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9. Financial Instruments
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3 Months Ended | ||||||
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Mar. 31, 2011
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| Financial Instruments Disclosure [Text Block] |
The
Company’s financial instruments consist of cash,
accounts payable and accrued liabilities, advances payable,
interest payable and promissory notes payable.
Fair
value
The
fair values of cash and certain accounts payable and
accrued liabilities approximate their carrying values due
to the relatively short periods to maturity of these
instruments.
Certain
accounts payable have been outstanding longer than one
year. The Company has recorded imputed interest at a rate
of 1% per month over the period the payables have been
outstanding for longer than one year, with a corresponding
amount recognized in additional paid-in capital. The
calculated amount represents the implicit compensation for
the use of funds beyond a reasonable term for regular trade
payables.
For
the purposes of fair value analysis, promissory notes
payable can be separated into three classes of financial
liabilities.
i.
Interest-bearing promissory notes, lines of credit and
related interest payable
ii.
Non-interest-bearing promissory notes past due
The
interest-bearing promissory notes payable are all
delinquent and have continued to accrue interest at their
stated rates. The Company currently does not have the funds
to extinguish these debts and will continue to incur
interest until such time as the liabilities are
extinguished. There is not an active market for delinquent
loans for a Company with a similar financial position.
Management asserts the carrying values of the promissory
notes and related interest payable are a reasonable
estimate of fair value as they represent the
Company’s best estimate of their legal obligation for
these debts. As there is no observable market for interest
rates on similar promissory notes, the fair value was
estimated using level 2 inputs in the fair value
hierarchy.
The
Company has three non-interest-bearing promissory note
payable past due. The first is several years delinquent and
there have been no renegotiated repayment terms. There is
not an active market for default loans not bearing interest
nor is there an observable market for lending to companies
with a financial position similar to the Company. The
Company has recorded imputed interest at a rate of 1% per
month over the life of the promissory notes, with a
corresponding amount recognized in additional paid-in
capital representing the implicit compensation for the use
of funds. Management asserts the payment date
for these amounts cannot be reasonably determined.
Management further asserts there is not a determinable
interest rate for arm’s-length borrowings based on
the current financial position of the Company and asserts
the carrying value is the best estimate of the
Company’s legal liability and represents the fair
value for the promissory note. This would be considered a
level 2 input in the fair value hierarchy.
Fair
value (continued)
The fair
value of advances payable cannot be determined as they are
related party amounts that have no stated terms of
repayment. There is no market for similar instruments. The
Company has recorded imputed interest at a rate of 1% per
month over the life of the advances payable, with a
corresponding amount recognized in additional paid-in
capital representing the implicit compensation for the use
of funds.
Credit
risk
Financial
instruments that potentially subject the Company to credit
risk consist of cash. The Company only has an immaterial
cash balance and is not exposed to significant credit
risk.
Market
risk
Market
risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes
in market prices. Market risk comprises two
types of risk: interest rate risk and foreign currency
risk.
i. Interest
rate risk
Interest
rate risk consists of two components:
The
Company is exposed to interest rate cash flow risk on
promissory notes payable of $500,000, which incurs a
variable interest rate of prime plus 1%. A hypothetical
change of 1% on interest rates would increase or decrease
net loss and comprehensive loss by $5,000.
The
Company’s promissory notes payable consist of
$500,000 of variable interest rate notes and $4,786,319 of
fixed interest rate notes. All of these notes are past due
and are currently due on demand while interest continues to
accrue. Due to the delinquency of the fixed interest rate
promissory notes payable, there is no active market for
these instruments and fluctuations in market interest rates
do not have a significant impact on their estimated fair
values as of June 30, 2011.
At
June 30, 2011, the effect on the net loss and comprehensive
loss of a hypothetical change of 1% in market interest rate
cannot be reasonably determined.
Foreign
currency risk
The
Company incurs certain accounts payable, advances payable
and expenses in Canadian dollars and is exposed to
fluctuations in changes in exchange rates between the US
and Canadian dollars. As at June 30, 2011, the effect on
net loss and comprehensive loss of a hypothetical change of
10% between the US and Canadian dollar would not be
material. The Company has not entered into any foreign
currency contracts to mitigate this risk.
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