Dollarama Inc. Consolidated Financial Statements

Transcription

1 Consolidated Financial Statements (Expressed in thousands of Canadian dollars, unless otherwise noted)

2 March 29, 2018 Independent Auditor s Report To the Shareholders of Dollarama Inc. We have audited the accompanying consolidated financial statements of Dollarama Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at January 28, 2018 and January 29, 2017 and the consolidated statements of changes in shareholder s equity (deficit), net earnings and comprehensive income (loss) 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. PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l René-Lévesque Boulevard West, Montréal, Quebec, Canada H3B 4Y1 T: , F: PwC refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.

3 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 Dollarama Inc. and its subsidiaries as at and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards CPA auditor, CA, public accountancy permit No. A117693

4 Consolidated Statement of Financial Position as at (Expressed in thousands of Canadian dollars) Note January 28, January 29, $ $ Assets Current assets Cash 54,844 62,015 Accounts receivable 15,263 15,386 Prepaid expenses 8,649 7,162 Inventories 3 490, ,715 Derivative financial instruments , , ,065 Non-current assets Property, plant and equipment 6 490, ,089 Intangible assets 7 145, ,515 Goodwill 7 727, ,782 Total assets 1,934,339 1,863,451 Liabilities and shareholders equity (deficit) Current liabilities Accounts payable and accrued liabilities 8 228, ,486 Dividend payable 12,180 11,591 Income taxes payable 39,491 16,597 Derivative financial instruments 14 35,720 8,085 Current portion of long-term debt 9 405, , , ,402 Non-current liabilities Long-term debt 9 1,260,459 1,050,101 Deferred rent and lease inducements 11 92,633 81,827 Deferred income taxes , ,837 Total liabilities 2,186,697 1,763,167 Commitments 10 Shareholders equity (deficit) Share capital , ,266 Contributed surplus 27,699 24,321 Deficit 12 (663,421) (342,957) Accumulated other comprehensive loss 12 (32,423) (1,346) Total shareholders equity (deficit) (252,358) 100,284 Total liabilities and shareholders equity (deficit) 1,934,339 1,863,451 Approved by the Board of Directors (signed) Stephen Gunn Stephen Gunn, Director (signed) Richard Roy Richard Roy, Director The accompanying notes are an integral part of these consolidated financial statements. 1

5 Consolidated Statement of Changes in Shareholders Equity (Deficit) for the years ended (Expressed in thousands of Canadian dollars, except share amounts) Note Number of common shares Share capital Contributed surplus Deficit Accumulated other comprehensive income (loss) Total $ $ $ $ $ Balance January 31, ,225, ,296 20,136 (62,375) 69, ,852 Net earnings , ,636 Other comprehensive loss Unrealized loss on derivative financial instruments, net of reclassification adjustment and income tax recovery of $25, (71,141) (71,141) Dividends declared (47,440) - (47,440) Repurchase and cancellation of common shares 12 (7,420,168) (26,669) - (678,778) - (705,447) Share-based compensation , ,932 Issuance of common shares ,413 4, ,892 Reclassification for the exercise of share options 12-2,747 (2,747) Balance January 29, ,051, ,266 24,321 (342,957) (1,346) 100,284 Balance January 29, ,051, ,266 24,321 (342,957) (1,346) 100,284 Net earnings , ,410 Other comprehensive loss Unrealized loss on derivative financial instruments, net of reclassification adjustment and income tax recovery of $11, (31,077) (31,077) Dividends declared (49,520) - (49,520) Repurchase and cancellation of common shares 12 (6,104,540) (22,305) - (790,354) - (812,659) Share-based compensation , ,559 Issuance of common shares ,050 14, ,645 Reclassification for the exercise of share options 12-3,181 (3,181) Balance January 28, ,325, ,787 27,699 (663,421) (32,423) (252,358). The accompanying notes are an integral part of these consolidated financial statements 2

