSL. Past service costs under previous Canadian GAAP also were amortized on a straight-line basis over EARSL.
Under IFRS, we recognize actuarial gains and losses on a current basis in other comprehensive income as incurred. Vested past service costs are recognized immediately in earnings. IFRS also requires that the return on pension plan assets be measured using market values, instead of the market-related values we used under previous Canadian GAAP.
Under IFRS 1, we elected to charge all deferred actuarial gains and losses to the opening deficit on January 1, 2010. At the date of changeover, we reduced the employee benefit asset by $2,316 million, increased employee benefit obligations by $979 million and the opening deficit increased by $2,403 million, net of a decrease in deferred tax liabilities of $652 million, an increase in deferred tax assets of $241 million and non-controlling interest of $1 million.
For the year ended December 31, 2010, the discount rate declined from 6.4% to 5.5% and the actual return on assets was 11.4% compared to an expected annual return of 7.0%. As a result, our employee benefit obligation increased by $1,358 million and the deficit increased by $969 million, net of taxes of $389 million and non-controlling interest of $2 million.
The decrease in net earnings of $97 million, net of taxes of $29 million, for the year ended December 31, 2010 is comprised of an increase in the net employee benefit plans cost due to the valuation of plan assets at market value, partly offset by the exclusion of amortization of actuarial losses as the losses were charged to the opening deficit on changeover to IFRS and the inclusion of pension current service cost in our capitalized labour rates. Additionally, for the year ended December 31, 2010, a valuation allowance amounting to $38 million, net of taxes of $13 million, that was recorded in pension expense under previous Canadian GAAP, has been recorded in other comprehensive income under IFRS.

 b. Deemed Cost

Under IFRS, we elected, at the date of changeover, to use fair value as deemed cost for certain items of property, plant and equipment. The fair value of the property, plant and equipment was $2,952 million, resulting in a decrease in the carrying amount of $1,344 million. As a result, $969 million, net of taxes of $375 million, was charged to the opening deficit on January 1, 2010.
As a result of this adjustment, net earnings increased by $172 million, net of taxes of $74 million, for the year ended December 31, 2010.

 c. Depreciation and Amortization

Under previous Canadian GAAP, we depreciated most of our wireline assets using the group method of depreciation. When we retired or disposed of assets in the ordinary course of business, we charged the gain or loss to accumulated depreciation.
Under IFRS, we depreciate capital assets using the straight-line method over their estimated useful lives and gains and losses on retirement or disposal of assets are included in earnings as incurred.
At January 1, 2010, we applied the straight-line method of depreciation retrospectively to assets previously depreciated using the group method, which resulted in a decrease to the carrying amount of those assets of $619 million. The resulting charge of $452 million, net of taxes of $167 million, was charged to the opening deficit at January 1, 2010. For the year ended December 31, 2010, depreciation expense increased by $104 million, net of taxes of $2 million.
For the year ended December 31, 2010, losses on disposal resulted in a decrease in net earnings of $13 million, net of taxes of $5 million.

 d. Income Taxes

On the date of changeover, we increased our deferred tax liabilities and the opening deficit by $314 million due to the difference in the inclusion rate for temporary differences related to certain intangible assets.

 e. Non-Controlling Interest

Under previous Canadian GAAP, non-controlling interest was presented as a separate component between liabilities and equity in the statements of financial position and as a component of net earnings in the income statements.
Under IFRS, non-controlling interest is presented as a separate component within equity in the statements of financial position and is not included as part of net earnings in the income statements.

 f. Fund Unit Liability

Under previous Canadian GAAP, the 55.9% of fund units that were publicly held were accounted for as equity. They were presented as non-controlling interest in our financial statements, and were measured at the pro-rata share of net assets of Bell Aliant.
Under IFRS, fund units held by the public that have a feature that allows the holder to redeem the instrument for cash or another financial asset at the holder’s option are presented as a liability and recorded at fair value with changes in fair value recorded in net earnings.
At the date of changeover to IFRS, we recognized a fund unit liability of $3,104 million, decreased our non-controlling interest by $1,030 million, decreased accumulated other comprehensive income by $15 million and increased our deficit by $2,059 million.
For the year ended December 31, 2010, interest on the fund unit liability was $370 million, the fair value gain was $49 million and previously reported non-controlling interest decreased by $299 million, which resulted in a decrease in net earnings of $22 million.

 g. Joint Venture Interests

Under previous Canadian GAAP, we accounted for our interests in joint ventures using the proportionate consolidation method. Under this method, we recorded our pro-rata share of the assets and liabilities, revenues and expenses, and cash flows of our joint ventures. Under IFRS, we use the equity method to account for our joint venture interests.