Consolidated Financial Statements. Sirius XM Canada Holdings Inc. August 31, 2013 and 2012

Transcription

1 Consolidated Financial Statements Sirius XM Canada Holdings Inc. August 31, 2013 and 2012

2 November 14, 2013 Independent Auditor s Report To the Shareholders of Sirius XM Canada Holdings Inc. We have audited the accompanying consolidated financial statements of Sirius XM Canada Holdings Inc. and its subsidiary, which comprise the consolidated balance sheets as at August 31, 2013 and August 31, 2012 and the consolidated statements of operations and comprehensive income (loss), changes in shareholders equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Sirius XM Canada Holdings Inc. and its subsidiaries as at August 31, 2013 and August 31, 2012 and their financial performance and their cash flows for the years ended August 31, 2013 and August 31, 2012 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants

4 CONSOLIDATED BALANCE SHEETS At August 31, August 31, (Canadian dollars) Notes ASSETS Current assets Cash and cash equivalents 44,078,584 51,034,749 Short-term investments 14 5,157,798 Accounts receivable 14 13,359,446 12,133,138 Prepaid expenses 6,778,736 3,361,448 Inventory 4 234, ,316 Total current assets 69,608,913 66,853,651 Long-term prepaid expenses 100,157 79,410 Property and equipment 5 5,979,911 7,617,399 Intangible assets 6 152,217, ,986,331 Deferred tax assets 7 54,483,616 59,858,394 Goodwill 8 96,732,525 96,732,525 Total assets 379,122, ,127,710 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade and other payables 14 47,145,257 39,085,800 Due to related parties 9 9,620,750 6,775,601 Interest payable 10 2,704,449 2,704,449 Current portion of deferred revenue 144,885, ,554,399 Provisions 11 1,327,974 1,285,587 Total current liabilities 205,683, ,405,836 Deferred revenue 17,105,210 21,019,320 Other long-term liabilities 14 1,669,229 6,902,537 Due to related parties 9 2,390,608 1,208,332 Long-term debt ,707, ,992,819 Provisions , ,112 Total liabilities 370,878, ,872,956 Shareholders' equity Share capital ,794, ,393,493 Contributed surplus 6,161,440 5,057,501 Accumulated deficit (149,712,623) (108,196,240) Total shareholders' equity 8,243,413 45,254,754 Total liabilities and shareholders equity 379,122, ,127,710 See accompanying notes Contracts, Contingencies and Commitments (note 19) Approved by Board of Directors (signed) John I. Bitove John I. Bitove, Director (signed) Anthony Viner Anthony Viner, Director

5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the year ended August 31 Share Contributed Accumulated Shareholders' (Canadian dollars) Notes Capital Surplus deficit Equity Total Balance, September 1, ,169,430 4,324,032 (104,017,424) 47,476,038 Net loss for the year (4,178,816) (4,178,816) Stock-based compensation 13 1,493,400 1,493,400 Stock options exercised 13 1,224,063 (759,931) 464,132 Balance, August 31, ,393,493 5,057,501 (108,196,240) 45,254,754 Balance, September 1, ,393,493 5,057,501 (108,196,240) 45,254,754 Net income for the year 12,190,542 12,190,542 Stock-based compensation 13 2,257,295 2,257,295 Dividends 12 (53,706,925) (53,706,925) Stock options exercised 13 3,401,103 (1,153,356) 2,247,747 Balance, August 31, ,794,596 6,161,440 (149,712,623) 8,243,413 See accompanying notes

6 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the year ended August 31 (Canadian dollars) Notes Revenue ,900, ,619,500 Operating expenses Operating costs ,650, ,703,343 Integration, severance and merger costs 16 1,383,105 Depreciation and amortization 5, 6 35,575,596 39,689,053 Operating income 30,674,559 2,843,999 Finance costs, net Interest income 686, ,906 Interest expense 10 (15,410,960) (16,699,532) Foreign exchange loss (675,789) (210,372) Gain on revaluation of derivative 14 2,291,378 1,213,473 Finance costs, net (13,109,239) (15,335,525) Net income (loss) before income tax 17,565,320 (12,491,526) Income tax (expense) recovery 7 (5,374,778) 8,312,710 Net income (loss) and comprehensive income (loss) 12,190,542 (4,178,816) Basic and diluted earnings (loss) per share (0.03) See accompanying notes

