Good Group Private Enterprise Inc. Illustrative consolidated financial statements for the year ended 31 December 2016

Transcription

1 Illustrative consolidated financial statements for the year ended Based on Accounting Standards for Private Enterprises in issue as at 1 January 2016

2 Introduction This publication contains an illustrative set of consolidated financial statements for Good Group Private Enterprise Inc. [ GGPE ] as at and for the year ended. These illustrative consolidated financial statements have been prepared in accordance with Part II of the CPA Canada Handbook - Accounting, Accounting Standards for Private Enterprises [ ASPE ]. These illustrative consolidated financial statements have been prepared subsequent to the first-time adoption of ASPE and do not include the opening consolidated balance sheet and transitional disclosures required when an entity prepares its first set of financial statements in accordance with ASPE. GGPE is a manufacturer, re-seller and servicer of specialized industrial equipment. It has operations in Canada and the United States. The functional currency of the parent company and the presentation currency of the consolidated financial statements is the Canadian dollar. These illustrative consolidated financial statements include a number of circumstances that might typically be encountered by a private enterprise, such as contingencies, asset impairments, related party transactions and the adoption of new accounting standards. GGPE has prepared its consolidated financial statements on a comparative basis; that is, amounts and other disclosures for the prior period are included for comparison with the consolidated financial statements of the current period. These illustrative consolidated financial statements only include those accounting standards with an effective date of 1 January 2016 or earlier. In some cases, ASPE permits more than one accounting treatment for a transaction or event. Preparers of financial statements should select the treatment that is most relevant to their business and circumstances as their accounting policy. It is important to remember that these illustrative consolidated financial statements do not encompass all aspects of financial reporting that could be encountered by a private enterprise in Canada. Furthermore, this publication is not designed to reflect disclosure requirements that may apply to regulated or specialized industries. It is essential that entities consider their own specific circumstances when determining which disclosures to include. For additional information, readers should refer to The Ernst & Young Accounting Standards for Private Enterprises Presentation and Disclosure Checklist in conjunction with the ASPE standards themselves to fully understand the implications of preparing ASPE financial statements. For more information on ASPE, please contact your EY advisor.

3 Consolidated Financial Statements Good Group Private Enterprise Inc.

4 As at 31 December CONSOLIDATED BALANCE SHEET , 10, $ $ ASSETS [restated note 3] Current [a]; , 04 Cash and cash equivalents [note 23] 80,527 59, [a] Investments [note 4] 603, , [h]; ; Accounts receivable [notes 5, 13, 17 and 23] 757, , [b] Inventories [notes 6, 13, 17 and 22] 477, , [f] Prepaid expenses 175, , [d]; Total current assets 2,094,709 1,019, [b] Investment in GGSII 182, , [h] [ii]; [c], 33 Investment in GGJA [notes 3 and 7] 215, , [g] [i]; [b]; [b], 33 Loan to related party [note 8] 191, , [e]; [a] Property, plant and equipment, net [notes 9 and 17] 1,440,000 1,708, [i] Assets under capital leases, net [notes 10 and 16] 225, , Intangible assets, net [note 11] 112, , [j]; Goodwill [note 12] 434, , [k]; ,894,879 4,195, [c] LIABILITIES AND EQUITY Current [d]; , 08, 11 Credit facility [note 13] 117, [a]; Accounts payable and accrued liabilities [notes 14 and 23] 289, , [a]; ; Income taxes payable 41,000 50, [a]; Current portion of contingent consideration payable [note 15] 140, [h] Current portion of obligations under capital leases [note 16] 81,845 64, [d]; , 23 Current portion of long-term debt [note 17] 220, , [f]; Total current liabilities 772, , [e] Contingent consideration payable [note 15] 140, [h] Obligations under capital leases [note 16] 189, , [d]; , 22 Long-term debt [note 17] 986, , [f] Due to related party [note 18] 720, , [h] Total liabilities 2,668,767 2,540, [f] Commitments and contingencies [notes 24 and 25] ; , 19; AcG-14.9 Equity Share capital [note 19] Common shares 785, , [c] Redeemable preferred shares total redemption amount of $208,000 [2015 $260,000] 184, , [c]; , 47 [c] [i] Cumulative translation adjustment 25,000 15, [f] Contributed surplus 125,000 40, [b] Retained earnings 993, , [a] Total shareholders equity 2,112,862 1,561,842 Non-controlling interest [note 19] 113,250 93, [e]; Total equity 2,226,112 1,654, [g] 4,894,879 4,195, [h] See accompanying notes On behalf of the Board: Director Director