6 Consolidated Statement of Net Earnings and Comprehensive Income (Loss) for the years ended (Expressed in thousands of Canadian dollars, except share and per share amounts) Note January 28, January 29, $ $ Sales 3,266,090 2,963,219 Cost of sales 17 1,965,171 1,801,935 Gross profit 1,300,919 1,161,284 General, administrative and store operating expenses 474, ,026 Depreciation and amortization 17 70,550 57,748 Operating income 755, ,510 Financing costs 17 39,877 33,083 Earnings before income taxes 715, ,427 Income taxes , ,791 Net earnings 519, ,636 Other comprehensive loss Items to be reclassified subsequently to net earnings Unrealized loss on derivative financial instruments, net of reclassification adjustment (42,641) (97,001) Income tax recovery relating to components of other comprehensive loss 11,564 25,860 Total other comprehensive loss, net of income tax recovery (31,077) (71,141) Total comprehensive income 488, ,495 Earnings per common share Basic net earnings per common share 16 $4.61 $3.75 Diluted net earnings per common share 16 $4.55 $3.71 Weighted average number of common shares outstanding (thousands) , ,998 Weighted average number of diluted common shares outstanding (thousands) , ,243 The accompanying notes are an integral part of these consolidated financial statements 3

7 Consolidated Statement of Cash Flows for the years ended (Expressed in thousands of Canadian dollars) Note January 28, 2018 $ $ January 29, 2017 Operating activities Net earnings 519, ,636 Adjustments to reconcile net earnings to net cash generated from operating activities: Depreciation of property, plant and equipment and amortization of intangible assets 17 70,550 57,748 Amortization of deferred tenant allowances 11 (5,149) (4,795) Amortization of deferred leasing costs Amortization of debt issue costs 17 2,017 1,481 Recognition of realized losses (gains) on foreign exchange contracts 14 3,851 (46,269) Cash settlement of gains (losses) on foreign exchange contracts (10,266) 16,108 Deferred lease inducements 11 5,348 6,020 Deferred tenant allowances 11 10,607 8,970 Share-based compensation 12 6,559 6,932 Financing costs on long-term debt 1, Deferred income taxes 13 6,297 16,105 Loss on disposal of assets , ,763 Changes in non-cash working capital components 18 25,872 (3,595) Net cash generated from operating activities 637, ,168 Investing activities Additions to property, plant and equipment 6 (112,786) (153,574) Additions to intangible assets 7 (19,134) (12,640) Proceeds from disposal of property, plant and equipment Net cash used in investing activities (131,224) (165,752) Financing activities Proceeds from long-term debt issued (Series 2 Floating Rate Notes) 9 300,000 - Proceeds from long-term debt issued (2.203% Fixed Rate Notes) 9 250,000 - Proceeds from long-term debt issued (2.337% Fixed Rate Notes) 9-525,000 Proceeds (Repayments) of Credit Facility 9 61,000 (120,000) Repayment of Series 1 Floating Rate Notes 9 (275,000) - Payment of debt issue costs (2,658) (2,319) Repayment of finance lease - (588) Issuance of common shares 14,645 4,892 Dividends paid (48,932) (46,936) Repurchase and cancellation of common shares 12 (812,336) (696,628) Net cash used in financing activities (513,281) (336,579) Increase (decrease) in cash (7,171) 2,837 Cash beginning of year 62,015 59,178 Cash end of year 54,844 62,015 The accompanying notes are an integral part of these consolidated financial statements. 4

