HIGH ARCTIC ENERGY SERVICES INC.

Transcription

1 HIGH ARCTIC ENERGY SERVICES INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016

2 March 9, 2018 Independent Auditor s Report To the Shareholders of High Arctic Energy Services Inc. We have audited the accompanying consolidated financial statements of High Arctic Energy Services Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016 and the consolidated statements of earnings and comprehensive income, changes in equity and cash flows for the years ended December 31, 2017 and December 31, 2016, 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 High Arctic Energy Services Inc. and their subsidiaries as at December 31, 2017 and December 31, 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants PricewaterhouseCoopers LLP th Avenue SW, Suite 3100, Calgary, AB, Canada T2P 5L3 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 Consolidated Statements of Financial Position As at December 31, 2017 and 2016 () Notes December 31, 2017 December 31, 2016 Assets Current assets Cash and cash equivalents Accounts receivable Short term investments Inventory Income taxes receivable Prepaid expenses Non-current assets Property and equipment Deferred tax asset Total assets Liabilities Current liabilities Accounts payable and accrued liabilities Dividend payable Current portion of finance lease obligation Current portion of deferred revenue Current portion of long-term debt Non-current liabilities Deferred revenue Finance lease obligation Unfavourable lease liability Deferred tax liability Total liabilities Shareholders' equity Total liabilities and shareholders' equity Commitments and contingencies 23 See accompanying notes to these consolidated financial statements. Approved on behalf of the Corporation by: (signed) Jim Hodgson Director (signed) Michael Binnion Director

4 Consolidated Statements of Earnings and Comprehensive Income, except per share amounts Notes Revenue Expenses Oilfield services General and administration Depreciation Share-based compensation Operating earnings Acquisition costs Gain on acquisition 9 - (12.7) Foreign exchange gain (0.7) (0.5) Gain on sale of property and equipment - (0.1) Interest and finance expense Net earnings before income taxes Current income tax expense Deferred income tax expense (recovery) 18 (0.8) Net earnings for the year Earnings per share: 16 Basic Diluted Net earnings for the year Other comprehensive income: Items that may be reclassified subsequently to net income: Foreign currency translation losses for foreign operations (9.5) (4.3) Items that may not be reclasified subsequently to net income: Gains (losses) on short term investments, net of tax (note 7) (0.6) 3.2 Comprehensive income for the year See accompanying notes to these consolidated financial statements. 2

5 Consolidated Statements of Changes in Equity Notes Share capital Contributed surplus Accumulated other comprehensive income Retained earnings (deficit) Total shareholders' equity Balance at January 1, Net earnings Dividends (10.5) (10.5) Other comprehensive income - foreign currency translation loss Other comprehensive income - loss on short term investments - - (9.5) - (9.5) (0.6) - (0.6) Share-based payment transactions Balance at December 31, Notes Share capital Contributed surplus Accumulated other comprehensive income Retained earnings (deficit) Total shareholders' equity Balance at January 1, (27.6) Net earnings Dividends (10.5) (10.5) Other comprehensive income - foreign currency translation loss - - (4.3) - (4.3) Other comprehensive income - gain on short term investments Purchase of common shares for cancellation (6.7) (6.5) Share-based payment transactions 2.5 (0.5) Balance at December 31, See accompanying notes to these consolidated financial statements. 3

6 Consolidated Statements of Cash Flows Notes Net earnings for the year Adjustments for: Depreciation Provision for onerous lease (0.4) 0.3 Share-based compensation Gain on acquisition 9 - (12.7) Gain on sale of property and equipment 9 - (0.1) Foreign exchange (gain) loss (0.5) 0.1 Deferred income tax expense (recovery) 18 (0.8) Net changes in items of working capital 22 (10.9) (7.9) Net cash generated from operating activities Investing activities Additions of property and equipment 10 (6.8) (9.6) Business acquisition 9 - (42.8) Disposal of short term investments Disposal of property and equipment Net changes in items of working capital Net cash used in investing activities (3.2) (43.3) Financing activities Long-term debt proceeds Long-term debt repayments 15 (35.7) (22.6) Dividend payments 14 (10.5) (10.5) Purchase of common shares for cancellation 16 - (6.5) Issuance of common shares, net of costs Finance lease obligation payments 12 (0.7) (0.8) Net cash from (used in) financing activities (34.9) 3.8 Effect of exchange rate changes (1.4) (0.6) Net change in cash and cash equivalents (5.2) 11.8 Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year Cash paid for: Interest Income taxes