5 CONSOLIDATED STATEMENT OF INCOME , 10, 12 Year ended 31 December $ $ [restated REVENUE note 3] Sale of equipment [note 26] 2,665,000 2,640, ; [a] Services [notes 22 and 26] 995, , ; [a] Commissions 1,041, , ; [a] 4,701,115 3,568, [a]; EXPENSES Cost of goods sold [notes 6 and 22] 2,118,874 1,758, [o] Selling [note 22] 328, ,748 General and administrative 415, ,009 Research and development 177, , Amortization of property, plant and equipment 348, , [d]; Amortization of assets under capital leases 64,170 62,500 Amortization of intangible assets 16,000 16, [e]; [a] [ii] Stock-based compensation [note 19] 85,000 40, [i]; [c] Foreign exchange loss (gain) 10,000 (15,000) [j] 3,564,367 3,265,073 Income before undernoted items and income taxes 1,136, ,427 Change in fair value of investments (70,000) 20, [a]; [k] [i] Property, plant and equipment impairment loss [note 9] (40,000) [f]; [c] Goodwill impairment loss [note 12] (60,000) [g]; Termination benefits [note 14] (105,500) [m] Interest and dividend income [note 8] 18,829 4, [k] [ii]; 3856.A5; [b] Interest expense Short-term (6,500) (8,546) [k] [iii]; [c] Long-term [note 20] (166,307) (155,765) [k] [iv], [l]; [d]; Adjustment to carrying amount of bonus equity payable [note 17] (50,000) [k] [i]; [c] Loss from investment in GGSII (12,000) (6,000) [b] [ii]; [c], 33 Income before income taxes 645, ,445 Provision for (recovery of) income taxes [note 21] 182,500 (4,000) [c] Net income for the year 462, , [f] Attributable to: Non-controlling interest 58,000 18, [a] Owners of parent 404, , [a] 462, ,445 See accompanying notes

6 CONSOLIDATED STATEMENT OF RETAINED EARNINGS , 10, Year ended 31 December $ $ [restated note 3] Balance, beginning of year as previously reported 726, ,647 Change in accounting policy [note 3] (56,500) (50,000) , 34[f] Balance, beginning of year as restated 670, ,647 Net income attributable to owners of parent 404, , [a] Related party transaction adjustment [note 22] (19,500) , 17 Acquisition of non-controlling interest [note 19] (62,250) Balance, end of year 993, ,092 See accompanying notes

7 CONSOLIDATED STATEMENT OF CASH FLOWS , 10, 12 Year ended 31 December , 05, 27 $ $ [restated OPERATING ACTIVITIES note 3] , 20 Net income for the year 462, ,445 Add (deduct) items not affecting cash: Amortization of property, plant and equipment 348, , [a] Amortization of assets under capital leases 64,170 62, [a] Amortization of intangible assets 16,000 16, [a] Amortization of discount on investments (5,000) [a], 32; 3856.A5 Amortization of financing fees and transaction costs 10,542 7, [a] Accretion on interest-free government loan 20,556 20, [a], 32 Adjustment to carrying amount of bonus equity payable 50, [a], [c] Property, plant and equipment impairment loss 40, [a] Goodwill impairment loss 60, [a] Change in fair value of investments 70,000 (20,000) [a] Stock-based compensation 85,000 40, [a] Loss from investment in GGSII 12,000 6, [a], 36 Deemed interest income on related party loan (4,329) (4,329) [a], 32 Net foreign exchange difference on cash and cash equivalents (24,800) (13,600) Net change in non-cash working capital balances related to operations (707,622) (163,723) [b], [c] Cash provided by operating activities 497, ,974 INVESTING ACTIVITIES , 23 Acquisition of investments (397,000) [c] Acquisition of machinery and equipment from related party (72,000) [a] Acquisition of property, plant and equipment (67,500) (190,000) [a] Cash used in investing activities (536,500) (190,000) FINANCING ACTIVITIES , 23 Credit facility, net (117,127) (120,418) Issuance of common shares 160,000 6, [a] Payment of share issue costs (10,000) [a] Repurchase of preferred shares (40,000) [b] Proceeds on exercise of stock options 23, [a] Advance from related party 279,998 50, [c] Repayment of advance from related party (150,000) (40,000) [d] Issuance of long-term debt 300, [c] Payment of long-term debt issue costs (17,500) [c] Repayment of long-term debt (228,028) (216,387) [d] Repayment of obligations under capital leases (65,353) (58,194) [e] Acquisition of non-controlling interest (100,000) [b] Cash provided by (used in) financing activities 34,990 (378,249) Net foreign exchange difference on cash and cash equivalents 24,800 13, Change in cash and cash equivalents during the year 21,077 (110,675) Cash and cash equivalents, beginning of year 59, ,125 Cash and cash equivalents, end of year 80,527 59,450 See accompanying notes