7 CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended August 31 (Canadian dollars) Notes Cash provided by (used in) OPERATING ACTIVITIES Net income (loss) for the year 12,190,542 (4,178,816) Add(deduct) items not involving cash Amortization of intangible assets 6 33,167,880 36,899,668 Depreciation of property and equipment 5 2,407,716 2,789,385 Loss on disposal of property and equipment 5 11,109 Deferred tax recovery 7 5,374,778 (8,312,710) Stock-based compensation 13 2,257,295 1,493,400 Accrued interest (5,088) Interest accretion , ,583 Revaluation of derivatives 10 (2,291,378) (1,213,473) Foreign exchange losses 769,540 3,010 Net change in non-cash working capital and deferred revenue related to operations 18 5,409,419 12,649,125 Cash provided by operating activities 60,251,276 41,075,084 INVESTING ACTIVITIES Purchase of property and equipment 5 (753,788) (728,425) Purchase of intangible assets 6 (7,624,829) (3,700,491) Prepayment of property and equipment (2,240,000) Purchase of short-term investments 14 (5,306,295) Interest received on short-term investments ,649 Cash (used in) investing activities (15,748,263) (4,428,916) FINANCING ACTIVITIES Payment of dividends 12 (53,706,925) Proceeds from exercise of stock options 13 2,247, ,132 Repayments of debt 10 (917,700) Payment of related party promissory notes 9 (11,173,290) Cash (used in) financing activities (51,459,178) (11,626,858) Net (decrease) increase in cash and cash equivalents during the year (6,956,165) 25,019,310 Cash and cash equivalents, beginning of year 51,034,749 26,015,439 Cash and cash equivalents, end of year 44,078,584 51,034,749 See accompanying notes

8 1. ORGANIZATION AND NATURE OF BUSINESS Sirius XM Canada Holdings Inc. (the Company or SXM ) was incorporated on July 31, 2002 for the purpose of establishing and operating a Canadian satellite radio service. The Company broadcasts music, sports, talk, entertainment and other content on a subscription fee basis in Canada. Subscribers can also receive certain content over the Internet and mobile devices. The Company s Satellite radios are primarily distributed through automakers ( OEMs ), through retail locations and through the Company s website. SXM has agreements with every major automaker to offer satellite radios as factory installed or dealer installed equipment in their vehicles. The Company operates and markets itself as SiriusXM Canada. On January 15, 2013, the Company changed its name from Canadian Satellite Radio Holdings Inc. to Sirius XM Canada Holdings Inc. to reflect the Company s unified branding and operations. The Company is incorporated and domiciled in Canada. The Company s head office is located at 135 Liberty Street, 4 th Floor, Toronto, Ontario, M6K 1A7. In November 2012, the Canadian Radio-television Telecommunications Commission ( CRTC ) granted the Company a single license with extended term of six years from December 1, 2012 to August 31, These financial statements were approved by the Board of Directors for issue on November 14, SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies used in the preparation of these consolidated financial statements are described below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of Preparation and Measurement The Company prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"), defined as International Financial Reporting Standards ( IFRS ) as set out in the Handbook of The Canadian Institute of Chartered Accountants. The preparation of consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated financial statements are disclosed later in this note. The consolidated financial statements have been prepared under the historical cost convention, except for certain financial assets and liabilities measured at fair value, including embedded derivatives. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for sharebased payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. 2

