MEGA Brands Inc. Consolidated Financial Statements December 31, 2013 and 2012 (in thousands of US dollars)

Transcription

1 MEGA Brands Inc. Consolidated Financial Statements December 31, 2013 and 2012 (in thousands of US dollars)

2 Independent Auditor s Report To the Shareholders of MEGA Brands Inc. We have audited the accompanying consolidated financial statements of MEGA Brands Inc., and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2013 and December 31, 2012 and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of 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. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of MEGA Brands Inc. and its subsidiaries as at December 31, 2013 and December 31, 2012 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Montreal, Quebec March 4, CPA auditor, CA, public accountancy permit No. A PwC refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.

3 Consolidated Income Statements For the years ended December 31, 2013 and 2012 (in thousands of US dollars, except per share amounts) Note $ $ Net sales 404, ,271 Cost of sales 255, ,452 Gross profit 149, ,819 Marketing and advertising expenses 18,231 16,937 Research and development expenses 15,389 16,218 Other selling, distribution and administrative expenses 84,059 87,830 Contingent consideration on business acquisition Loss (gain) on foreign currency translation (1,808) 576 Earnings from operations 32,818 35,875 Financial expenses 5 10,766 17,647 Early redemption of debentures 15 2,869-13,635 17,647 Earnings before income taxes 19,183 18,228 Income taxes 6 (1,591) 1,642 Net earnings 20,774 16,586 Earnings per share Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. 3

4 Consolidated Statements of Comprehensive Income For the years ended December 31, 2013 and 2012 (in thousands of US dollars) Note $ $ Net earnings 20,774 16,586 Other comprehensive income (loss): Items that may be reclassified subsequently to income or loss Cumulative translation adjustment (620) 1,008 Items that w ill not be reclassified subsequently to income or loss Cumulative translation adjustment Other comprehensive income (loss) (211) 1,099 Comprehensive income 20,563 17,685 The accompanying notes are an integral part of these consolidated financial statements. 4

5 Consolidated Statements of Financial Position As at December 31, 2013 and 2012 (in thousands of US dollars) December 31, December 31, Note $ $ Assets Current assets Cash and cash equivalents 16,417 8,018 Trade and other receivables 8 116, ,541 Inventories 10 54,101 45,779 Derivative financial instruments Prepaid expenses 7,916 9,370 Total current assets 195, ,821 Non-current assets Property, plant and equipment 11 46,385 39,817 Intangible assets 12 22,349 22,771 Goodw ill 12 30,000 30,000 Total assets 293, ,409 Liabilities Current liabilities Trade and other payables 13 54,231 62,638 Income taxes 6 3,842 5,631 Derivative financial instruments 9 1,037 - Current portion of long-term debt 14 1,844 8,023 60,954 76,292 Non-current liabilities Long-term debt 14 59, ,992 Derivative financial instruments , ,198 Equity Share capital , ,893 Warrants 15 8,485 24,029 Contributed surplus 5,851 4,478 Deficit (336,962) (357,736) Accumulated other comprehensive loss (5,956) (5,745) Total equity 173,611 96,919 Total liabilities and equity 293, ,409 The accompanying notes are an integral part of these consolidated financial statements. 5

6 Consolidated Statements of Changes in Equity For the years ended December 31, 2013 and 2012 (in thousands of US dollars) Share capital Warrants Contributed surplus Deficit Accumulated other comprehensive loss (Audited) Note $ $ $ $ $ $ Total equity Balance December 31, ,007 24,430 3,492 (374,322) (6,844) 75,763 Net earnings ,586-16,586 Options exercised (148) 324 Warrants exercised 15 2,414 (401) ,013 Other comprehensive loss ,099 1,099 Stock-based compensation - - 1, ,134 Balance December 31, ,893 24,029 4,478 (357,736) (5,745) 96,919 Net earnings ,774-20,774 Options exercised 15 2,018 - (621) 1,397 Warrants exercised 15 68,282 (15,544) ,738 Other comprehensive loss (211) (211) Stock-based compensation - - 1, ,994 Balance December 31, ,193 8,485 5,851 (336,962) (5,956) 173,611 Accumulated other comprehensive loss is comprised solely of Cumulative translation adjustment. The accompanying notes are an integral part of these consolidated financial statements. 6

