Question

Exercise 9-13 (Essay)

Alliance Atlantis Communications Inc. changed its accounting policy to amortize broadcast rights over the contracted exhibition period, which is based on the estimated useful life of the program. Previously, the company amortized broadcast rights over the lesser of 2 years or the contracted exhibition period.

Write a short memo to your client explaining the implications this has for the analysis of Alliance Atlantis’s results.

Answer 1

REGARGING CHANGE IN POLICY ON AMORTIZATION OF BROADCAST RIGHTS:

The change in accounting policy to writing off broadcasting rights over their useful life, is an appropriate decision, as it rightfully spreads the amount paid over the useful life of those rights. It also paves way for correct income determination and related analyses.

But, a caution to be taken here is the impact it will have over the comparison of current year's and future years' results with those of the years before the change in policy. As the amount amortized in the current and and future years will differ from what was amortized previously, the results so obtained will not be comparable.

However, this situation can be rectified if, for comparison purposes, the previous years' figures are also restated as if, the changed policy existed from the beginning itself.

Further, tax considerations are also involved. Taxes will be paid in earlier than under the old policy,