8 1. DESCRIPTION OF BUSINESS Good Group Private Enterprise Inc. [the Company ] is incorporated under the Canada Business Corporations Act. The Company is a manufacturer, re-seller and servicer of specialized industrial equipment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1 Basis of presentation These consolidated financial statements were prepared in accordance with Part II of the CPA Canada Handbook - Accounting, Accounting Standards for Private Enterprises, which sets out generally accepted accounting principles for non-publicly accountable enterprises in Canada and includes the significant accounting policies described hereafter. Principles of consolidation The Company consolidates all its subsidiaries, which are entities over which it has the continuing power to determine the strategic operating, investing and financing policies without the co-operation of others. These consolidated financial statements include the accounts of the Company and the following subsidiaries: , 05, 06, [a] [b] Name Description Functional currency Foreign currency translation model Ownership Good Group America Corp. Servicing US$ Self-sustaining 100% Good Group 80pc Subsidiary Manufacturing C$ Integrated 85% Foreign currency translation Foreign currency transactions and integrated foreign operations In the case of the Company s foreign currency transactions and foreign operations that are integrated in terms of financial and operational management, accounts stated in foreign currencies are translated according to the temporal method. Under this method, monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the consolidated balance sheet date, and non-monetary items are translated at the prevailing historical rate at the time of the transaction. Revenue and expenses arising from foreign currency transactions are translated into Canadian dollars at the exchange rate in effect at the transaction date. The exchange gains or losses resulting , 16, 20, 22, 24 1 Paragraph requires the disclosure of accounting policies of an enterprise to be provided as the first note to the financial statements. However, the 2017 Annual Improvements to Accounting Standards for Private Enterprises Exposure Draft issued by the Accounting Standards Board proposes to amend this paragraph to require the disclosure of accounting policies of an enterprise to be provided in one of the first notes to the financial statements. 1

9 from foreign currency transactions and the translation of integrated foreign operations are included in net income. Self-sustaining foreign operations The financial statements of foreign operations that are self-sustaining in terms of financial and operational management are translated according to the current rate method using the foreign currency as the measuring unit. Under this method, assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the consolidated balance sheet date, and revenue and expenses are translated at the average exchange rate in effect during the year. The exchange gains or losses resulting from the translation of the financial statements of these foreign operations are presented as a cumulative translation adjustment under equity in the consolidated balance sheet. Financial instruments The Company initially records a financial instrument at its fair value, except for a related party transaction, which is recorded at the carrying or exchange amount depending on the circumstances. The Company recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption. Subsequently, the Company measures financial instruments as follows: investments in equity instruments that are quoted in an active market at fair value; all other investments in equity instruments at cost less impairment; all other financial assets, which include cash and cash equivalents, investments in bonds, accounts receivable, and the loan to related party, at amortized cost; the bonus equity payable, an indexed liability, at the higher of the amortized cost of the debt and the amount that would be due at the consolidated balance sheet date if the formula determining the additional amount was applied at that date; and all other financial liabilities, which include the credit facility, accounts payable and accrued liabilities, long-term debt (excluding the bonus equity payable), and the amount due to related party, at amortized cost. Cash and cash equivalents Bank balances, including bank overdrafts with balances that fluctuate frequently from positive to overdrawn, are presented under cash and cash equivalents. Cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent when it has a short maturity of approximately three months or less from the date of acquisition , , , 18, , 12, , 09, 10, 43 2

10 Investments [i] Reported at fair value Investments reported at fair value consist of equity instruments that are quoted in an active market, as well as any investments in debt or equity instruments that the Company designated to be measured at fair value. Such designation must be made when the investment is initially recognized. In the case of an equity instrument that was previously measured at fair value because it was quoted in an active market, this designation may be made when the instrument ceases to be quoted in an active market. This designation is irrevocable. Changes in fair value are recognized in net income. Transaction costs to acquire or dispose of these instruments are recognized in net income in the period during which they are incurred. [ii] Reported at cost or amortized cost Investments in equity instruments that are not quoted in an active market, as well as investments in debt instruments, whether or not quoted in an active market, are initially recorded at fair value adjusted by financing fees and transaction costs that are directly attributable to their origination, acquisition, issuance or assumption. Investments in equity instruments are subsequently measured at cost less any reduction for impairment and investments in debt instruments are subsequently measured at amortized cost. Inventories Inventories are measured at the lower of cost and net realizable value, with cost determined using the specific identification method. Cost of work in progress and finished goods includes raw materials, direct labour and indirect manufacturing costs. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Investment in GGSII The Company uses the equity method to account for all entities over which it can exercise significant influence. The determination of when significant influence is present is a matter of judgment. If the Company holds less than 20% of the voting interest in the investee, it is presumed that it does not have the ability to exercise significant influence, unless such influence is clearly demonstrated. The Company has a 30% common share investment in Good Group Significant Influence Investment Inc. [ GGSII ] [a], , 11 [a], [b] [a] , 11, [b] ,