7 Consolidated Statements of Cash Flows For the years ended December 31, 2013 and 2012 (in thousands of US dollars) Note $ $ Operating activities Net earnings 20,774 16,586 Adjustments for: Depreciation of property, plant and equipment 11 13,387 12,476 Amortization of intangible assets Stock-based compensation 1,994 1,134 Financial expenses 5 10,766 17,647 Early redemption of debentures 14 2,869 - Income taxes 6 (1,591) 1,642 Loss (gain) on foreign currency 459 2,316 49,080 52,223 Net change in non-cash w orking capital balances (7,709) 14,406 Income taxes paid (recovered) 6 1,695 (1,473) Interest paid (7,654) (13,158) Cash flow s provided by operating activities 35,412 51,998 Financing activities Repayment of debentures 14 (60,368) (7,411) Change in asset-based credit facility 14 - (37,279) Government loans 14-6,591 Issuance of long-term debt ,524 Repayment of long-term debt 14 (750) (220) Issuance of capital stock 15 54,135 2,337 Cash flow s used in financing activities (6,767) (31,458) Investing activities Acquisition of property, plant and equipment 11 (20,228) (19,234) Cash flow s used in investing activities (20,228) (19,234) Effect of changes in foreign exchange rates on cash and cash equivalents (18) (33) Increase in cash and cash equivalents 8,399 1,273 Cash and cash equivalents Beginning of year 8,018 6,745 Cash and cash equivalents End of year 16,417 8,018 The accompanying notes are an integral part of these consolidated financial statements. 7

8 1. General information MEGA Brands Inc. ( MEGA Brands or the Corporation ) is incorporated under the Canada Business Corporations Act and is listed on the Toronto Stock Exchange. The Corporation s registered and principal office is located at 4505 Hickmore, Montreal, Quebec, Canada H4T 1K4. The Corporation designs, manufactures and markets a broad line of toys, stationery and activity products. The Corporation sells and distributes its products under the MEGA BLOKS, MEGA PUZZLES, ROSE ART, BOARD DUDES and WRITE DUDES brands. Historically, the Corporation has observed a higher level of sales and operating results during the last two quarters of the fiscal year compared to the first two quarters. 2. Summary of significant accounting policies Basis of preparation The Corporation prepares its financial statements in accordance with Canadian generally accepted accounting principles ( GAAP ) as set forth in Part 1 of the Chartered Professional Accountants of Canada (CPA Canada) Handbook Accounting, which incorporates International Financial Accounting Standards ( IFRS ) issued by the International Accounting Standards Board. The key accounting policies applied in the preparation of these consolidated financial statements are described below. These policies have been consistently applied to all years presented, unless otherwise stated. The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments. The Corporation s reporting currency is the US dollar. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of choosing and applying the Corporation s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3. These consolidated financial statements were approved by the Board of Directors on March 4, The accompanying notes are an integral part of these consolidated financial statements. 8

9 2. Summary of significant accounting policies (cont d) Recently Adopted Accounting Standards The Corporation has adopted the following new and revised standards, along with any consequential amendments, effective January 1, These changes were made in accordance with the applicable transitional provisions. (i) The Corporation has adopted the amendments to IAS 1, Presentation of Financial Statements. These amendments required the Corporation to group other comprehensive income items according to those that will be reclassified subsequently to profit or loss and those that will not be reclassified. (ii) IFRS 10, Consolidated Financial Statements, replaces the guidance on control and consolidation in IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation Special Purpose Entities. IFRS 10 requires consolidation of an investee only if the investor possesses power over the investee, has exposure to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect its returns. The accounting requirements for consolidation have remained largely consistent with IAS 27 and the Corporation determined that the adoption of IFRS 10 did not result in any change in the consolidation status of any of its subsidiaries and investees. (iii) 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. The Corporation has incorporated the new disclosure requirements within these financial statements. (iv) IFRS 13, Fair Value Measurement, provides a single framework for measuring fair value. The measurement of the fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. The Corporation adopted IFRS 13 on January 1, 2013 on a prospective basis. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the Corporation to measure fair value and did not result in any measurement adjustments as at January 1, (v) In May 2013, the IASB amended IAS 36, Impairment of assets regarding disclosures for non-financial assets. This amendment removed certain disclosures related to the recoverable amount of CGUs which had been included in IAS 36 by the issue of IFRS 13. The amendment is not mandatory until January 1, 2014; however, the Corporation has decided to early adopt the amendment as of January 1, (vi) IFRS 7, Financial instruments disclosure ("IFRS 7") The amendments to IFRS 7 contain new disclosure requirements for financial assets and liabilities that are either offset in the consolidated balance sheet or subject to master netting arrangements or other similar arrangements. The amendments are to be applied retrospectively. As a result of the amendments to IFRS 7, the Corporation has provided additional disclosures about offsetting of financial assets and financial liabilities. The accompanying notes are an integral part of these consolidated financial statements. 9