8 1 General information Dollarama Inc. (the Corporation ) was formed on October 20, 2004 under the Canada Business Corporations Act. The Corporation operates dollar stores in Canada that sell all items for $4.00 or less. As at January 28, 2018, the Corporation maintains retail operations in every Canadian province. The Corporation s corporate headquarters, distribution centre and warehouses are located in the Montreal area. The Corporation is listed on the Toronto Stock Exchange ( TSX ) under the symbol DOL and is incorporated and domiciled in Canada. The Corporation s fiscal year ends on the Sunday closest to January 31 of each year and usually has 52 weeks. However, as is traditional with the retail calendar, every five to six years, a week is added to the fiscal year. The fiscal years ended were comprised of 52 weeks. The Corporation s head and registered office is located at 5805 Royalmount Avenue, Montreal, Quebec, H4P 0A1. As at January 28, 2018, the significant entities within the legal structure of the Corporation are as follows: Dollarama Inc. (Canada) Dollarama L.P. (Québec) Dollarama L.P. operates the chain of stores and performs related logistical and administrative support activities. 2 Basis of preparation The Corporation prepares its consolidated financial statements in accordance with generally accepted accounting principles in Canada ( GAAP ) as set out in the CPA Canada Handbook Accounting under Part I, which incorporates International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). These consolidated financial statements have been prepared on a historical cost basis except for derivative financial instruments, which are measured at fair value. The accounting policies of the Corporation have been applied consistently to all periods in these consolidated financial statements. These consolidated financial statements were approved by the board of directors of the Corporation for issue on March 29,

9 3 Summary of significant accounting policies Subsidiaries Subsidiaries are all entities over which the Corporation has control. The Corporation determines control based on its ability to exercise power that significantly affects the entities relevant day-to-day activities. Control is also determined by the Corporation s exposure to the variability in returns on investment in the entity, whether favorable or unfavourable. Furthermore, control is defined by the Corporation s ability to direct the decisions made by the entity which ultimately impact return on investment. The existence and effect of substantive voting rights are considered when assessing whether the Corporation controls another entity. Subsidiaries are fully consolidated from the date on which control is determined and they are deconsolidated from the date on which control is deemed to have ceased. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Subsidiaries accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Corporation. All subsidiaries of the Corporation are whollyowned subsidiaries. Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Corporation s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The consolidated financial statements are presented in Canadian dollars, which is also the Corporation s functional currency. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at the year-end exchange rate of monetary assets and liabilities denominated in foreign currencies are recognized in earnings, except where hedge accounting is applied as described below under Derivative financial instruments. Segment information The Corporation manages its business on the basis of one operating segment, which is also the Corporation s only reportable segment, which is consistent with the internal reporting provided to the chief operating decision-maker. The Corporation operates in Canada, which is its country of domicile. 6

10 3 Summary of significant accounting policies (cont d) Financial assets The Corporation classifies its financial assets in the following categories: financial assets at fair value through profit or loss, and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. a) Financial assets 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 unless they are designated as hedges. Financial assets at fair value through profit or loss are initially and subsequently recognized at fair value; transaction costs are expensed in earnings. b) Loans and receivables Loans and receivables comprise cash and accounts receivable. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are neither quoted on an active market nor intended for trading. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Financial liabilities Financial liabilities comprise accounts payable and accrued liabilities, dividend payable, derivative financial instruments, and long-term debt. Long-term debt is recognized initially at fair value, net of recognized transaction costs, and is subsequently measured at amortized cost, being the carrying value. Any difference between the carrying value and the redemption value is recognized in the consolidated statement of net earnings and comprehensive income (loss) using the effective interest rate method. Fees paid on the establishment of revolving credit facilities and on debt issuances are capitalized as a prepayment for liquidity services and amortized over the term of the facility or the notes to which they relate. Financial liabilities are classified as current liabilities unless the Corporation has an unconditional right to defer settlement of the financial liabilities for at least 12 months after the statement of financial position date. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is 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 to realize the asset and settle the liability simultaneously. 7