9 In addition, for financial reporting purpose, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 - inputs are inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 - inputs are unobservable inputs for the asset or liability. Consolidation The consolidated financial statements consolidate the accounts of Sirius XM Canada Holdings Inc. and its subsidiary, Sirius XM Canada Inc. Subsidiaries are those entities which Sirius XM Canada Holdings Inc. controls by having the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Sirius XM Canada Holdings Inc. controls another entity. Subsidiaries are fully consolidated from the date on which control is obtained by Sirius XM Canada Holdings Inc. and are de-consolidated from the date that control ceases. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. Business combinations The Company uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Company recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the income statement. Foreign currency translation Items included in the financial statements of each consolidated entity in the Sirius XM Canada Holdings Inc. group are measured using the currency of the primary environment in which the entity operates (the functional currency ). The functional currency of all entities in the group is the Canadian dollar. The consolidated financial statements are also presented in Canadian dollars. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end of monetary assets and liabilities denominated in currencies other than an operation s functional currency are recognized in the statement of operations and comprehensive income. 3

10 Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and short term highly liquid investments with original maturity of three months or less that are subject to an insignificant risk of changes in value. Short-term investments Short-term investments represent investments in corporate bonds, which have original maturities in excess of three months but less than twelve months. These investments are being accounted for at amortized cost. Prepaid expenses Prepaid expenses consist primarily of prepayments for goods and services, including marketing payments and performance rights fees paid relating to future periods. These amounts are deferred and expensed as the goods or services are used by the Company. Financial instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. At initial recognition, the Company classifies its financial instruments in the following categories depending on the nature of the financial instrument and the purpose for which the instruments were acquired: (i) Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short term. (ii) Available-for-sale investments: are non-derivatives that are either designated in this category or not classified in any of the other categories. The Company currently does not have any available-for-sale investments. (iii) Held-to-maturity: are non-derivative financial assets with fixed or determinable payments that the Company intends and is able to hold to maturity and that do not meet the definition of loans and receivables and are not designated on initial recognition as assets at fair value through profit or loss or as available for sale. Held-to-maturity investments are measured at amortized cost. (iv) Loans and receivables: are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Company s loans and receivables are comprised of trade receivables and cash and cash equivalents, and are included in current assets due to their short-term nature. Loans and receivables are initially recognized at the amount expected to be received less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest rate method less a provision for impairment. 4

11 (v) Financial liabilities at amortized cost: include trade and other payables, due to related parties, other longterm liabilities, and long-term debt. Trade and other payables are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, trade and other payables are measured at amortized cost using the effective interest rate method. Longterm debt is recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the effective interest rate method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. (vi) Derivative financial instruments: Derivatives are initially recognized at fair value on the date a derivative contract is entered into and would be subsequently re-measured at their fair value. The Company has not entered into any standalone derivative instruments. (vii) Embedded derivatives: are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Liabilities related to embedded derivatives are included in trade and other payables. Gains or losses arising from the changes in fair value are presented in the income statement as gain (loss) on revaluation of derivatives in the period in which they arise. Compound financial instruments Compound financial instruments issued by the Company comprise of convertible notes that can be converted to share capital at the option of the holder. The number of shares potentially issuable does not vary with changes in the fair value of the underlying shares (see Note 10 for further details). The liability of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss, as follows: (i) Financial assets carried at amortized cost: The loss is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. 5

12 (ii) Available-for-sale financial assets: The impairment loss is the difference between the original cost of the asset and its fair value at the measurement date, less any impairment losses previously recognized in the statement of operations and comprehensive income. This amount represents the cumulative loss in accumulated other comprehensive income that is reclassified to net income. The Company currently does not have any available for sale financial assets. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Inventory Inventory is stated at the lower of cost and net realizable value. Cost of sales is determined using the average weighted cost method. The entire balance consists of finished goods. The cost of finished goods comprises invoiced cost, shipping costs and other costs directly attributable to acquiring the inventory. Net realizable value is the estimated selling price less estimated selling expenses. If the carrying value exceeds net realizable value, a write down is recognized. The write-down may be reversed in a subsequent period if the circumstances which caused it to exist no longer exist. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Leases where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. The Company does not have any finance leases. Property and equipment Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The cost of replacing a part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement as incurred. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Terrestrial repeaters Computer hardware Office equipment Furniture and fixtures 7 years 3-5 years 3-5 years 7 years 6