7 See accompanying notes to these consolidated financial statements. 1 Nature of Business High Arctic Energy Services Inc. ( High Arctic or the Corporation ) is incorporated under the laws of Alberta, Canada and is a publicly traded corporation listed on the Toronto Stock Exchange under the symbol HWO. The head office of the Corporation is located at nd Street S.W. Suite 500, Calgary, Alberta, Canada, T2P 2W1. High Arctic s business is to provide contract drilling, completion services, equipment rentals and other oilfield services to the oil and natural gas industry in Papua New Guinea ( PNG ) and Canada. As of December 31, 2017, 21,916,634 common shares of the Corporation were owned by FBC Holdings S.A.R.L. representing 41.1% of the outstanding common shares. 2 Basis of Preparation The consolidated financial statements ( Financial Statements ) of the Corporation have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). These consolidated financial statements have been prepared in compliance with IFRS. The Financial Statements of High Arctic for the year ended December 31, 2017 were approved by the Board of Directors on March 9, Significant Accounting Policies Basis of measurement These Financial Statements have been prepared on the historical cost basis except as noted below. Principles of consolidation The Financial Statements include the accounts of High Arctic and its subsidiaries, all of which are whollyowned. Intercompany balances and transactions, including unrealized gains or losses between subsidiaries are eliminated on consolidation. Business Combinations Acquisitions of subsidiaries and assets that meet the definition of a business under IFRS are accounted for using the acquisition method. The consideration for each acquisition is measured at the date of exchange as the aggregate of the fair value of assets acquired, liabilities assumed, and cash payments or equity instruments issued by the Corporation. The identifiable assets acquired and liabilities assumed that meet the conditions for recognition under IFRS 3 are recognized at their fair value with the exception of deferred income taxes and assets held for sale, which are measured in accordance with their applicable IFRS. Any deficiency of the fair value of the identifiable net assets below the consideration paid is recognized as goodwill, and any surplus of the fair value of the identifiable net assets relative to the consideration paid is recorded as gain on acquisition. Transaction costs associated with an acquisition are expensed as incurred. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Corporation reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted retrospectively during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date, that if known, would have materially affected the amounts recognized as of that date. The measurement period can be up to a maximum of one year and is the period from the date of acquisition to the date the Corporation obtains complete information about facts and circumstances that existed as of the acquisition date. Foreign currency a) Functional and presentation currency: 5

8 Items included in the Financial Statements of each consolidated entity of the Corporation are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The Financial Statements are presented in Canadian dollars, which is the Corporation s functional currency. b) Foreign operations: The financial statements of entities that have a functional currency different from that of the Corporation ( foreign operations ) are translated into Canadian dollars as follows: assets and liabilities at the closing rate at the date of the statement of financial position, and income and expenses at the average rate of the period (where it approximates to the rates at the date of the transaction). All changes resulting from applying the closing rate to the assets and liabilities of foreign operations are recognized in other comprehensive income as cumulative translation adjustments. c) Transactions and balances: Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation s functional currency are recognized in the consolidated statement of earnings. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less. Financial instruments Financial assets and 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 liabilities are offset and the net amount reported in the 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. Initial measurement of financial instruments The Corporation classifies and measures financial assets and liabilities on initial recognition as described below: a) Cash and cash equivalents Cash and cash equivalents include cash and term deposits and are classified as financial assets at fair value through profit or loss. Cash and cash equivalents are measured at fair value and unrealized gains or losses related to changes in fair value are reported in income. b) Trade and other receivables Trade and other receivables are classified as assets at amortized cost and are measured using the effective interest method, less impairment allowance, if any, where the financial assets are supported by the Corporation s business model to hold to collect and where the financial assets are considered to consist solely of payments of principal and interest. c) Equity investments All of the Corporation s equity investments are initially recognized at fair value and classified into the following categories: fair value through profit or loss ( FVTPL ) or fair value through other comprehensive income ( FVTOCI ). Both realized and unrealized gains and losses on FVTOCI equity investments are recognized in OCI. Dividends from such investments are recognized in profit or loss as other income when the Corporation s right to receive payments is established. 6