10 2. Summary of significant accounting policies (cont d) Consolidation The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries since their date of acquisition. Subsidiaries are all entities (including structured entities) over which the Corporation has control. Control exists when the Corporation is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through the power over the entity. Subsidiaries are fully consolidated from the date control is obtained and they are de-consolidated on the date control ceases. The Corporation uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Corporation. 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. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation. The following table includes the principal subsidiaries which significantly impact the results or assets of the Corporation: % equity % equity As at March 31 interest interest Subsidiary Country of incorporation MEGA Brands America, Inc. United States 100.0% 100.0% MEGA Brands International Luxembourg 100.0% 100.0% MEGA Brands Europe NV/SA Belgium 100.0% 100.0% MEGA Brands China Ltd. Hong Kong 100.0% 100.0% MEGA Brands Toy Consulting Service (Shenzhen) China 100.0% 100.0% MEGA Brands Toys Manufacturing (Shenzhen) China 100.0% 100.0% Mega Bloks Latino-America Mexico 100.0% 100.0% MEGA Brands Australia Pty Ltd Australia 100.0% 100.0% The accompanying notes are an integral part of these consolidated financial statements. 10

11 2. Summary of significant accounting policies (cont d) Segments The Corporation manages its operations under two product segments, Toys and Stationery & Activities. The Toys segment is comprised of MEGA BLOKS construction toys and MEGA PUZZLES. The Stationery & Activities segment is comprised of ROSE ART art materials and craft and activity sets, BOARD DUDES presentation boards and accessories, and WRITE DUDES writing instruments. These operating segments are reported in a manner consistent with the internal reporting provided to the chief decision-maker. The Corporation s Chief Executive Officer is the chief decision-maker, and is responsible for making strategic decisions, allocating resources and assessing the performance of the operating segments. Foreign currency translation a) Functional and presentation currency IAS 21, Effects of Changes in Foreign Currency Rates, requires entities to consider primary and secondary indicators when determining the functional currency. Primary indicators are closely linked to the primary economic environment in which the entity operates and are given more weight. Secondary indicators provide supporting evidence to determine an entity's functional currency. Once the functional currency of an entity is determined, it should be used consistently, unless significant changes in economic facts, events and conditions indicate that the functional currency has changed. The functional currency of MEGA Brands Inc. is the Canadian dollar; however, the consolidated financial statements are presented in US dollars, which in the opinion of management remains the most appropriate presentation currency in view of its operations in the global marketplace, user needs and comparison with its major competitors. b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income. Foreign exchange gains and losses are presented in the consolidated income statement within loss (gain) on foreign currency translation. The accompanying notes are an integral part of these consolidated financial statements. 11

12 2. Summary of significant accounting policies (cont d) Foreign currency translation (cont d) c) Entities of the Corporation The results and financial position of all entities of the Corporation that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities are translated at the closing rate at the date of that statement of financial position; (ii) income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and (iii) all resulting exchange differences are recognized in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and borrowings and other currency instruments designated as hedges of such investments, are recorded in other comprehensive income. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the consolidated income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Equity is translated at the historical rate. Revenue recognition Revenues are recognized at the fair value of the consideration received or receivable, net of allowances used to promote products. All of the following conditions must be met to recognize revenues from product sales: The Corporation has transferred the significant risks and rewards of ownership of the goods to the buyer; The Corporation retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; The amount of the sale can be measured reliably; It is probable that the economic benefits associated with the transaction will flow to the Corporation; and The costs incurred or to be incurred in respect of the transaction can be measured reliably. Vendor allowance Cash considerations received from vendors are deemed a reduction of the prices of the vendors' products or services and are accounted for as a reduction of cost of sales and related inventory when recognized in the Corporation's consolidated income statements and financial position. The accompanying notes are an integral part of these consolidated financial statements. 12