13 Broadcast studio equipment Leasehold improvements 3-10 years Term of lease Depreciation methods, useful lives and residual values are reviewed at least at each financial year end and adjusted if appropriate prospectively. Intangible assets The Company s intangible assets include distribution rights with automotive companies, subscriber relationships, XM activation fees, rights to use trademarks and computer software, and licenses with finite useful lives. These assets are capitalized and amortized on a straight-line basis in the statement of operations and comprehensive income over the period of their expected useful lives as follows: General Motors of Canada Limited (GMCL) distribution rights Honda distribution rights Nissan distribution rights Hyundai distribution rights Toyota distribution rights Subscriber relationships XM activation fees NHL Trademark Computer software Computer software licenses 7.4 years 2.8 years 4.8 years 0.9 years 5.6 years 3.5 years 1.7 years 4.2 years 3-5 years Term of license Intangible assets are stated at cost less accumulated amortization. Intangible assets related to computer software and licenses and XM activation fees are measured at cost paid to third parties. Other intangible assets were acquired as part of the business combination, and were initially recorded at their estimated fair value at the date of the business combination. XM activation fees comprise activation fees relating to XM subscribers, paid to Sirius XM Radio Inc. ( Sirius XM ). These are included in intangible assets and amortized over the estimated life of the subscriber relationship. Amortization methods and amortization periods are reviewed at least at each financial year end and adjusted if appropriate prospectively. Intangible assets with indefinite lives, which comprise the Company s broadcast licenses, are not amortized. The Company has determined the broadcast license has an indefinite life as the license can be renewed without substantial cost. Intangible assets with indefinite lives are reviewed each period to determine whether events and circumstances continue to support an indefinite useful life assessment for that asset. The broadcast license is tested for impairment at least annually or when an indicator of impairment exists. Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible with indefinitely useful lives are that acquired separately are carried at costs less accumulated impairment losses. Cost related to research activities for internally generated assets is recognized as an expense in the period when it is incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognized as an intangible asset if, and only if, all of the following have been demonstrated: The technical feasibility of completing the intangible asset so that it will be available for use or sale. 7

14 The intention to complete the intangible asset and use or sell it. The ability to use or sell the intangible asset. How the intangible asset will generate probable future economic benefits. The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. The ability to measure reliably the expenditure attributable to the intangible during its development. The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested at least annually for impairment in accordance with the policy on impairment of non-financial assets and is carried at cost less accumulated impairment losses. Goodwill is allocated to each cash-generating unit ( CGU or CGUs ) that is expected to benefit from the related business combination. Impairment losses on goodwill are not reversed. Impairment of non-financial assets Property and equipment and definite life intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (CGUs). Recoverable amount is the higher of an asset s fair value less costs to sell and value in use (being the present value of the expected future cash flows of the relevant asset or CGU, as determined by management). Goodwill, indefinite lived intangible assets and intangible assets not yet available for use are reviewed for impairment annually or at any time if an indicator of impairment exists. Management monitors and tests goodwill for impairment based at the CGU level to which the goodwill relates. The Company evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances warrant such consideration and accordingly, goodwill is assessed for impairment together with the assets and liabilities of the related segment. Employee benefits Group Registered Retirement Savings Plan The Company sponsors a Group Registered Retirement Savings Plan ("RRSP") (the "Plan") for eligible employees. The Plan allows eligible employees to voluntarily contribute to a Group RRSP subject to certain defined limitations. Currently, the Company matches 100% of an employee's voluntary contributions, up to 4% of an employee's pre-tax base salary, in the form of cash contributions. Company payments to the Group RRSP are charged to expense as the contributions become payable. 8