9 d) Debt investments All of the Corporation s debt investments are initially recognized at fair value and classified into the following categories: FVTPL or FVTOCI. The amounts recognized in OCI for FVTOCI debt investments are charged to earnings when the asset is derecognized. Interest from such investments are recognized in profit or loss as other income when the Corporation s right to receive payments is established. e) Financial liabilities Financial liabilities are initially recognized at fair value when the outflow of economic benefit is probable and costs of the obligation can be measured reliably. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expired. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements and since the Corporation does not have any financial liabilities designated at fair value through profit or loss, the adoption of IFRS 9 did not impact our accounting policies for financial liabilities. The Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Corporation is recognized as a separate asset or liability. Financial liabilities within the scope of IFRS 9 are classified as financial liabilities at fair value through earnings or loss or other liabilities. The Corporation determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value and loans and borrowings include directly attributable transaction costs. Items classified as other financial liabilities on the Corporation s financial statements are accounted for at amortized cost using the effective interest method. Any gains or losses in the realization of other financial liabilities are included in earnings. The fair value of accounts payable, accrued liabilities and dividends payable approximate their carrying values due to the short-term nature of these instruments. The credit facility and long-term debt are recorded initially at fair value, net of transaction costs incurred. Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise they are presented as non-current liabilities. Property and equipment Property 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 statement of income during the period in which they are incurred. Depreciation is calculated on the depreciable amount which is the carrying cost of an asset less its residual value. Depreciation is recognized in the statement of earnings using various methods over the estimated useful lives of certain assets. The Corporation allocates the amount initially recognized in respect of an item of property and equipment to its significant components and depreciates separately each such component. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Land is not depreciated. Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains and losses in the statement of earnings. 7

10 Inventory Inventory consists primarily of operating supplies and spare parts not held for sale and are valued at the lower of average cost and net realizable value. Inventory is charged to operating expenses as items are consumed at the average cost of the item. Net realizable value is the estimated selling price less estimated selling costs. A regular review is undertaken to determine the extent of any obsolescence for which a provision is required. Impairment of financial assets The Corporation s trade and lease receivables are subject to the expected credit loss model under IFRS 9. For trade and lease receivables, the Corporation applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all trade receivables. In estimating the lifetime expected loss provision, the Corporation considered historical industry default rates as well as credit ratings of specific customers. Impairment of non-financial assets At each reporting date, property and equipment are assessed for impairment. If necessary, impairment is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount for an individual asset is determined as the higher of its fair value less costs to sell the asset and the asset s value in use. Should the recoverable amount not be determinable on an individual asset basis, it is estimated for groups of assets by determining the recoverable amount of the group of assets. This is done by determining the value of the discounted cash inflows less the discounted cash outflows of the group of assets. For the purposes of assessing impairment on groups of assets, the individual assets are grouped together into cash generating units ( CGUs ). Such CGUs represent the lowest level for which there are separately identifiable cash inflows. If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the statement of earnings so as to reduce the carrying amount to its recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of earnings. Employee benefits a) Defined contribution pension plan: A defined contribution pension plan is a pension plan under which the Corporation pays fixed contributions into a separate entity. Amounts are recognized as a liability and expense in accordance with the fixed contribution terms. The Corporation has no legal or constructive obligations relating to future payments to employees. b) Bonus plans: The Corporation recognizes a liability and an expense for bonuses based on various formulae that take into consideration operating earnings and other factors attributable to the financial and operational performance of the Corporation. The Corporation recognizes a provision where contractually obligated or where there is a past practice that has created a constructive obligation. c) Share-based plans: Stock Option Plan The Corporation has a stock option plan that provides incentive for directors, management and certain employees. Options granted are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of stock options are set out in the share-based compensation note. The fair value determined at the grant date of the stock options is recognized as an employee benefit expense, with a corresponding increase in contributed surplus, over the vesting period based on the Corporation s estimate of equity instruments that will eventually vest. At the end of each reporting period, 8