13 2. Summary of significant accounting policies (cont d) Self-insurance The Corporation is primarily self-insured for MAGNETIX products manufactured before May 1, 2006 and against certain product-related incidents occurring on or after December 1, Required accruals for self-insurance liabilities are determined by management based on claims filed and an estimate of claims incurred but not yet reported. Research and development expenses Research expenses are charged to earnings net of related tax credits. Unless development expenditures meet criteria for deferral, they are charged to earnings, net of related tax credits. Financial expenses Financial expenses are comprised of interest expense on borrowings, amortization of transaction costs incurred in conjunction with debt transactions and accretion of interest on debentures. All borrowing costs are recognized in earnings on an accrual basis using the effective interest method. The Corporation s financial income is not significant. Financial instruments Financial assets and financial liabilities are recognized when the Corporation 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 Corporation has transferred substantially all risks and rewards of ownership. Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position 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 Corporation classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: a) Financial instruments at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading. Assets in this category are classified as current assets if expected to be settled within twelve months; otherwise, they are classified as non-current. Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated income statement. The Corporation uses derivatives in the form of forward exchange contracts to manage risks related to foreign currency. All derivatives have been classified as held for trading, are included in the consolidated statement of financial position within derivative financial instruments, and are classified as current or non-current based on the contractual terms specific to the instrument. Gains or losses arising from changes in the fair value are presented in the consolidated income statement within Loss (gain) on foreign currency translation in the year in which they arise. The accompanying notes are an integral part of these consolidated financial statements. 13

14 2. Summary of significant accounting policies (cont d) Financial instruments (cont d) b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than twelve months after the end of the reporting period. These are classified as non-current assets. The Corporation s loans and receivables comprise cash and cash equivalents and trade and other receivables in the consolidated statement of financial position. 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 method less a provision for impairment. c) Financial liabilities at amortized cost Financial liabilities at amortized cost include the asset-based credit facility, trade and other payables, accrued liabilities and long-term debt. Trade payables and accrued liabilities are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables to fair value. Subsequently, trade payables and accrued liabilities are measured at amortized cost using the effective interest method. Long-term debt is recognized initially at fair value, net of any transaction costs incurred, and subsequently measured at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-current liabilities. The following is a summary of the Corporation s categories of financial instruments: Financial instrument Category Measurement Cash and cash equivalents Loans and receivables Amortized cost Trade and other receivables Loans and receivables Amortized cost Trade and other payables Financial liabilities at amortized cost Amortized cost Derivative financial instruments At fair value through profit and loss Fair value Asset-based credit facility Financial liabilities at amortized cost Amortized cost Long-term debt Financial liabilities at amortized cost Amortized cost Impairment of financial assets At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Corporation recognizes an impairment loss for financial assets carried at amortized cost as follows: 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. 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. The accompanying notes are an integral part of these consolidated financial statements. 14

15 2. Summary of significant accounting policies (cont d) Share capital Common shares granted as compensation for goods and services are classified as equity. Incremental costs directly attributable to the issuance of new shares or warrants are shown in equity as a deduction, net of tax, from the proceeds. Share-based payments The Corporation has a stock-based compensation plan whereby it grants stock options to certain employees. Each tranche in an award is considered a separate award with its own grant date fair value and vesting period. The fair value of each tranche is measured at the date of grant using the Black- Scholes option pricing model. Compensation expense is recognized over the tranche s vesting period based on the number of awards expected to vest, by increasing contributed surplus. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. The Corporation has a share unit plan, which became effective February 24, 2005, which allows the Board of Directors to grant bonuses in the form of share units that are time- and performance-based, vesting primarily over a three-year period. The plan is non-dilutive and will be settled in shares purchased from the secondary market or in cash, at the option of the Corporation. The share units are accounted for as liabilities on a fair value basis by using the quoted market price of the common shares and are revalued at the end of each period with the (gain) loss included in other selling, distribution and administrative expenses in the consolidated income statement. The share units are expensed and credited to liabilities under cash-settled share-based payments over the vesting period. On March 29, 2007, the Corporation adopted a deferred share unit plan for its independent directors. The share units are accounted for as liabilities on a fair value basis by using the quoted market price of the common shares and are revalued at the end of each period with the (gain) loss included in other selling, distribution and administrative expenses in the consolidated income statement. The deferred share units are expensed and credited to liabilities under cash-settled share-based payments over the vesting period. Earnings per share Basic earnings per share ( EPS ) is calculated by dividing the net earnings for the period 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 number of shares included with respect to options is computed using the treasury stock method. The dilutive effect of warrants whose proceeds from exercise must be used to retire debentures is determined by assuming that the proceeds from exercise are applied to purchase the debt at its average market price rather than to purchase common shares under the treasury stock method. The treasury stock method is applied, however, to any excess of the proceeds received from the assumed exercise over the amount used for the assumed purchase of debt. Interest, net of tax, on any debt assumed to be purchased is added back as an adjustment to the numerator. The Corporation s potentially dilutive common shares comprise stock options granted to employees, and warrants. Cash and cash equivalents Cash and cash equivalents consist of cash and highly-liquid investments with original terms to maturity of 90 days or less, at the date of purchase. The accompanying notes are an integral part of these consolidated financial statements. 15