15 Stock-based compensation Stock option awards The Company grants stock options to certain employees, directors and senior officers. Stock options vest either immediately or equally over either four or five years and expire after seven years. Each tranche of an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is determined as at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period by increasing contributed surplus based on the number of awards expected to vest. The number of awards expected to vest is reviewed at least annually, with any change in estimate recognized immediately in compensation expense with a corresponding adjustment to contributed surplus. Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital. Restricted stock units (RSUs) and performance stock units (PSUs) For each RSU and PSU granted, the Company recognizes compensation expense equal to the market value of a Class A common share of the Company at the date of grant based on the number of RSUs and PSUs expected to vest, recognized over the term of the vesting period, with a corresponding credit to contributed surplus for equity settled RSUs and PSUs. RSUs and PSUs vest over a three year period and the number of PSUs that will vest will vary depending on meeting performance conditions attached to the award. Compensation expense is adjusted for subsequent changes in management s estimate of the number of RSUs and PSUs that are expected to vest. The effect of these changes is recognized in the period of change. Upon settlement of equity settled RSUs and PSUs, any difference between the cost of the shares purchased on the open market and the amount of credited to contributed surplus is reflected in accumulated deficit. Vested RSUs and PSUs are settled in common shares, at the discretion of the Board of Directors, however they may be settled in cash. Currently the Company expects all RSUs and PSUs to be settled in shares. Termination benefits The Company recognizes termination benefits when it is demonstrably committed to terminating the employment of current employees according to a detailed formal plan without the possibility of withdrawal. Benefits falling due more that twelve months after the end of a reporting period are discounted to their present value. Provisions Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present value where the effect is material. The Company performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts. Provisions include the following: 9

16 i) Product obligations - A provision for product obligation is due to the Company s operating relationship with distributors and retailer vendors. There is a constructive obligation that the Company will subsidize discounts and provide price protection in order to move existing obsolete products in order to sell new products. ii) Decommissioning liabilities - A provision is made for the present value of the future costs of retiring terrestrial repeater equipment and restoration of leased facilities to their original state at the end of the lease term. The estimated costs are computed based on management s estimate of the fair value of the expenditures expected to be required to settle the obligations using a pre-tax discount rate, updated at each reporting date, which reflects current market assessments of the time value of money and the risks specific to the obligations. The corresponding amount is capitalized as part of property and equipment and depreciated over the period from the lease inception until the time the Company expects to remove the terrestrial repeater equipment and vacate the premises, with the liability accreted over the same period. Any adjustment arising from the assessment of estimated decommissioning cost is capitalized, while the charge arising from the accretion of the discount applied to the decommissioning liabilities is treated as a component of interest expense in the statement of operations and comprehensive income. Income tax Income tax comprises current and deferred tax. Income tax is recognized in the statement of operations and comprehensive income except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect to previous years. In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not recognized if it arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilized. Deferred tax assets and liabilities are presented as non-current. Revenue recognition The Company derives revenue primarily from subscription and activation fees (net of customer rebates earned), equipment sales and advertising. Revenue is measured at the fair value of the consideration received or receivable. The Company recognizes revenue when the amount of the revenue and costs can be reliably measured; when it is probable that future economic benefits will flow to the Company; and when specific criteria have been met for each of the Company s activities, as described below. 10

17 Subscription and activation fees The Company recognizes subscription fees as service is provided to the subscriber. Subscription fees include music royalty fees and other fees. Prepaid subscription fees billed in advance are recorded as deferred revenue and recognized as revenue ratably over the term of the applicable subscription plan. At the time of sale, certain vehicle owners purchasing or leasing a vehicle with a subscription to the Company s service typically receive between a three-month and one-year prepaid subscription. Prepaid subscription fees received from automakers are recorded as deferred revenue and amortized to revenue ratably over the service period, upon activation. The Company reimburses automakers for certain costs associated with the satellite radio installed in the applicable vehicle at the time the vehicle is manufactured. The associated payments to the automakers are included in subscriber acquisition costs, which are part of sales and marketing. Although the Company receives payments for the subscription from the automakers, they do not resell the service; the automakers facilitate the sale of the service to their customers, acting similarly to an agent for the Company. The Company is principally obligated in these relationships as the Company is responsible for providing the service to the customers, including being obligated to the customers in the case of an interruption of service. Sales incentives consisting of rebates to customers are accounted for as reductions of revenue when the revenue is recognized or the incentive is offered. Certain fees billed to automakers for services offered to automobile purchasers during the promotional periods are offset by amounts paid to the automakers for subsidies related to the sale of the automobiles with the Company s product. Activation fees are recognized evenly over the estimated term of a subscriber relationship which is based upon historical customer subscription terms. The Company currently estimates this period to be 20 months. Fees received in advance are recognized as deferred revenue. Equipment sales Equipment revenue from the direct sale of satellite radios and accessories is recognized upon shipment. Shipping and handling costs billed to customers are recorded as revenue. Shipping and handling costs associated with shipping goods to customers are recorded within cost of service expense. Under IAS 18, the Company recognizes revenue for sales of bundled packages, which might include a radio, activation and/or service component, by allocating the consideration received based on the relative fair values of the individual components, consisting of service fees (subscription and activation fees) and equipment sales. Objective and reliable evidence of fair value exists for all units of accounting in the arrangement. Advertising revenue The Company recognizes advertising revenue from the sale of advertisements in the period in which the advertising is broadcast. Broadcast license and renewal costs All costs related to renewing the broadcast license are expensed as incurred. CRTC and Canadian Content Development Obligations Under conditions of its broadcasting license from CRTC, the Company is obligated to contribute a percentage of its gross revenues from its satellite radio undertaking on qualifying Canadian Content Development ( CCD ). 11