11 the Corporation revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized immediately. When the options are exercised, the Corporation issues new shares. The proceeds received plus the amount of the related previously recognized benefit in contributed surplus are credited to share capital. Executive and Director Share Incentive Plan The Corporation has an Executive and Director Share Incentive Plan under which common shares may be issued to directors and executives. A share-based compensation amount for the common shares issued under the plan is measured as the number of common shares multiplied by the trading price of the Corporation s shares at the time of the grant and that amount is amortized over the vesting period. Each vesting period is treated as a separate tranche for measurement of the non-cash share-based compensation expense. The share-based compensation for each tranche is expensed based on the vesting date for that tranche resulting in a proportionally greater amount being recognized in the earlier periods. Cash Settled Restricted Share Units The Corporation has awarded Cash Settled Restricted Share Units ( CSRSUs ) to certain employees of the Corporation. Each CSRSU carries the right to a cash payment based upon the trading price of the common shares when exercised. The CSRSUs are treated as cash-settled share-based compensation and a compensation expense is recognized over the vesting period using fair values with a corresponding increase or decrease in liabilities. The liability is remeasured at each reporting date and at the settlement date. Any changes in the fair value of the liability are recognized as share-based compensation expense in the statement of income. Deferred Share Units: The Corporation has awarded Deferred Share Units ( DSUs ) to non-employee directors of the Corporation. DSU s awarded will vest immediately and provide participants the right to receive, at the election of the Corporation, common shares or a cash payment equal to the five day volume weighted average price of the Corporation s common shares. DSU holders are also entitled to dividends and on any date a cash dividend is paid on the Corporation s common shares, DSU holders will be credited with a dividend equivalent in the form of a number of DSUs calculated by multiplying the amount of the dividend per common share by the aggregate number of DSUs that were credited to the participant s account as of the record date for payment of the dividend, and dividing that amount by the fair market value on the date on which the dividend is paid. The DSUs are treated as equity-settled share-based compensation and compensation expense is recognized when the DSUs are issued using fair values with a corresponding increase in contributed surplus. Performance Share Unit Plan: The Corporation has a Performance Share Unit Plan ( PSUP ) under which the Corporation may grant restricted share units ( RSUs ) and performance share units ( PSUs ) to its employees. Under the terms of the PSUP, certain vesting criteria may be applied to share units granted. The Corporation intends to grant share units which have performance vesting conditions, referred to as Performance Share Units ( PSUs ) and other units which, unless otherwise directed by the Board of Directors, vest one third on each of the first, second and third anniversaries from the date of the grant, referred to as Restricted Share Units ( RSUs ). The fair value of the RSUs and PSUs issued is equal to the Corporation s five day weighed average share price on the grant date. The fair value is expensed over the vesting term on a graded vesting basis. PSU and RSU holders are also entitled to dividends and on any date a cash dividend is paid on the Corporation s common shares, and will be credited with a dividend equivalent in the form of a number of PSUs or RSUs calculated by multiplying the amount of the dividend per common share by the aggregate number of PSUs or RSUs that were credited to the participant s account as of the record date for payment of the dividend, and dividing that amount by the fair market value on the date on which the dividend is paid. The PSUs and RSUs are treated as equity-settled share-based compensation and compensation expense is recognized when the units are issued using fair values with a corresponding increase in contributed surplus. 9

12 Provisions Provisions for legal claims and other obligations, where applicable, are recognized in accrued liabilities when the Corporation has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at management s best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present value where the effect is material. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable, net of discounts, and after eliminating intercompany sales. The Corporation bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue from the rendering of services is recognized as services are provided when the following criteria are met: the amount of revenue can be measured reliably; the receipt of economic benefits is probable; and costs incurred and to be incurred can be measured reliably. The Corporation may receive payments from its customers for services yet to be rendered. As service is provided to the customer and the Corporation incurs expenses the Corporation recognizes revenue for the value of the service provided to that point in time. Interest and finance costs Interest and finance costs are comprised of interest payable on borrowings calculated using the effective interest rate method. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Debt transaction costs incurred in connection with entering into new credit facility agreements are amortized over the term of the debt using the effective interest rate method. All other borrowing costs are recognized in earnings in the period in which they are incurred. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of earnings on a straight-line basis over the period of the lease. Income tax Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in the statement of earnings except to the extent that it relates to the items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date in the jurisdictions where the Corporation operates. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for temporary differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. 10