11 3 Summary of significant accounting policies (cont d) Derivative financial instruments The Corporation may use derivative financial instruments in the management of its foreign currency risk on purchases. The Corporation may also use derivative financial instruments in the management of its interest rate exposure. The Corporation designates certain derivatives as hedges of a particular risk associated with a highly probable forecast transaction (cash flow hedge). When hedge accounting is applied, the Corporation documents at inception the relationships between the hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking derivatives to specific assets and liabilities on the consolidated statement of financial position or to specific firm commitments or forecasted transactions. The Corporation also assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Movements on the hedging reserve in shareholders equity (deficit) are shown in the consolidated statement of changes in shareholders equity (deficit). The fair value of a hedging derivative is classified as a noncurrent asset or liability when the remaining maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income (loss). The gain or loss relating to the ineffective portion is recognized immediately in earnings. Amounts accumulated in shareholders equity (deficit) are reclassified to earnings in the periods when the hedged item affects earnings (the vast majority of the reclassification occurs in the first 12 months following the settlement of the derivative financial instrument). The gain or loss relating to the effective portion of the derivatives is recognized as part of cost of sales in the consolidated statement of net earnings and comprehensive income (loss). When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in shareholders equity (deficit) at that time remains in shareholders equity (deficit) and is recognized when the forecast transaction is ultimately recognized in earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in shareholders equity (deficit) is immediately transferred to earnings. Foreign exchange forward contracts are designated as cash flow hedges of specific anticipated transactions. For cash flow hedges associated with interest rate risk such as a bond forward sale, the derivative is recorded on the consolidated statement of financial position at fair value. The effective portion of changes in the fair value of the derivative is recorded to other comprehensive income (loss), and reclassified to earnings over the same period as the hedged interest payments are recorded in earnings. Derivatives where hedge accounting is not applied Derivative financial instruments which are not designated as hedges or have ceased to be effective prior to maturity are recorded at their estimated fair values under assets or liabilities, with changes in their estimated fair values recorded in earnings. 8

12 3 Summary of significant accounting policies (cont d) Property, plant and equipment Property, plant and equipment are carried at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows: Store and warehouse equipment Vehicles Building and roof Leasehold improvements Computer equipment 10 to 15 years 5 years years Lease term 5 years The Corporation recognizes in the carrying amount of property, plant and equipment the full purchase price of assets acquired or constructed as well as the costs incurred that are directly incremental as a result of the construction of a specific asset, when they relate to bringing the asset into working condition. Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized. The rate for calculating the capitalized financing cost is based on the Corporation s weighted average cost of borrowing experienced during the reporting period. The Corporation also capitalizes the cost of replacing parts of an item when that cost is incurred, if it is probable that the future economic benefits embodied within the item will flow to the Corporation and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes are accounted for prospectively as a change in accounting estimate. If the expected residual value of an asset is equal to or greater than its carrying value, depreciation on that asset is ceased. Depreciation is resumed when the expected residual value falls below the asset s carrying value. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of the item and are recognized directly in the consolidated statement of net earnings and comprehensive income (loss). Goodwill and intangible assets The Corporation classifies intangible assets into three categories: (1) intangible assets with finite lives subject to amortization, (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. Intangible assets with finite lives subject to amortization The Corporation determines the useful lives of identifiable intangible assets based on the specific facts and circumstances related to each intangible asset. Finite life intangibles are carried at cost and depreciated on a straight-line basis over the estimated useful lives of the assets as follows: Computer software Deferred leasing costs 5 years Lease term 9