11 Investment in GGJA The Company uses the cost method to account for all jointly controlled enterprises. A jointly controlled enterprise is a joint arrangement that involves the establishment of a corporation, partnership or other enterprise in which each investor has an interest. The enterprise operates in the same way as other enterprises, except that a contractual arrangement between the investors establishes joint control over the economic activity of the enterprise. The Company has a 50% common share investment in Good Group Joint Arrangement Inc. [ GGJA ], a jointly controlled enterprise. Property, plant and equipment and assets under capital leases Property, plant and equipment are recorded at cost less accumulated amortization. Assets under capital leases are recorded at cost, which corresponds to the present value of the minimum lease payments on initial recognition, less accumulated amortization. Amortization of property, plant and equipment and assets under capital leases are calculated over their estimated useful lives using the straight-line method and the following durations: , , , 73 [c] Building Office furniture Machinery and equipment Computer hardware 25 years 10 years 12 years 4 6 years [c] Intangible assets Intangible assets, except for those not subject to amortization, are amortized on the basis of their estimated useful lives using the straight-line method and the following durations: Patents Customer lists 10 years 4 6 years The Company has an intangible asset in the form of a license that is considered to have an indefinite life and is therefore not amortized. Expenditures incurred during the development phase of a new or substantially new product are expensed as incurred [a] [iii] , 91 [c] Impairment [i] Long-lived assets subject to amortization Property, plant and equipment, assets under capital leases, and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset to be held and used with the total of the undiscounted cash flows , 05, 06, 09

12 expected from its use and disposition. If the asset is impaired, the impairment loss to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value, generally determined on a discounted cash flow basis. Any impairment results in a write-down of the asset and a charge to income during the year. An impairment loss is not reversed if the fair value of the related asset subsequently increases. [ii] Indefinite-life intangible asset The license is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may exceed its fair value. Impairment is assessed by comparing the carrying amount of the intangible asset with its fair value, generally determined on a discounted cash flow basis. When the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. An impairment loss is not reversed if the fair value of the related asset subsequently increases. [iii] Goodwill Goodwill is not amortized but is instead tested for impairment if events or changes in circumstances indicate that an impairment loss may have occurred. In the impairment test, the carrying amount of the reporting unit, including goodwill, is compared to its fair value. When the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment loss is recognized up to a maximum amount of the recorded goodwill related to the reporting unit. Goodwill impairment losses are not reversed , 66, , 74 [iv] Financial assets measured at cost and amortized cost When there are indications of possible impairment, the Company determines if there has been a significant adverse change to the expected timing or amounts of future cash flows expected from the financial asset. The amount of any impairment loss is determined by comparing the carrying amount of the financial asset with the highest of three amounts: i. The present value of the cash flows expected to be generated by holding the asset, discounted using a current market rate of interest appropriate to that asset; ii. The amount that could be realized by selling the asset at the date of the consolidated balance sheet; and iii. The amount the Company expects to realize by exercising its right to any collateral held to secure repayment of the asset, net of all costs necessary to exercise those rights. A previously recognized impairment loss is reversed to the extent that the improvement can be related to an event occurring after the impairment was recognized, but the adjusted carrying amount of the financial asset shall be no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized

13 [v] Investments accounted for using the cost or equity method At the end of each reporting period, the Company assesses whether there are any indications that an investment may be impaired. When there is an indication of impairment, the Company determines whether a significant adverse change has occurred during the period in the expected timing or amount of future cash flows from the investment. If the investment is impaired, the Company reduces the carrying amount of the investment to the higher of the following: i. The present value of the cash flows expected to be generated by holding the investment, discounted using a current market rate of interest appropriate to the asset; and ii. The amount that could be realized by selling the asset at the consolidated balance sheet date. When the extent of impairment of a previously written down investment decreases and the decrease can be related to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed to the extent of the improvement. The adjusted carrying amount of the investment shall be no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income in the period the reversal occurs Contingent consideration The Company recognizes the fair value of any contingent consideration that is transferred to the seller in a business combination on the date at which control of the acquiree is obtained. This value is generally determined through a probability-weighted analysis of the expected cash flows. Contingent consideration is classified as a liability or as equity on the basis of the definitions of an equity instrument and a financial liability. The contingent consideration is payable in cash and, accordingly, the Company classified its contingent consideration as a liability. It is not remeasured, and any gain or loss on settlement at an amount different from its carrying value will be recognized in net income in the period during which it is settled Long-term debt Long-term debt is initially measured at fair value, net of transaction costs and financing fees. It is subsequently measured at amortized cost, with the exception of the bonus equity payable. Transaction costs and financing fees are amortized on a straight-line basis [c] 6