13 A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Dividends Dividends on common shares, if declared, are recognized in the Corporation s financial statements in the period in which the dividends are approved by the Board of Directors of the Corporation. Earnings per share The Corporation presents basic and diluted earnings per share ( EPS ) data for its common shares. Basic EPS is calculated by dividing the net earnings or loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the net earnings or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise restricted incentive shares and share options granted to employees. Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Corporation determines its operating segments based on internal information regularly reviewed by the Corporation s chief operating decision makers to allocate resources and assess performance. The Corporation has determined that it has four operating segments: drilling services, production services, ancillary services and corporate. 4 Future Accounting Policies Leases On January 13, 2016, the IASB issued IFRS 16, Leases ( IFRS 16 ), which requires entities to recognize lease assets and lease obligations on the balance sheet. For lessees, IFRS 16 removes the classification of leases as either operating leases or finance leases, effectively treating most leases as finance leases. Certain short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements, and may continue to be treated as operating leases. IFRS 16 is effective for years beginning on or after January 1, 2019, with early adoption permitted if IFRS 15 Revenue From Contracts With Customers has been adopted. The standard may be applied retrospectively or using a modified retrospective approach. The Corporation is currently evaluating the impact of adopting IFRS 16 on the Financial Statements. Revenue Recognition In May 2014, the IASB published IFRS 15, Revenue From Contracts With Customers ( IFRS 15 ) replacing IAS 11, Construction Contracts, IAS 18, Revenue and several revenue-related interpretations. IFRS 15 establishes a single revenue recognition framework that applies to contracts with customers. The standard requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it expects to receive, when control is transferred to the purchaser. Disclosure requirements have also been expanded. The new standard is effective for annual periods beginning on or after January 1, 2018, and may be applied either retrospectively or using a modified retrospective approach. The Corporation has evaluated the impact of applying the new standard on the Financial Statements and has not identified any material differences from its current revenue recognition practice. The Corporation intends to adopt the standard using the modified retrospective approach recognizing the cumulative impact of adoption in retained earnings as of January 1, Comparative periods will not be restated. 11

14 5 Critical Accounting Estimates and Judgements The preparation of the Corporation s Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities as at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates. The accounting policies and practices that involve the use of estimates and judgments that have a significant impact on the Corporation s financial results include the allowance for doubtful accounts, depreciation, impairment of property and equipment, income taxes and share-based compensation. Allowance for doubtful accounts The Corporation estimates the amount of expected credit losses for trade receivables with no financing component using a provision matrix. The provision matrix is based on historical loss experience and is adjusted for forward looking estimates based on current and future economic conditions. The Corporation uses the simplified approach of the expected credit loss model for lease and trade receivables with no significant financing component which requires measuring the loss allowance at an amount equal to the lifetime expected credit losses at initial recognition and throughout its life. Depreciation Depreciation of the Corporation s property and equipment incorporates estimates of useful lives and residual values. Equipment under construction is not depreciated until it is available for use. Included in property and equipment is equipment under a financing lease. Effective January 1, 2017, all equipment is depreciated based on the straight-line method over the asset s useful life in years. Previously, property and equipment was depreciated using the declining balance method, excluding drilling and service rigs, which were depreciated using the straight-line method. Upon the Corporation s review of depreciation methodology during the first quarter of 2017, it was determined that using the straight-line method is a more accurate reflection of the pattern in which the asset s future economic benefits are expected to be consumed. Existing assets were assessed for their remaining useful lives in years and are being depreciated prospectively on that basis. Had the Corporation continued to depreciate the assets using declining balance, depreciation expense would have been approximately $27.0, which is $1.1 million higher than what was recorded for the year ended December 31, For the period ended December 31, 2017 Expected Life Salvage Value Basis of Depreciation Oilfield Equipment: Drilling rigs 5-15 years Up to 10% Straight line Service rigs 5-20 years Up to 10% Straight line Support and shop 7-10 years Up to 5% Straight line Drilling support 7-10 years Up to 5% Straight line Hydraulic workover and UB rigs 7-10 years Up to 5% Straight line Snubbing 7-10 years Up to 5% Straight line Nitrogen 7-10 years Up to 5% Straight line Rentals and matting 5-10 years Up to 5% Straight line Light vehicles 5-10 years Up to 5% Straight line Heavy trucks 7-10 years Up to 5% Straight line Buildings years Up to 10% Straight line Office equipment and computer hardware 3-5 years Up to 5% Straight line Computer software 3-5 years nil Straight line Leasehold improvements Lease term or five years nil Straight line 12