13 3 Summary of significant accounting policies (cont d) The Corporation recognizes in the carrying amount of intangible assets with finite lives subject to amortization the full purchase price of the intangible assets developed or acquired as well as other costs incurred that are directly incremental as a result of the development of a specific intangible asset, when they relate to bringing the asset into working condition. Intangible assets with indefinite lives not subject to amortization The trade name is the Corporation s only intangible asset with indefinite life not subject to amortization. The trade name is recorded at cost and is not subject to amortization, having an indefinite life. It is tested for impairment annually, as of the statement of financial position date, or more frequently if events or circumstances indicate that it may be impaired. 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. As the trade name does not generate cash flows that are independent from other assets or individual cash-generating units ( CGUs or CGU ), trade name is allocated to one group of CGUs that is expected to benefit from the business combination, and which represents the lowest level within the Corporation at which trade name is monitored for internal management purposes. Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the share of the net identifiable assets acquired of the acquiree and the fair value of the non-controlling interest in the acquiree. Goodwill is subsequently measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually, as at the statement of financial position date, or more frequently if events or circumstances indicate that it may be impaired. For the purposes of annual impairment testing, goodwill is allocated to one group of CGUs that is expected to benefit from the business combination, and which represents the lowest level within the Corporation at which goodwill is monitored for internal management purposes. Impairment of non-financial assets Assets that are subject to amortization are periodically reviewed for indicators of impairment. Whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, the asset or CGU is tested for impairment. To the extent that the asset or CGU s carrying amount exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of net earnings and comprehensive income (loss). The recoverable amount of an asset or a CGU is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from an asset or CGU. The fair value is the price that could be received for an asset or CGU in an orderly transaction between market participants at the measurement date, less costs of disposal. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs these are individual stores). Management undertakes an assessment of relevant market data, which includes the current publicly quoted market capitalization of the Corporation. 10

14 3 Summary of significant accounting policies (cont d) Cash and cash equivalents Cash and cash equivalents include highly liquid investments with original maturities from the date of purchase of three months or less. The majority of payments due from financial institutions for the settlement of credit card and debit card transactions are processed within one business day, and are therefore classified as cash and cash equivalents. Inventories The Corporation s inventories at the distribution centre, warehouses and stores consist primarily of merchandise purchased and held for resale and are valued at the lower of cost and net realizable value. Cost is determined at the distribution centre and warehouses on a weighted average cost basis and is then assigned to store inventories using the retail inventory method. Costs of inventories include amounts paid to suppliers, duties and freight into the warehouses as well as costs directly associated with warehousing and distribution to stores. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Accounts payable and accrued liabilities Accounts payable and accrued liabilities are obligations to pay for goods acquired from suppliers or services rendered by employees and service providers in the ordinary course of business. Accounts payable and accrued liabilities are classified as current liabilities if payment is due or expected within one year or less. Otherwise, they are presented as non-current liabilities. Accounts payable and accrued liabilities are recognized initially at fair value and subsequently measured at amortized cost. Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and if it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are not recognized for future operating losses. If the effect of time value of money is material, provisions are measured at the present value of cash flows 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 the passage of time is recognized as accretion expense under financing costs in the consolidated statement of net earnings and comprehensive income (loss). 11

15 3 Summary of significant accounting policies (cont d) Share capital Common shares are classified as shareholders equity (deficit). Incremental costs directly attributable to the issuance of shares or options are shown in shareholders equity (deficit) as a deduction, net of tax, from the proceeds of issuance. When the Corporation repurchases common shares under its normal course issuer bid, the portion of the price paid for the common shares that corresponds to the book value of those shares is recognized as a reduction of share capital. The portion of the price paid that is in excess of the book value is recognized as a reduction of retained earnings. As a direct result of the fact that the price paid for each common share significantly exceeds its book value, the Corporation s shareholders equity is now in a deficit position. Dividends declared Dividend distributions to the Corporation s shareholders are recognized as a liability in the Corporation s consolidated financial statements in the period in which the dividends are declared by the board of directors. Employee future benefits A defined contribution pension plan is a post-employment benefit plan under which the Corporation pays fixed contributions into a separate legal entity as well as state plans administered by the provincial and federal governments and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution retirement plans are recognized as an expense in earnings when they are due. The Corporation offers a defined contribution pension plan to eligible employees whereby it matches an employee s contributions up to 5% of the employee s salary, subject to a maximum of 50% of the RRSP annual contribution limit. Short-term employee benefits Liabilities for bonus plans are recognized based on a formula that takes into consideration individual performance and contributions to the profitability of the Corporation. Termination benefits Termination benefits are generally payable when employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Corporation recognizes termination benefits when it is demonstrably committed to providing termination benefits as a result of an offer made. Income taxes The income tax expense for the year comprises current and deferred tax. Tax is recognized in earnings, except to the extent that it relates to items recognized in other comprehensive income (loss) or directly in shareholders equity (deficit). In this case, tax is recognized in other comprehensive income (loss) or directly in shareholders equity (deficit). 12