14 With respect to the interest-free government loan, the difference between the fair value of the loan and the cash received was accounted for as a government grant and, accordingly as a reduction of property, plant and equipment. With respect to the convertible debenture, the Company chose to assign a nil value to the equity component and to allocate the entire proceeds, net of transaction costs and financing fees, to the liability component. Income taxes The Company follows the taxes payable method whereby only the cost or benefit of current income taxes for the year is reported, as determined in accordance with the rules established by the taxation authorities. Revenue recognition [i] General criteria Revenue is recognized when persuasive evidence of an arrangement exists, delivery of equipment has occurred or services have been rendered, the selling price to the buyer is fixed or determinable, and collection of the selling price is reasonably assured. Revenue is measured at the amount of consideration received, excluding discounts, returns and sales taxes. The specific recognition criteria set out below must be met before revenue is recognized. [ii] Sale of equipment and commission Revenue from the sale of equipment is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is usually upon the delivery of the goods. The Company considers that due to the customized nature of this equipment, delivery is not considered to have occurred until written customer acceptance of the equipment has been obtained. Occasionally, the Company consigns certain of its manufactured equipment to specialized retailers. Revenue from consignment sales is recorded when the retailer has sold the equipment, at which point the delivery criteria have been met. When recognizing distribution revenue, the Company must consider whether revenue should be reported on a gross or a net basis, which is based upon an assessment of whether the Company is acting as an agent or a principal. When the Company has the primary responsibility for providing the equipment [as evidenced by the Company s responsibility for the customer s ultimate acceptance or rejection of the equipment], is at risk for the loss of the inventory at any point prior to sale or during shipping, has the discretion to set prices and assumes all credit risk for the amount receivable, distribution revenue is reported on a gross basis as a sale of equipment. When these criteria are not met, the Company earns a fixed fee per completed equipment sale, which is recognized as commissions revenue when the general criteria are met A [a] , 22 [a] [a], [a] [b] [c]

15 [iii] Services Revenue from maintenance or repair service contracts is recognized as the services are rendered. [iv] Contracts with separately identifiable components Contracts to sell equipment frequently include maintenance and/or repair services. The Company considers the equipment and the services to be separately identifiable components of a single transaction as both have standalone value to the customer. Both the equipment and the maintenance and repair services are sold separately Contracts with separately identifiable components require the Company to allocate the proceeds between the components. This allocation is completed based upon the relative, standalone selling price for the equipment and the services. Once the allocation has been made, the applicable recognition criteria are applied to the sale of the equipment and the rendering of the services. [v] Interest and dividends Interest income is recognized on the basis of the passage of time when collectability is reasonably assured. Dividend income is recognized when the dividends are declared and when the right to receive payment is established. Stock-based compensation The Company has a stock option plan for employees and directors from which options to purchase common shares are issued [the Stock Option Plan ]. Options may not be granted with an exercise price of less than the fair value of the options at the grant date. The awards have no cash settlement alternatives. The vesting requirements are typically service-based and the options normally have a contractual life of five years, although options with performance-based vesting criteria may be issued from time to time [a] [c]

16 [i] Transactions with employees Stock-based compensation costs are accounted for on a fair value basis, as measured at the grant date, which is generally the date at which both the Company and the employee have a mutual understanding of the terms of the award. The fair value is measured using the option s calculated value, a method that substitutes the historical volatility of an appropriate industry sector index for the expected volatility of an entity s share price in an option-pricing model, such as the Black- Scholes option pricing model. The resulting stock-based compensation cost is recognized on a straight-line basis, with a corresponding credit to contributed surplus over the vesting period involved, typically three years. The compensation expense is based on the number of awards that eventually vest, and adjustments for forfeitures are made as they occur. Any consideration paid by employees upon exercise of the options and the previously recognized compensation cost of the options exercised included in contributed surplus are added to share capital. When the Company issues options with a performance condition, that is, options on which the vesting is dependent upon the employee s achievement of the condition, compensation cost is recognized based on the best estimate of the number of options expected to vest, and adjusted for subsequent changes in the expected or actual outcome in the period when the change occurs. [ii] Transactions with non-employees When the Company exchanges options or shares for goods and services, the measurement basis is the fair value of the goods or services received, as this value is typically more reliably measureable than the equity instruments themselves. Should this not be the case, the estimated fair value of the equity instruments is used. The measurement date in both cases is generally the earliest of the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, the date the equity instruments are granted if they are fully vested and non-forfeitable at that date or the date at which the counterparty s performance is complete. The cost is recognized in the same manner and in the same period as if the Company had paid cash for the goods or the services. The Company occasionally issues options to non-employees with performance-based conditions that, depending upon the counterparty s achievement of these conditions, could result in a range of possible outcomes. At the date at which a commitment to earn the equity instruments by the counterparty is reached, the lowest aggregate fair value is recognized based on the conditions and variables associated with the counterparty s performance. After this date, modification accounting is applied to reflect incremental changes in the fair value of the options resulting from the achievement or non-achievement of the related performance conditions