18 Programming royalty arrangements The Company is responsible for the payment of copyright royalties with a number of Canadian copyright collectives. The Company accrues these royalties based on tariffed rates that have been set for previous periods by the Copyright Board of Canada. The cost of these royalty arrangements is expensed as an operating expense. Sales and marketing costs Sales and marketing includes advertising and costs for media and events, which are expensed as incurred as an operating expense. Marketing also includes incentives and subsidies to retailers and manufacturers to promote the distribution of radios with the capacity to receive either XM satellite digital radio programming ( XM radios ) or Sirius satellite digital radio programming ( Sirius radios ). These costs are expensed at the time of payment which approximates the timing of the sale or activation of the XM radios and Sirius radios. Subsidies and distribution costs Subsidies and distribution costs consist of costs incurred to acquire new subscribers and include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and a prepaid subscription to the Company's service in the sale or lease price of a new vehicle or offer a free trial; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as incentives to purchase, install and activate radios; and provisions to reduce inventory to net realizable value. Subsidies paid to radio manufacturers and automakers are expensed on shipment of the product or activation of the radio, based on contractual terms. Commissions paid to retailers and automakers are expensed on either the purchase or activation of radios, based on contractual terms. Earnings (loss) per share Basic earnings per share ( EPS ) is calculated by dividing the net income (loss) for the period attributable to the Company s equity owners by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The Company has the following categories of dilutive potential shares: convertible debt, stock options, restricted stock units and performance stock units. The number of shares included with respect to stock options is computed using the treasury stock method. The convertible debt is assumed to have been converted into shares, and net income is adjusted to eliminate the interest expense less the tax effect. Accounting standards issued but not yet effective Certain pronouncements were issued by the IASB or IFRIC that are effective for accounting periods beginning on or after January 1, 2013 unless otherwise noted. The Company has assessed the impact of these standards and amendments listed below, and determined there are no material impacts to the Company s financial statements. IFRS 10, Consolidated Financial Statements replaces the guidance on consolidation in IAS 27 Consolidated and Separate Financial Statements and Standing Interpretations Committee ( SIC ) 12 Consolidation Special Purpose Entities. The new standard contains a single consolidation model that identifies control as the basis for consolidation for all types of entities, including special purpose entities. The new standard also sets out 12

