Multi-Communications Ltd. (MCL) is a Canadian-owned public company operating throughout North America. Its core business is communications media, including newspapers, radio, television, cable, and Internet. The company's year end is December 31.

You, CA, have recently joined MCL's corporate office as a finance director, reporting to the chief financial officer, Dasan Sudjic. It is October 2013. Mr. Sudjic has asked you to prepare a report that discusses the accounting issues that might arise with the auditors during their visit in November.

MCL's growth in 2012 was achieved through expansion into the United States by acquiring a number of newspa pers, television, and cable operations. Since the U.S. side of MCL's operations is now significant, management will be reporting its financial statements in U.S. dollars. Shareholders' equity at the beginning of the period was stated in U.S. 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 2013, 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 last 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 this investment on the books at cost.

In 2013, MCL acquired a conglomerate, Peters 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.

Newspaper readership has peaked, leaving no room for expansion. In 2012, to increase its share of the market, MCL bought all the assets of a competing newspaper for $10 million. In 2013, MCL ceased publication of the competing newspaper and liquidated the assets for $4.5 million.

In 2013, 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 are duplicating services and do not fit with MCL's long-range objectives. These assets have been segregated on the balance sheet and classified as current. The company anticipates generating a gain on the disposal of the entire pool of assets, although losses are expected 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 2013, 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 2014. In order to facilitate the sale of these assets, MCL is considering taking back mortgages.

In 2013, MCL estimated the fair 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 acquired intangibles are not difficult to determine; however, it has taken MCL staff some time to determine the costs of internally generated intangibles. In order 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 staff have examined the accounting records for the past 10 years and have identified expenditures totaling $35 million 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 to $80 million. In order to be conservative, management has decided to reflect these intangibles on the December 31, 2013, balance sheet at $60 million.

The market value of companies in the communications industry has been escalating in the past few years, indicating that the value of the underlying assets (largely intangibles) is increasing over time. MCL management would prefer not to amortize broadcasting licenses, arguing that these licences do not lose any value and, in this industry, actually increase in value over time.

One of the items included in the intangible category is MCL's patented converter, which was an unplanned by product of work being done on satellite communications devices a few years ago. MCL has sold $25 million of its accounts receivables to a medium-sized financial intermediary, PayLater Corp. The receivables are being resold to a numbered company whose common shares are owned by PayLater Corp. MCL receives one half of the consideration in cash and one half in subordinate non-voting, redeemable shares of the numbered company, bearing a dividend rate of 9%. The dividend payments and share redemption are based on the collectability of the receivables. The purchase price is net of a 4% provision for doubtful accounts. MCL has recorded a loss of $1 million on this transaction. PayLater has an option to return the receivables to MCL at any time for 94% of their face value.

The arrival of Internet video streaming services has revolutionized the entertainment industry. In response to this new development, which is seen as a threat, the communication industry is developing its own interactive services at a cost of over $6 billion. This service will allow viewers to access television services through their computers. MCL hopes this will allow it to maintain its market share of viewers.

MCL has invested in equipment allowing it to offer Internet customers "turbo" high-speed so they can receive their regular TV channels on their computers. The cost of the equipment itself is negligible. MCL will be using it for all its major Canadian cities. MCL needed servers in only six cities but decided that it might as well put them in 36 cities since it was doing line upgrades anyway. To date, MCL has rolled out the turbo service in six cities and charges a monthly fee to new owners to cover their share of all maintenance expenses. MCL is leasing 10 other servers for 15-year periods.

Required

Prepare the report to the CFO, Dasan Sudjic.