17 Hedge accounting The Company periodically uses forward contracts to economically hedge the impact of foreign currency changes in anticipated transactions denominated in foreign currencies, and interest rate swaps to mitigate the effect of changes in interest rates on variable-rate debt. When both at the inception of a hedging relationship and throughout its term, the Company has reasonable assurance that the critical terms of the hedging item and the hedged item are the same, and, in the case of an anticipated transaction, it is probable that the anticipated transaction will occur at the time and in the amount designated, the Company may choose to apply hedge accounting. The Company then formally documents the hedging relationship, identifying the hedged item, the related hedging item, the nature of the specific risk exposure or exposures being hedged and the intended term of the hedging relationship. Forward contracts and interest rate swaps in qualifying hedging relationships are not recognized until their maturity. When hedging anticipated transactions denominated in foreign currencies, the anticipated transaction is recognized at the amount of consideration paid or received when it occurs. The gain or loss on the forward contract is recorded as an adjustment to the carrying amount of the hedged item or, when the hedged item is recognized directly in net income, the gain or loss on the forward contract is included in the same category of net income. When hedging interest rate risk, interest on the debt is recorded at the stated interest rate plus or minus amortization of any initial premium or discount and any financing fees and transaction costs. Net amounts receivable or payable on the interest rate swap are recognized as an adjustment to the interest expense on the hedged item in the period during which they accrue. Hedge accounting may not be electively discontinued. If the forward contract is discontinued, any gain or loss is recognized as a separate component of equity until the anticipated transaction occurs, at which point it is removed from equity and recorded as an adjustment to the carrying amount of the hedged item [in the case of an asset or liability] or recorded in net income. If an interest rate swap is discontinued, any gain or loss is recognized as an adjustment to the debt and amortized to net income as interest payments are accrued. When it is no longer probable that the anticipated transaction will occur in the amount designated or within 30 days of the maturity date of the hedging item for a forward contract or within two weeks of the maturity date of the hedging item for an interest rate swap, or if the debt is derecognized, the forward contract or the interest rate swap is measured at fair value and any gain or loss is recognized in net income

18 3. CHANGES IN ACCOUNTING POLICIES [a] Subsidiaries Effective 1 January 2016, the Company adopted the new Section 1591 of Part II of the CPA Canada Handbook Accounting, Subsidiaries, issued by the Canadian Accounting Standards Board. This section replaces Section 1590 of the CPA Canada Handbook Accounting on the same subject as well as Accounting Guideline 15, Consolidation of Variable Interest Entities. Under the new standard, additional guidance was added to assess when control is obtained through means other than equity interests. The guidance on assessing control through equity interests was largely unchanged. The Company adopted the new Section 1591 retrospectively. The Company determined that it continued to control its wholly owned subsidiary, Good Group America Corp. and its 85% owned subsidiary, Good Group 80pc Subsidiary, under the new Section 1591 and therefore continued to consolidate them upon the adoption of Section As a result, there was no impact of the adoption of Section 1591 on the consolidated financial statements of the Company for the years ended 31 December 2016 or 31 December [b] Interests in Joint Arrangements Effective 1 January 2016, the Company adopted the new Section 3056 of Part II of the CPA Canada Handbook Accounting, Interests in Joint Arrangements, issued by the Canadian Accounting Standards Board. This section replaces Section 3055 of the CPA Canada Handbook Accounting, Interests in Joint Ventures. Under the new standard, the term joint venture was replaced with the term joint arrangement and the option to account for an interest in a joint venture using the proportionate consolidation method, equity method or cost method was removed. Instead, an investor in a joint arrangement accounts for its interest according to its rights and obligations in the joint arrangement. The Company adopted the new Section 3056 retrospectively. Under the previous standard, the Company had proportionately consolidated its 50% interest in a jointly controlled enterprise, GGJA. Under the new standard, the Company has chosen to account for its interest in GGJA using the cost method. In accordance with the transitional provisions of Section 3056, the Company has recognized its investment in GGJA as at 1 January 2015 and measured it as the aggregate of the carrying amounts of the assets and liabilities that the Company had previously proportionately consolidated [c] , 18,

19 A breakdown of the assets and liabilities that have been aggregated into the single line investment balance as at 1 January 2015 is as follows: Cash and cash equivalents 8,000 Accounts receivable 73,000 Inventories 96,000 Property, plant and equipment 200,000 Accounts payable and accrued liabilities (112,000) 265,000 $ As at 1 January 2015, due to the loss of a key customer by GGJA, the Company determined that there were indications that its investment in GGJA may be impaired. Consequently, the Company undertook an analysis to determine whether a significant adverse change had occurred in the expected timing or amount of future cash flows from the investment in GGJA. As a result of this analysis, the Company determined that its investment in GGJA was impaired and recognized an impairment loss of $50,000. In accordance with the transitional provisions of Section 3056, this impairment loss was recognized as an adjustment to opening retained earnings as at 1 January