16 3 Summary of significant accounting policies (cont d) The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date and any adjustment to tax payable in respect of previous years. 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 income tax liabilities are not recognized if they arise from initial recognition of goodwill or if they arise 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 statement of financial position date 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 profits will be available against which the temporary differences can be utilized. 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 tax 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. Revenue recognition The Corporation recognizes revenue from the sale of products or the rendering of services when they are earned, specifically when all the following conditions are met: (1) the significant risks and rewards of ownership are transferred to customers and the Corporation retains neither continuing managerial involvement nor effective control; (2) there is clear evidence that an arrangement exists; (3) the amount of revenue and related costs can be measured reliably; and (4) it is probable that the economic benefits associated with the transaction will flow to the Corporation. The recognition of revenue at the store occurs at the time a customer tenders payment for and takes possession of the merchandise. All sales are final. Revenue is shown net of sales tax and discounts. Gift cards sold are recorded as a liability, and revenue is recognized when gift cards are redeemed. Gross versus net The Corporation may enter into arrangements with third parties for the sale of products to customers. When the Corporation acts as the principal in these arrangements, it recognizes revenue based on the amounts billed to customers. Otherwise, the Corporation recognizes the net amount that it retains as revenue. Cost of sales Cost of sales includes the cost of inventories, outbound transportation costs, warehousing and distribution costs, store, warehouse and distribution centre occupancy costs, as well as the transfer from accumulated other comprehensive income (loss) (AOCI) of any gains (losses) on qualifying cash flow hedges related to the purchase of inventories. 13

17 3 Summary of significant accounting policies (cont d) Vendor rebates The Corporation records vendor rebates, consisting of volume purchase rebates, when it is probable that they will be received and the amounts are reasonably estimable. The rebates are recorded as a reduction of inventory purchases and are reflected as a reduction of cost of sales in the consolidated statement of net earnings and comprehensive income (loss). General, administrative and store operating expenses The Corporation includes store and head office salaries and benefits, repairs and maintenance, professional fees, store supplies and other related expenses in general, administrative and store operating expenses. Earnings per common share Earnings per common share is determined using the weighted average number of common shares outstanding during the year. Diluted earnings per common share is determined using the treasury share method to evaluate the dilutive effect of share options. Under this method, instruments with a dilutive effect are considered to have been exercised at the beginning of the year, or at the time of issuance, if later, and the proceeds received are considered to have been used to redeem common shares at the average market price during the year. Leases Finance leases Assets held under leases which result in the Corporation receiving substantially all the risks and rewards of ownership of the asset ( finance leases ) are capitalized at the lower of the fair value of the property and equipment or the estimated present value of the minimum lease payments. The corresponding finance lease obligation is included within interest bearing liabilities. The interest element is amortized using the effective interest rate method. Operating leases The Corporation leases stores, five warehouses, a distribution centre and corporate headquarters. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. The Corporation recognizes rental expense incurred and inducements received from landlords on a straight-line basis over the term of the lease. Any difference between the calculated expense and the amounts actually paid is reflected as deferred lease inducements in the Corporation s consolidated statement of financial position. Contingent rental expense is recognized when the achievement of specified sales targets is considered probable. Deferred leasing costs and deferred tenant allowances are recorded on the consolidated statement of financial position and amortized using the straight-line method over the term of the respective lease. 14