15 For the period ended December 31, 2016 Oilfield Equipment: Expected Life Salvage Value Basis of Depreciation Drilling rigs 5-15 years Up to 10% Straight line Service rigs 5-20 years Up to 10% Straight line Support and shop 20% N/A Declining balance Drilling support 12.5% - 20% N/A Declining balance Hydraulic workover and UB rigs 12.5% - 15% N/A Declining balance Snubbing 15% % N/A Declining balance Nitrogen 17.50% N/A Declining balance Rentals and matting 20% N/A Declining balance Light vehicles 30% N/A Declining balance Heavy trucks 15% - 20% N/A Declining balance Buildings 4% N/A Declining balance Office equipment and computer hardware 20% - 30% N/A Declining balance Computer software 50% - 100% N/A Declining balance Leasehold improvements Lease term or five years N/A Declining balance Residual values, method of depreciation and useful lives of the assets are reviewed annually, with the effect of any changes in estimate accounted for on a prospective basis. Impairment of property and equipment Property and equipment are tested for impairment when events and or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units or CGUs). The recoverable amount is the higher of an asset s fair value less costs to dispose and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). Estimates of future cash flows used in the evaluation of impairment of assets are made using management s current operating forecasts, utilization rates, rates and costs of available equipment (margin), terminal values and discount rates. An impairment loss is recognized for the amount by which the asset or CGUs carrying amount exceeds its expected recoverable amount. Income taxes Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. The Corporation s calculation of income taxes involves many complex factors as well as the Corporation s interpretation of relevant tax legislation and regulations and estimations of future taxable profits. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. The Corporation has losses that currently exceed near term profit expectations, as a result, the full benefit has not been recognized. Deferred tax assets are reviewed at each reporting date and are increased or reduced depending on the probability that the related tax benefit will be realized. Share-based compensation The fair value of stock options is estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected option life, dividend yield, estimated forfeitures and estimated volatility of the Corporation s shares. The fair value of the 13

16 shares under the Executive and Directors Share Incentive Plan are recognized based on the market value of the Corporation s shares on the grant date, the vesting period of the plan and the estimated forfeitures. The fair value of Restricted Stock Units is estimated based on the market value of the Corporation s shares at the balance sheet date. Business acquisition In accordance with IFRS 3, the Corporation measures the assets, liabilities and contingent liabilities acquired through a business combination at fair value. Where possible, fair value adjustments are based on external appraisals or valuation models. The Corporation is often required to make judgements and estimates in relation to the fair value allocation of the purchase price. Changes in any of these judgements or estimates used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities and goodwill (or gain from a bargain purchase) in the acquisition equation. If any unallocated portion is positive, it is recognized as goodwill and if negative, it is recognized as a gain in the statement of earnings. Critical accounting judgments Significant judgments are used in the application of accounting policies that have been identified as being complex and involving subjective judgments and assessments. Functional currency The determination of functional currency is based on the primary economic environment (including monetary policy) in which an entity operates. The functional currency of an entity reflects the underlying transactions, events and conditions that are relevant to the entity. Factors that the Corporation considers when determining the functional currency of its subsidiaries include: (i) the currency that the delivery of goods and services are contracted in, (ii) the currency used to conduct business in the region, (iii) the currency that mainly influences labour, material and other costs of providing goods or services, (iv) the currency in which receipts from operating activities are usually retained in. When the indicators are mixed and the functional currency of an entity is not obvious, management uses its judgment to determine the functional currency that most appropriately represents the economic effects of the underlying transactions, events and conditions. Judgment was applied in determining the functional currency of the operations in PNG to be US dollars due to all existing rig contracts negotiated and settled in US dollars, as well as majority of the expenses quoted and paid in US dollars, including lease expenses. 6 Accounts Receivable The Corporation applies the simplified approach to providing for expected credit losses as prescribed by IFRS 9, which permits the use of lifetime expected loss provision for all trade receivables. December 31, 2017 December 31, 2016 Less than 31 days to 60 days to 90 days Greater than 90 days Allowance for doubtful accounts (0.1) (0.1) Total The Corporation's accounts receivable are denominated in the following currencies: Canadian dollar (in millions) United States dollar (in millions) ( US $19.4; US $27.4) Total High Arctic determined the loss provision percentages used in the provision matrix based on historical credit loss experience as well as Historical Global Default rates for investment grade and speculative grade 14