20 The impact of adopting the new Section 3056 on the Company's consolidated financial statements as at and for the year ended is as follows 2 : Impact of the change Previous accounting policy in accounting policy New accounting policy $ $ $ [e] Retained earnings as at 1 January ,592 (56,500) 670,092 Cash and cash equivalents 86,527 (6,000) 80,527 Accounts receivable 840,499 (83,000) 757,499 Inventories 559,900 (82,000) 477,900 Investment in GGJA 215, ,000 Property, plant and equipment 1,660,000 (220,000) 1,440,000 Accounts payable and accrued liabilities 385,715 (96,500) 289,215 Income taxes payable 45,500 (4,500) 41,000 Retained earnings as at 1,068,112 (75,000) 993,112 Revenue sale of equipment 2,780,000 (115,000) 2,665,000 Revenue services 1,007,115 (12,000) 995,115 Revenue commissions 1,050,000 (9,000) 1,041,000 Cost of goods sold 2,177,874 (59,000) 2,118,874 Expenses selling 338,863 (10,000) 328,863 Expenses general and administrative 419,460 (4,000) 415,460 Amortization of property, plant and equipment 388,500 (40,000) 348,500 Provision for income taxes 187,000 (4,500) 182,500 Net income for the year 481,270 (18,500) 462, INVESTMENTS Measurement basis $ $ Equity instruments quoted in an active market Fair value 151, ,060 Equity instruments not quoted in an active market Cost, less impairment 50,000 50,000 Bonds AA-rated corporate bonds; maturity date of 12 June 2017; coupon rate 5.50%; yield 5.78% Amortized cost 402, , , [a],[b],[c] 2 Paragraph (e) requires disclosure for the current period, to the extent practicable, of the amount of the adjustment for each financial statement line item affected. If it is impracticable to ascertain these amounts, this disclosure is not required. 13

21 5. ACCOUNTS RECEIVABLE $ $ Trade 746, ,500 Trade company under common control 25,000 20,000 Allowance for doubtful accounts (14,000) (53,000) 757, ,500 The terms and conditions for trade accounts receivable company under common control are the same commercial terms provided to non-related parties [a], [e] [e] 6. INVENTORIES $ $ Raw materials 160, ,000 Work in progress 130, ,000 Finished goods [note 22] 187,900 65, , ,000 The amount of inventories recognized as an expense during the year ended is $2,089,000 [2015 $1,716,500]. 7. INVESTMENT IN GGJA The Company s investment in GGJA with a carrying amount as at of $215,000 [2015 $215,000] is net of an allowance for impairment of $50,000 [2015 $50,000]. 8. LOAN TO RELATED PARTY During the year ended 31 December 2014, the Company provided a housing relocation loan to an officer in the amount of $200,000. The loan is unsecured, non-interest bearing and is repayable in December A financial instrument originated with a related party whose sole relationship with an entity is in the capacity of management must be initially recorded at fair value. Consequently, the fair value of the loan was calculated using a 5.0% interest rate, which was considered to be consistent with market rates for similar loans at that date. The difference between the fair value of the loan and the cash received, which amounted to $17,318, was recorded as compensation expense at the inception of the loan. Amortization of this discount amounts to $4,329 annually and is recorded as interest income [b] [c] , 38 [a] [a]-[c], [e] [a]-[e] , , A3

22 9. PROPERTY, PLANT AND EQUIPMENT Cost Accumulated amortization Net carrying value Cost Accumulated amortization Net carrying value $ $ $ $ $ $ Land 220, , , ,000 Building 608,000 64, , ,000 32, ,000 Office furniture 380, , , , , ,000 Machinery and equipment 1,440, , ,500 1,510, , ,500 Computer hardware 630, ,500 22, , , ,000 3,278,000 1,838,000 1,440,000 3,318,000 1,609,500 1,708,500 During the year ended, the Company determined that machinery used only in the production of one of its highly specialized products was impaired due to a change in the demand for this product as a result of a rapid and unexpected technological change. The $40,000 carrying value of this machinery, with a cost of $160,000 and accumulated amortization of $120,000, without further use to the Company and without resale or scrap value was recorded as an impairment loss [a], [b] ASSETS UNDER CAPITAL LEASES Cost Accumulated amortization Net carrying value Cost Accumulated amortization Net carrying value $ $ $ $ $ $ Machinery and equipment 500, , , , , ,000 Computer hardware 40,000 1,670 38, , , , , , ,000 Additions to computer hardware under capital leases during the year ended totaled $40,000 [2015 nil] [a], [b] [b] 15