19 requirements for situations when control is difficult to assess, including circumstances in which voting rights are not the dominant factor in determining control. IFRS 12, Disclosure of Interests in Other Entities establishes disclosure requirements for interests in other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosure that address the nature of, and risks associated with, an entity s interests in other entities. IAS 1, Presentation of Financial Statements was amended to require entities to group items presented in other comprehensive income into two categories. Items will be grouped together based on whether those items will or will not be classified to profit or loss in the future. The following revised standards and amendments are effective for annual periods beginning on or after January 1, 2013 with earlier application permitted, unless otherwise noted. The Company has not yet assessed the impact of these standards and amendments or determined whether it will early adopt them. IFRS 9, Financial Instruments (Classification and Measurement) replaces the guidance on classification and measurement of financial instruments in IAS 39 Financial Instruments Recognition and Measurement. The new standard requires a consistent approach to the classification of financial assets and replaces the numerous categories of financial assets in IAS 39 with two categories, measured at either amortized cost or at fair value. Most of the requirements for financial liabilities were carried forward unchanged from IAS 39. However, some changes were made to the fair value option for financial liabilities to address the issue of own credit risk. This is effective for accounting periods beginning on or after January 1, IFRS 13, Fair Value Measurement defines fair value and sets out in a single standard a framework for measuring fair value and requires disclosures about fair value measurements. The new standard reduces complexity and improves consistency by clarifying the definition of fair value and requiring its application to all fair value measurements. IAS 32, Financial Instruments (Presentation) was amended to clarify existing application issues related to the offsetting requirements. Specifically, the amendments clarify the meaning of currently has a legally enforceable right of set-off and simultaneously realization and settlement. IFRIC 21, Levies was issued to clarify that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be recognized before the specified minimum threshold is reached. This is effective for annual periods beginning on or after January 1, 2014 and cannot be early adopted. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the actual results. The estimates and assumptions that are critical to the determination of carrying values of assets and liabilities are addressed below. 13

20 Impairment of non-financial assets The impairment test on non-financial assets, which are comprised primarily of property and equipment, intangible assets and goodwill, is carried out by comparing the carrying value of a CGU that includes these assets to the recoverable amount of a CGU. The recoverable amount of a CGU is the higher of fair value less costs to sell, and its value in use. Goodwill and indefinite lived intangibles are tested at least annually for impairment. For the purpose of impairment testing, goodwill is tested for impairment using the fair value less cost to sell model at the operating segment level. The business is managed as one operating segment based on how financial information is produced internally for the purposes of making operating decisions. In assessing the Company s broadcast license for impairment, the Company compares the aggregate recoverable amounts of the assets and related liabilities included in a CGU to its respective carrying amount. For the purpose of the impairment test carried out during the year ended August 31, 2013 the CGU was equivalent to the Sirius XM business. During the year, the Sirius and XM licenses were combined into one license which resulted in a change in CGUs from the prior year. In the prior year the CGUs for purpose of testing the broadcast licenses were at the XM and Sirius levels. In assessing both the goodwill and broadcast license for impairment, the Company compares the aggregate recoverable amount which is fair value less cost to sell (and is determined based on the value of the Company s quoted shares and the estimated fair value of its debt) to the carrying value of its net assets excluding long term debt. An impairment charge is recognized to the extent that the carrying value exceeds the recoverable amount. In the prior year, the recoverable amount of the XM and Sirius CGUs was determined using a discounted cash flow model. No impairment charges have arisen as a result of the reviews performed during the year ended August 31, 2013 and August 31, Reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill or the broadcast license to fall below the carrying value. Income taxes The recognition of deferred tax assets is based on whether it is more likely than not that sufficient and suitable taxable income will be available in the future against which the reversal of temporary differences can be deducted. The Company s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of the company s taxable income in the future increases or decreases, or its ability to utilize the underlying future tax deductions changes, the Company would be required to recognize more or less of the tax deductions as deferred tax assets, which would decrease or increase the income tax expense in the period in which this is determined. The calculation of current and deferred taxes involves significant estimation and judgment in respect of certain items whose tax treatment cannot be finally determined until resolution is reached with the Canada Revenue Agency ( CRA ). The final resolution of the audit of the 2006 taxation year may result in adjustments to the recognized and unrecognized deferred tax assets. See note 7 and note 19 for additional information. Provisions Considerable estimation is used in measuring and recognizing certain provisions and the exposure to contingent liabilities. Management also applies judgment in determining the likelihood that a pending litigation or other claim will succeed or a liability will arise, and to quantify the possible range of the final settlement. Provisions that include estimation and judgment include liabilities related to product obligations, where the Company may be required to make payments to retailers to facilitate sale of radios held by retailers. 14