16 2. Summary of significant accounting policies (cont d) Trade receivables Trade receivables are amounts due from customers for merchandise sold in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognized initially at fair value, and subsequently measured at amortized cost, less provision for impairment. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is established based on the firstin, first-out method and, as appropriate, includes material, labour and manufacturing overhead costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Corporation and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated income statement during the period in which they are incurred. The major categories of property, plant and equipment are depreciated on a straight-line basis as follows: Buildings Machinery and equipment Computer equipment Leasehold improvements 25 years 3 to 15 years 3 to 5 years over the lease terms Residual values, the method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within cost of sales or other selling, distribution and administrative expenses in the consolidated income statement. Government grants Government grants are recognized only when the Corporation has reasonable assurance that it meets the conditions and will receive the grants. Government grants related to assets, including interest free loans, are recognized in the consolidated statement of financial position as a deduction from the carrying amount of the related asset. They are then recognized in profit or loss over the useful life of the depreciable asset that the grants were used to acquire, as a deduction from the depreciation expense. Other government grants are recognized in profit or loss as a deduction from the related expenses. The accompanying notes are an integral part of these consolidated financial statements. 16

17 2. Summary of significant accounting policies (cont d) Intangible assets Intangible assets with a finite service life are accounted for at cost less accumulated amortization and impairments. They consist of customer relationships which are amortized over twenty years. Intangible assets with an indefinite service life, consisting of trade names, are accounted for at cost and are carried at cost less accumulated impairment losses. The determination of service life used to amortize intangible assets relate to the future performance of the assets acquired and management s judgement of the period over which economic benefits will be derived from the assets. Goodwill Goodwill represents the excess of the purchase consideration of businesses over the fair value of the identifiable net assets acquired and is carried at cost less accumulated impairment losses. Goodwill is tested for impairment annually on December 31 or more frequently if changes in circumstances indicate a potential impairment. Impairment losses on goodwill are not reversed. Impairment of non-financial assets Assets that are subject to amortization are reviewed for impairment by management whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs of disposal and value in use. For the purposes of assessing impairment, when required, individual assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units or CGUs ). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Goodwill and trade names are not subject to amortization and are tested annually for impairment. Goodwill acquired through a business combination is allocated to CGUs or group of CGUs that are expected to benefit from the related business combination. A group of CGUs represents the lowest level within the entity at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. Leases Leases are classified as finance leases when the lease arrangement transfers substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Gains and losses on sale and operating leaseback transactions are recognized immediately in the income statement when it is clear that the transactions are established at fair value. If the sale price is below fair value, any loss is recognized immediately except that, if the loss is compensated for by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the gain is deferred and amortized over the period for which the asset is expected to be used. In the context of sale and finance leaseback transactions, any gain on the sale is deferred and amortized over the lease term. The accompanying notes are an integral part of these consolidated financial statements. 17

18 2. Summary of significant accounting policies (cont d) Current and deferred income tax The tax expense for the year comprises current and deferred tax. Tax is recognized in the consolidated income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. The current income tax charge and any adjustment to tax payable/receivable in respect of previous years are calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Corporation and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities and prior year settlements. Deferred income tax is recognized using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from 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 income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of financial position and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Taxes on income in interim periods are accrued using the tax rate that will be applicable to expected total annual profit and loss. Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. The accompanying notes are an integral part of these consolidated financial statements. 18