18 3 Summary of significant accounting policies (cont d) Share-based compensation The Corporation recognizes a compensation expense for share options granted based on the fair value of those options at the grant date, using the Black-Scholes option pricing model. The options granted by the Corporation vest in tranches (graded vesting); accordingly, the expense is recognized in vesting tranches. The total amount to be expensed is determined by reference to the fair value of the options granted. The impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and retaining an employee of the entity over a specified time period) are excluded from the fair value calculation. Non-market performance vesting 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. At the end of each reporting period, the Corporation revises its estimates of the number of options that are expected to vest based on the non-market performance vesting conditions. The Corporation recognizes the impact of the revision to original estimates, if any, in the consolidated statement of net earnings and comprehensive income (loss), with a corresponding adjustment to contributed surplus. When option holders exercise their options, the cash paid for the shares issued is credited, together with the related compensation costs, to share capital (nominal value). 4 Significant new accounting standards not yet adopted IFRS 16 In January 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases. The new standard will be effective for fiscal years beginning on or after January 1, 2019, with early adoption permitted provided the Corporation has adopted IFRS 15, Revenue from Contracts with Customers. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a right-of-use asset for virtually all lease contracts, and record it on the statement of financial position, except with respect to lease contracts that meet limited exception criteria. Given that the Corporation has significant contractual obligations in the form of operating leases (Note 10) under IAS 17, there will be a material increase to both assets and liabilities upon adoption of IFRS 16, and material changes to the timing of recognition of expenses associated with lease arrangements. 15

19 4 Significant new accounting standards not yet adopted (cont d) The following table outlines the key areas that will be impacted by the adoption of IFRS 16. Impacted areas of the business Financial reporting Information systems Analysis The analysis includes which contracts will be in scope as well as the options available under the new standard such as whether to early adopt, the two recognition and measurement exemptions and whether to apply the new standard on a full retrospective application in accordance with IAS 8 or choose the modified retrospective approach. The Corporation is analyzing the need to make changes within its information systems environment to optimize the management of more than 1,000 leases that will fall within the scope of the new standard. Impact The Corporation is in the process of analyzing the full impact of the adoption of IFRS 16 on the Corporation s consolidated statement of financial position and consolidated statement of net earnings and comprehensive income (loss). In addition, the Corporation is working with a third party provider of advisory services. As at January 28, 2018, the operating leases disclosed in Note 10 to the audited consolidated financial statements for the year ended January 28, 2018 are in scope with IFRS 16. The Corporation has chosen an IT solution for the eventual recognition and measurement of leases in scope. Integration testing began in the 13-week period ended October 29, 2017 and was ongoing as at January 28, Internal controls Stakeholders The Corporation will be performing an analysis of the changes to the control environment as a result of the adoption of IFRS 16. The Corporation will be performing an analysis of the impact on the disclosure to its stakeholders as a result of the adoption of IFRS 16. Concurrently with integration testing, the Corporation is evaluating the impact of IFRS 16 on its control environment. The Corporation has begun communicating the impact of IFRS 16 to internal stakeholders. IFRS 9 In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments concerning classification and measurement, impairment and hedge accounting, to supersede IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 is effective for years beginning on or after January 1, 2018 with early adoption permitted. On transition to IFRS 9, the Corporation will apply the new hedge accounting requirements to all qualifying hedge relationships existing on the date of transition. IFRS 9 introduces changes to the cash flow hedge accounting model and eliminates the accounting policy choice provided by IAS 39 for the hedge of a forecasted transaction that results in the recognition of a non-financial asset or liability. Classification under IFRS 9 is based on the concept that financial assets should be classified and measured at fair value, with changes in fair value recognized through profit or loss (FVPL), unless restrictive criteria are met for classifying and measuring the asset at either amortized cost or fair value through other comprehensive income (loss) (FVOCI). The following table compares the different categories of classification under IAS 39 and IFRS 9: Current IAS 39 accounting standard IFRS 9 Classifications Loans and receivables FVPL Available for sale Held to maturity Measurement models Amortized cost FVPL FVOCI Amortized cost Classifications and measurement models Amortized cost FVPL FVOCI FVOCI 16