17 companies as published by Standard and Poor s. The expected credit losses also incorporate forward looking information. Total receivable Less than 31 days 31 to 60 days days Over 90 days Total Investment grade receivables Non-investment grade receivables Total receivables Expected credit loss for investment grade 0.04% 0.06% 0.10% 0.30% 0.50% Expected credit loss for non-investment grade 0.75% 1.00% 2.00% 4.00% 7.75% Investment grade expected credit loss provision (0.01) (0.01) (0.01) (0.01) (0.04) Non-investment grade expected credit loss provision (0.03) (0.02) (0.01) - (0.06) Total allowance for doubtful accounts (0.04) (0.03) (0.02) (0.01) (0.10) 7 Short Term Investments High Arctic periodically invests in the common shares and debt instruments of certain publicly traded oil and gas service companies. As at December 31, 2017, the investments are presented at a fair value of $2.4 million (December 31, $4.8 million) which is $1.4 million (December 31, $1.7 million) less than the original cost. The difference in fair value of $1.4 million has been included in accumulated other comprehensive income. For the year ended December 31, 2017, decreases in fair value of $0.8 million have been included in other comprehensive income. During the year ended December 31, 2017, the Corporation disposed of investments in equity securities, which had an original cost of $2.8 million, for proceeds of $1.8 million. The resulting loss of $1.0 million has been included in other comprehensive income. Short term investments consist of the following: December 31, 2017 December 31, 2016 Investments in equity securities Total Inventory As at December 31, 2017 the Corporation had inventory of $10.0 million (December 31, $8.8 million), which is primarily comprised of parts and materials related to maintenance, recertification and refurbishment of rigs and rig-related equipment. During the year ended December 31, 2017, the Corporation did not recognize an impairment on inventory items (2016 nil). 9 Business Acquisition On August 31, 2016, High Arctic acquired the Production Services Division of Tervita Corporation by payment of cash in the amount of $42.8 million. The acquisition diversified High Arctic s revenue base within the Canadian well servicing industry. The acquisition had been accounted for as a business combination using the acquisition method of accounting whereby the assets acquired and the liabilities assumed were recorded at estimated fair value on the acquisition date. The surplus of the fair value of the identifiable net assets relative to the consideration paid was recorded as a gain on acquisition. Transaction costs of $2.3 million associated with the acquisition were expensed when incurred. The Corporation recognized a gain on the acquisition of the PS Division as the total fair value of the net assets acquired, based on an independent appraisal, exceeded the fair value of the consideration paid. The following table summarizes the allocation of the purchase price: 15

18 Cash and cash equivalents 42.8 Consideration 42.8 Property and equipment 64.0 Unfavourable lease liability current portion (0.4) Unfavourable lease liability long-term portion (3.4) Deferred tax liability (4.7) Fair value of net assets acquired 55.5 Gain on acquisition 12.7 The Corporation relied on a third party appraisal for the fair value of the assets acquired, less management s estimate of the liability associated with an unfavorable lease assumed in the transaction and the deferred income taxes associated with the timing differences between the tax and accounting values for the net assets acquired. Changes to any of these assumptions or estimates could impact the amounts assigned to assets acquired, liabilities assumed, and the gain on the acquisition. 10 Property and Equipment The following tables provide a continuity of the property and equipment costs, net of impairment and accumulated depreciation, and provide details of the effects of foreign currency translation for the year ended December 31, 2017 and Cost: Vehicles Oilfield Equipment Computer hardware and office equipment Land & Building Work-inprogress Balance, January 1, Acquisition (note 9) Additions Finance lease obligation (note 12) Disposals (0.6) (2.9) (3.5) Transfers (11.8) - Effect of foreign exchange - (5.5) (5.5) Balance, December 31, Additions Finance lease obligation (note 12) Disposals (3.3) (5.4) (8.7) Transfers (6.6) - Effect of foreign exchange (0.1) (11.8) (11.9) Balance, December 31, Total 16