Multi-Communications Ltd. (MCL) is a Canadian- owned public company operating through-out North America. Its core business is communications media, including newspapers, radio, television, and cable. The company’s year- end is December 31.
You, CA, have recently joined MCL’s reporting office as a finance director, reporting to the chief financial officer, Robert Allen. It is October 20X8. Mr. Allen has asked you to prepare a report discussing the accounting and auditing issues that may arise with the auditors during their visit in November.
MCL’s growth in 20X8 was achieved through expansion into the United States by acquiring a number of newspaper, television, and cable operations. Since the US side of MCL’s operations is now significant, management will be reporting its financial statements in US dollars. Shareholders’ equity at the beginning of the period was $ 220 million, including a separately disclosed cumulative foreign exchange gain of $ 45 million. Management merged this balance with retained earnings because “the operations it relates to are no longer considered foreign for accounting purposes, and as a result no foreign- currency exposure will arise.”
With recent trends to international free trade, MCL decided to position itself for future expansion into the South American market. Therefore, in 20X8 MCL bought a company that owns a radio network in a country in South America that has high inflation. MCL was willing to incur losses in the start-up since it was confident that in the long run it would be profitable. The South American country has had a democratic government for the past two years. Its government’s objectives are to open the country’s borders to trade and lower its inflation rate. The government was rather reluctant to let a foreign company purchase such a powerful communication tool. In exchange for the right to buy the network, MCL agreed, among other conditions, not to promote any political party, to broadcast only pre- approved public messages, and to let the government examine its books at the government’s convenience. Management has recorded its investment in the books using the cost method.
In 20X8, MCL acquired a conglomerate, Peter Holdings (PH), which held substantial assets in the communications business. Over the past three months, MCL has sold off 80% of PH’s non–communications-related businesses. In the current month, MCL sold PH’s hotel and recreational property business for $ 175 million, realizing a gain of $ 22 million ($ 14.5 million after tax). The assets related to the non- communications businesses were scattered throughout the United States and MCL lacked the industry expertise to value them accurately. Management therefore found it difficult to determine the net realizable value of each of these assets at the time PH was acquired.
In 20X8, MCL decided to rationalize its television operations. Many of PH’s acquisitions in the television business included stations in areas already being served by other stations operated by MCL. MCL systematically identified stations that were duplicating services and did not fit with MCL’s long- range objectives. These assets have been segregated on the SFP and classified as current. The company anticipates generating a gain on the disposal of the entire pool of assets, although losses are anticipated on some of the individual stations. Operating results are capitalized in the pool. Once a particular station is sold, the resulting gain or loss is reflected in income.
Nine stations are in the pool at the present time. In 20X8, three were sold, resulting in gains of $ 65,000 after tax. Losses are expected to occur on several of the remaining stations. Although serious negotiations with prospective buyers are not underway at present, the company hopes to have disposed of them in early 20X9. To facilitate the sale of these assets, MCL is considering taking back mortgages.
In 20X8, MCL estimated the fair market value of its intangible assets at $ 250 million. Included as intangibles are newspaper and magazine circulation lists, cable subscriber lists, and broadcast licenses. Some of these assets have been acquired through the purchase of existing businesses; others have been generated internally by operations that have been part of MCL for decades.
Amounts paid for intangibles are not difficult to determine; however, it has taken MCL staff some time to determine the costs of internally generated intangibles. To increase subscriptions for print and electronic media, MCL spends heavily on subscription drives by way of advertisements, cold calls, and free products. For the non- acquired intangibles, MCL staffs have examined the accounting records for the past 10 years and have identified expenditures totaling $ 35 mil-lion that were expensed in prior years. These costs relate to efforts to expand customer bases. In addition, independent appraisers have determined the fair market value of these internally generated intangibles to be in the range of $ 60 million to $ 80 million. To be conservative, management has decided to reflect these intangibles on the December 31, 20X8, SFP at $ 60 million.
The market values of companies in the communications industry have been escalating in the past few years, indicating that the value of the underlying assets (largely intangibles) is increasing over time. MCL management stated that these licenses do not lose any value, and in this industry, actually increase in value over time.
MCL has invested in the installation of fiber optic cable, which can transmit far more, far faster than conventional cable. The cost of the cable itself is negligible. MCL will be using it for transmission between its stations in two major Canadian cities. MCL needed only six cables to link all its television and radio stations between the two cities, but it decided to put in 36 cables since it was doing the digging anyway. To date, MCL has sold six cables and charges a monthly fee to new owners to cover their share of maintenance expenses. MCL is leasing 10 other cables for 15-year periods.

Required
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