19 2. Summary of significant accounting policies (cont d) Provisions Provisions are recognized when: the group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Accounting standards issued but not yet applied IFRS 9, Financial Instruments, as issued, reflects the current status of the IASB s work plan on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities, as defined in IAS 39. The IASB is also addressing hedge accounting and impairment of financial assets. In December 2013 the IASB removed the mandatory effective date of IFRS 9 until all phases of the project have been completed. The mandatory effective date has yet to be determined; however, it has been deferred beyond annual periods beginning on or after January 1, The Corporation has not yet quantified the effect of the published phases of the standard nor does it intend at this time to early adopt the standard until the mandatory effective date. IFRIC 21, Levies IFRIC 21 provides guidance on accounting for levies in accordance with the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The interpretation defines a levy as an outflow from an entity imposed by a government in accordance with legislation and confirms that a liability for a levy is recognized only when the triggering event specified in the legislation occurs. The interpretation is effective for annual periods beginning on or after January 1, 2014; however, the Corporation has not yet assessed the impact of this interpretation. 3. Critical accounting estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. These estimates and associated assumptions are based on historical experience, future operating plans and various other factors believed to be reasonable under the circumstances, and the results of such estimates form the basis of judgments about carrying values of assets and liabilities. These underlying assumptions are reviewed on an ongoing basis. Actual results could differ materially from those estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements relate to the following: The accompanying notes are an integral part of these consolidated financial statements. 19

20 3. Critical accounting estimates and judgments (cont d) Estimates a) Sales allowances Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the customer, generally at the time of shipment. Revenue from product sales, less related sales allowances, is reflected as net sales in the consolidated income statements. The Corporation routinely commits to promotional sales allowance programs with customers. These allowances primarily relate to fixed programs, which the customer earns based on purchases of the Corporation s products during the year. Discounts and allowances are recorded as a reduction of related revenue at the time of sale. While many of the allowances are based on fixed amounts, certain of the allowances, such as the returns allowance, are based on market data, historical trends and information from customers, and are therefore subject to estimation. For its allowance programs that are not fixed, such as returns, the Corporation estimates these amounts using a combination of historical experience and current market conditions. These estimates are reviewed periodically against actual results and any adjustments are recorded at that time as an increase or decrease to net sales. During 2013, there were no material adjustments to the Corporation s estimates of sales allowances made in prior years. b) Allowance for doubtful accounts The Corporation s allowance for doubtful accounts is based on management s assessment of the business environment, customers financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer s creditworthiness, or actual defaults were higher than the Corporation s historical experience, estimates of the recoverability of amounts due could be overstated, which could have an adverse impact on operating results. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off. Major customers accounts are monitored on an ongoing basis; more in depth reviews are performed based on changes in customer s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects(note 8). c) Reserve for inventory obsolescence The Corporation values inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict demand for the Corporation s products would impact management s estimates in establishing its inventory provision(note 10). The accompanying notes are an integral part of these consolidated financial statements. 20

21 3. Critical accounting estimates and judgments (cont d) d) Impairment of non-financial assets Non-financial assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. In addition, non-financial assets that are not amortized are subject to an annual impairment assessment. The Corporation s impairment test for indefinite life intangibles take into account past experience and represent management s best estimate about future developments and form part of the Corporation s strategic plan approved annually by the Board of Directors. These estimates, including the methodology used, can have a material impact on the respective values and ultimately the amount of any impairment. See note 12 for further discussion on key assumptions used in the determination of recoverable amounts for trademarks and brand names. Judgment a) Income taxes The Corporation is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes, including the probability of recovery of deferred tax assets. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Corporation recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the year in which such determination is made. b) Indefinite life intangibles The Rose Art and Board Dudes trademarks and brands represent intangible assets recorded on the acquisition of Rose Art Industries and The Board Dudes Inc. respectively. Management determined upon acquisition that these assets represented the established brand recognition of the acquired entities and their product lines in the United States. Management continues to market products in the Stationary and Activities segment under these two brands throughout North America. When assessing impairment of the brands annually, management reassesses its assumption of the indefinite service life of these assets. A change in the service life will result in amortization charges recorded to operations in the future (note 12). The accompanying notes are an integral part of these consolidated financial statements. 21

22 4. Employee benefit expense $ $ Wages and salaries (including bonuses) 82,695 88,120 Stock-based compensation 1,994 1,134 Termination benefits 1, ,144 89, Financial expenses $ $ Interest on secured debentures 8,946 14,789 Interest on asset-based credit facility 532 1,432 Interest on government loans Amortization of deferred financing costs Others Financial expenses 10,766 17,647 The accompanying notes are an integral part of these consolidated financial statements. 22