23 11. INTANGIBLE ASSETS $ $ Intangible assets subject to amortization Patents 50,000 50,000 Less accumulated amortization on patents 20,000 14,000 30,000 36,000 Customer lists 70,000 70,000 Less accumulated amortization on customer lists 48,000 38,000 22,000 32,000 Intangible asset not subject to amortization License 60,000 60, , , GOODWILL $ $ Balance, beginning of year 494, ,000 Impairment loss (60,000) Balance, end of year 434, , [a] [i] [b] [b] A loss of a major customer has resulted in continued and significant losses in the Company s USbased subsidiary, which provides maintenance services for highly specialized robotic assembly line production machinery in the automotive sector. As a result, the Company determined that there were indicators that the carrying amount of the reporting unit to which goodwill is assigned may exceed the fair value of the reporting unit. Accordingly, the Company undertook a goodwill impairment test, which was based on a discounted cash flow analysis [a] Based on the results of the goodwill impairment test, the Company determined that the estimated fair value of this reporting unit was less than its carrying amount [including goodwill] by $60,000. A goodwill impairment loss in this amount has been recorded for the year ended [b] 16

24 13. CREDIT FACILITY The Company has a demand credit facility [the Facility ] with a Canadian chartered bank for a maximum amount of $500,000, bearing interest at the bank s prime rate plus 1.75%. The relevant prime rate was 2.70% as at [ %]. No amounts were drawn as at [2015 $117,127]. The Facility is collateralized by all accounts receivable and inventories of the Company, which have a carrying value of $1,235,399 as at [2015 $548,500]. A $20,000 tranche of the Facility [2015 $20,000] is available for letters of credit. 14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ $ Trade payables and accrued liabilities 129,262 95,563 Trade supplier controlled by a director 46,625 Accrued interest long-term debt 80,417 89,431 Termination benefits 59,000 Government remittances payable 20,536 43, , ,215 During the year ended, as a result of an effort to streamline a number of the Company s administrative functions, a staff reduction plan was approved and communicated to the affected employees. The plan included a termination package and a timetable for departure. The aggregate amount of the termination package was $105,500, which includes an estimate of the costs related to vocation re-training services included in the termination package. An amount of $59,000 remains accrued at and will be paid in the year ending 31 December The trade accounts payable due to a supplier controlled by a director are under similar commercial terms and conditions granted to non-related parties by this supplier [e] [d] , [e] 15. CONTINGENT CONSIDERATION PAYABLE In November 2012, the Company completed a business combination in which it agreed to pay additional consideration to the seller in the amount of up to $400,000 at the fifth anniversary of the acquisition based on a formula that considers the financial performance of the acquiree in each of the five subsequent years. An amount of $140,000 was accrued and will be adjusted only upon settlement, if any, of the contingent consideration in November Given the actual financial performance of the acquiree since November 2012, the estimate of the maximum amount payable is now $300,000 and the minimum is nil , 06, [e] 17

25 16. OBLIGATIONS UNDER CAPITAL LEASES $ $ Obligation under capital lease for machinery and equipment, with interest at a rate of 8%, maturing on 31 December , ,086 Obligation under capital lease for computer hardware, with interest at a rate of 7%, maturing on 30 June , , ,086 Less current portion 81,845 64, , ,073 Future minimum lease payments, including principal and interest, under the capital leases for subsequent years are as follows: , , , , ,595 The obligations under capital leases are secured by the underlying leased assets [note 10]. $ [a], [b], [c] [d] 18

26 17. LONG-TERM DEBT $ $ Senior note payable $1,000,000, 8-year, bearing interest at the prime rate plus 4.5%, repayable in annual instalments of interest and principal in the amount $187,444, maturing on 31 December Collateralized by land, building, and machinery and equipment having a net carrying value of $1,281,500 [2015 $1,384,500]. 466, ,173 Less unamortized financing fees and transaction costs 22,500 28, , ,048 Note payable $300,000, 5-year note payable, bearing interest at the prime rate plus 4.5%, repayable on 31 October Collateralized by a second-ranking lien on the totality of the Company s trade accounts receivable and inventories having a carrying value of $1,235,399 [2015 $548,500]. 300,000 Less unamortized financing fees and transaction costs 14, ,417 Bonus equity payable Bonus equity payable to the holders of the notes payable, noninterest bearing, due October 2020, the amount payable of which is based on a percentage of the equity value of the Company and its subsidiaries in ,000 Convertible debenture $350,000, 5-year, annual interest payments at the prime rate plus 3%; principal maturing on 31 December Convertible at any time at the option of the holder into common shares equal to the quotient of dividing the outstanding principal and accrued interest by $ , ,000 Less unamortized financing fees and transaction costs 2,000 4, , ,000 Interest-free unsecured government loan $400,000, 5-year loan, repayable in annual instalments of $100,000 commencing in the second year of the loan and maturing on 31 December , ,000 Less unamortized interest-free loan deemed discount 20,556 41,112 79, ,888 Total long-term debt 1,206,506 1,070,936 Less current portion 220, ,846 Long-term portion of long-term debt 986, , [a]-[d], [f] [a]-[d], [f] [a]-[d], [f] , 22 [a] [a] [a]-[d], [f] 3856.A3