In the fall of 2012, eight wealthy businesspeople from the same ethnic background formed a committee (CKER committee) to obtain a radio license from the Canadian Radio-television and Telecommunications Commission (CRTC). Their goal is to start a non-profit, ethnic community radio station for their area. They plan to call the station CKER-FM Ethnic Radio (CKER). It will broadcast ethnic music, news, and sports from their country of origin, cultural information, ethnic cooking, and other such programs, seven days a week.

The station's capital requirements are to be financed by memberships, donations, and various types of loans. It is expected that ongoing operations will be supported by advertising paid for by businesspeople from that ethnic community and by the larger business community targeting that ethnic audience, as well as by donations and memberships.

It is now March 2013, and the CRTC has announced that hearings will start in one month on a number of broad casting license applications, including the CKER committee's application. The CKER committee members are fairly confident about the viability of their proposal; however, they have decided to seek the advice of a professional accounting firm to assist with the endeavor. The CKER committee has engaged Maria & Casano, Chartered Accountants, for the assignment, as three of the five partners of the firm are from the same ethnic community. The partner in charge of the assignment has stated that the firm will donate half its fee for the work.

You, CA, work for Maria & Casano and have been put in charge of the assignment. You have met with the CKER committee and various volunteers associated with the project. Information gathered on station start-up is contained in Exhibit C9-5(a). Exhibit C9-5(b) provides other information on the CKER committee's proposal. The partner has asked you to prepare a draft report to the committee members discussing the viability of the proposed radio station over the initial three-year period. Since the committee is fairly confident that they will receive the licence, the partner has also asked you to recommend accounting policies for the transactions that CKER is contemplating. Your report must also cover other significant issues that the station will face after it begins operations.

Required

Prepare the draft report.

EXHIBIT C9-5(a)

INFORMATION ON STATION START-UP

1. Costs to date have totaled $50,000 and are mostly transportation and meeting costs, as well as postage. These costs have been paid for personally by the CKER committee members.

2. To approve the license application, the CRTC must see written commitments to finance the station's start-up costs and operating losses in the first two years. Remaining costs to obtain the license, excluding donated legal work, are expected to be about $8,000, and will be paid by CKER committee members.

3. If the CRTC approves the license application, the CKER committee will immediately set up a non-profit organization and apply to the Canada Revenue Agency for charitable status, which it will likely receive.

4. Fairly exhaustive efforts to obtain commercial financing have failed. As a result, four wealthy individuals have volunteered to provide CKER with the financing for the start-up costs. They will each personally borrow $25,000 from financial institutions and give the funds to the station. These individuals expect the loans to be cost-free to them as the station will make the interest and principal payments.

5. A "Reverse Life-Time Contribution" program will also be instituted. Under this program, a donor will pay the station a capital sum of at least $50,000. The station can do whatever it wants with the funds, but it will repay the donor an equal annual amount calculated as the capital sum divided by 90 years less the individual's age at the time of contribution. Upon the death of the donor, the station will retain the balance of the funds. Currently, a 64-year-old station supporter has committed $78,000, and seven other individuals are considering this method of assisting the station.

6. Initially, the station is to broadcast with a 2,500-watt signal. It is hoped that within three to four years it will be possible to obtain commercial financing for a second transmitter that will boost the power of the signal and the broadcast range.

EXHIBIT C9-5(b)

OTHER INFORMATION ABOUT PLANS FOR STATION

1. The CKER committee has analyzed census and other data to determine the potential market for the station. Engineering studies have mapped out the area that will be covered by the broadcast signal. There are about 1.1 million people in the target listening area. The latest Canadian census shows that 14% of the population comes from the target ethnic group. A number of surveys have shown that, of a given population, nearly 80% listen regularly to the radio. By applying a conservative factor of 50% to these findings, the CKER committee has arrived at a listenership figure of 5.6% or about 62,000 people. The CKER committee has found that about one in five of the businesses in the area are run by members of the ethnic community, many of whom would like a medium for reaching their own people through direct advertising.

2. The amount of time expected to be devoted to commercials per hour is four minutes in year one, five minutes in year two, and six minutes in year three. Advertising cost per minute, discounted to 25% below the current market rate, will be:

Prime time (6 hours a day) ........$40

Regular time (10 hours a day) .......$30

Off-peak (8 hours a day) .........$25

Advertising time will be sold by salespeople whose remuneration will be a 15% commission.

3. Miscellaneous revenue from renting out the recording studio when not in use by CKER could approach $3,000 per month in year three but will start out at about $2,200 per month.

4. At least 120 people have committed to pay a $125 annual membership fee. Membership carries no special privileges other than to be identified as a supporter of the station. Membership is expected to grow by 20% per year.

5. Start-up capital expenditures are as follows: transmission equipment $61,000; broadcast studio equipment $62,000; and production studio equipment $40,000. Administration and other costs, including rent, are expected to total about $1,237,000 per year and will not increase when advertising sales increase.

6. The committee believes that there are no HST implications related to running the station, since it is a non-profit venture.

7. About one third of the person-hours needed to run the station are expected to come from volunteers.