20 4 Significant new accounting standards not yet adopted (cont d) As a result of the adoption of IFRS 9, the Corporation will remove the gains or losses previously recognized in accumulated other comprehensive income (loss) and include them directly in the carrying amount of the asset or the liability (referred to as basis adjustment ). This is done in order to better match the settlement of the hedged transaction that has occurred with the carrying amount of the hedged asset, being the portion of the Corporation s inventory that was purchased with a foreign currency. This basis adjustment is not a reclassification adjustment and will not affect the Corporation s consolidated statement of net earnings and comprehensive income (loss). IFRS 15 In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 replaces all previous revenue recognition standards, including IAS 18, Revenue. In September 2015, the IASB deferred the effective date of IFRS 15 from January 1, 2017 to annual periods beginning on or after January 1, 2018, with early adoption permitted. IFRS 15 is based on the principle that revenue is recognized when control of a good or service is transferred to a customer. A five-step recognition model is used to apply the standard as follows: 1. Identify the contract(s) with the customer; 2. Identify the separate performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to separate performance obligations; and 5. Recognize revenue when (or as) each performance obligation is satisfied. The Corporation is in the final stages of analyzing the impact of the adoption of IFRS 15 on the Corporation s consolidated statement of financial position and consolidated statement of net earnings and comprehensive income (loss). The impact is not expected to be significant. 5 Critical accounting estimates and judgments The preparation of financial statements requires management to make estimates and assumptions using judgment that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses during the reporting period. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates. The following discusses the most significant accounting judgments and estimates that the Corporation made in the preparation of the consolidated financial statements. Income taxes Judgment - Judgment is required in determining income taxes. There are 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 differs from the amounts that were initially recorded, such differences impact the current and deferred income tax assets and liabilities in the period in which such determination is made. 17

21 5 Critical accounting estimates and judgments (cont d) Property, plant and equipment Estimate - Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes, based on additional available information, are accounted for prospectively as a change in accounting estimate. Valuation of inventories Estimate - Store inventories are valued at the lower of cost and net realizable value, with cost being determined by the retail inventory method. Under the retail inventory method, inventories are converted to a cost basis by applying an average cost-to-sell ratio. Inventories that are at the distribution centre or warehouses and inventories that are in transit from suppliers are measured at the lower of cost and net realizable value, with cost determined on a weighted average cost basis. Inventories include items that have been marked down to management s best estimate of their net realizable value and are included in cost of sales in the period in which the markdown is determined. The Corporation estimates its inventory provisions based on the consideration of a variety of factors, including quantities of slow-moving or carryover seasonal merchandise on hand, historical markdown statistics, future merchandising plans and inventory shrinkage. The accuracy of the Corporation s estimates can be affected by many factors, some of which are beyond its control, including changes in economic conditions and consumer buying trends. Historically, the Corporation has not experienced significant differences in its estimates of markdowns compared with actual results. Changes to the inventory provisions can have a material impact on the results of the Corporation. Impairment of goodwill and trade name Estimate - Goodwill and trade name are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate that the assets might be impaired. Impairment is identified by comparing the recoverable amount of the CGU to its carrying value. To the extent the CGU s carrying amount exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of net earnings and comprehensive income (loss). The recoverable amount of the CGU is based on the fair value less costs of disposal. The fair value is the price that could be received for an asset or CGU in an orderly transaction between market participants at the measurement date, less costs of disposal. Management undertakes an assessment of relevant market data, which includes the current publicly quoted market capitalization of the Corporation. As at, impairment reviews were performed by comparing the carrying value of goodwill and the trade name with the recoverable amount of the CGU to which goodwill and the trade name have been allocated. Management determined that there has been no impairment. 18