Consolidated Financial Statements (expressed in thousands of Canadian dollars)
April 12, 2013 Independent Auditor s Report To the Shareholders of Dollarama Inc. We have audited the accompanying consolidated financial statements of Dollarama Inc., which comprise the consolidated statement of financial position as at and the consolidated statements of changes in shareholders equity, comprehensive income and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4 T: +1 514 205 5000, F: +1 514 876 1502, www.pwc.com/ca PwC refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Dollarama Inc. as at and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. 1 CPA auditor, CA, public accountancy permit No. A119427 (2)
Consolidated Statements of Financial Position (expressed in thousands of Canadian dollars) Note As of February 3, 2013 As of January 29, 2012 Assets Current assets Cash and cash equivalents 52,566 70,271 Accounts receivable 5,798 1,844 Deposits and prepaid expenses 5,756 4,436 Merchandise inventories 338,385 315,873 Derivative financial instruments 17 3,710 3,951 406,215 396,375 Non-current assets Property and equipment 5 207,697 173,053 Intangible assets 6 111,998 110,531 Goodwill 6 727,782 727,782 Total assets 1,453,692 1,407,741 Liabilities and Shareholders Equity Current liabilities Accounts payable and accrued liabilities 7 101,890 101,301 Dividend payable 8,099 6,635 Income taxes payable 23,636 20,635 Derivative financial instruments 17 185 248 Current portion of long-term debt 8-13,967 133,810 142,786 Non-current liabilities Long-term debt 8 262,071 258,385 Deferred income tax 13 80,994 73,765 Other liabilities 45,327 37,859 Total liabilities 522,202 512,795 Commitments 15 Shareholders equity 10 Share capital 517,306 525,024 Contributed surplus 8,157 15,659 Retained earnings 403,266 352,287 Accumulated other comprehensive income 9 2,761 1,976 Total shareholders equity 931,490 894,946 Total liabilities and shareholders equity 1,453,692 1,407,741 Approved by the Board of Directors (signed) Stephen Gunn Stephen Gunn, Director (signed) John J. Swidler John J. Swidler, Director The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Changes in Shareholders Equity (expressed in thousands of Canadian dollars) Note Number of common shares Share capital Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total Balance January 30, 2011 73,600,559 523,295 16,066 198,712 (6,865) 731,208 Net earnings for the year - - 173,474-173,474 Other comprehensive income Unrealized gain on derivative financial instruments, net of reclassification adjustment and income tax of 3,120 9 - - - 8,841 8,841 Dividends declared - - (19,899) - (19,899) Share-based compensation 11-784 - - 784 Issuance of common shares 206,983 538 - - - 538 Reclassification related to exercise of stock options 1,191 (1,191) - - - Balance January 29, 2012 73,807,542 525,024 15,659 352,287 1,976 894,946 Net earnings for the year - - 220,985-220,985 Other comprehensive income Unrealized gain on derivative financial instruments, net of reclassification adjustment and income tax of 308 9 - - - 785 785 Repurchase and cancellation of shares 10 (2,583,264) (18,372) - - - (18,372) Premium paid on share repurchase 10 - - (137,570) - (137,570) Dividends declared - - (32,436) - (32,436) Share-based compensation 11-1,558 - - 1,558 Issuance of common shares 1,866,192 1,594 - - - 1,594 Reclassification related to exercise of stock options 9,060 (9,060) - - - Balance February 3, 2013 73,090,470 517,306 8,157 403,266 2,761 931,490 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Comprehensive Income (expressed in thousands of Canadian dollars, except share and per share amounts) Note For the year ended February 3, 2013 For the year ended January 29, 2012 Sales 1,858,818 1,602,827 Cost of sales 1,163,979 1,002,487 Gross profit 694,839 600,340 General, administrative and store operating expenses 12 339,662 305,121 Depreciation and amortization 12 39,284 33,336 Operating income 315,893 261,883 Net financing costs 12 10,839 16,555 Earnings before income taxes 305,054 245,328 Provision for income taxes 13 84,069 71,854 Net earnings for the year 220,985 173,474 Other comprehensive income Unrealized gain on derivative financial instruments, net of reclassification adjustment 17 1,093 11,961 Income tax relating to component of other comprehensive income (308) (3,120) Total other comprehensive income, net of income taxes 785 8,841 Total comprehensive income for the year 221,770 182,315 Earnings per common share Basic net earnings per common share 14 3.00 2.35 Diluted net earnings per common share 14 2.94 2.30 Weighted average number of common shares outstanding during the year (in thousands) 14 73,660 73,684 Weighted average number of diluted common shares outstanding during the year (in thousands) 14 75,190 75,563 The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows (expressed in thousands of Canadian dollars) Cash flows Note For the year ended February 3, 2013 For the year ended January 29, 2012 Operating activities Net earnings for the year 220,985 173,474 Adjustments for Depreciation of property and equipment 39,546 33,493 Amortization of intangible assets 1,018 1,076 Amortization of deferred tenant allowances (2,871) (2,444) Amortization of deferred leasing costs 295 310 Amortization of unfavourable lease rights (1,280) (1,233) Amortization of debt issue cost and discounts 1,133 2,250 Excess of receipts over amount recognized on derivative financial instruments 17 1,272 3,466 Deferred lease inducements 5,328 3,323 Deferred tenant allowances 6,832 4,028 Share-based compensation 11 1,558 784 Repayment of finance lease (695) (653) Deemed interest on repayment of long-term debt (216) (1,419) Deferred income tax 6,921 8,739 Loss (gain) on disposal of assets 716 (9) 280,542 225,185 Changes in non-cash working capital components 19 (24,198) (52,123) Net cash generated from operating activities 256,344 173,062 Investing activities Purchase of property and equipment (75,007) (52,957) Proceeds on disposal of property and equipment 256 297 Deferred leasing costs (2,780) - Net cash used by investing activities (77,531) (52,660) Financing activities Repurchase and cancellation of shares 10 (155,942) - Proceeds from long-term debt Revolving loan 8 264,420 - Repayment of long-term debt Term loan 8 (274,781) (90,459) Dividends (30,972) (13,264) Issuance of common shares 1,594 538 Debt issue costs (837) (75) Net cash used by financing activities (196,518) (103,260) Increase (decrease) in cash and cash equivalents (17,705) 17,142 Cash and cash equivalents Beginning of year 70,271 53,129 Cash and cash equivalents End of year 52,566 70,271 Cash payment of interest 7,639 11,495 Cash payment of income taxes 75,090 55,954 The accompanying notes are an integral part of the consolidated financial statements.
1 General information and basis of measurement General information Dollarama Inc. (the Corporation ) was formed on October 20, 2004 under the Canada Business Corporations Act. The Corporation operates dollar stores in Canada that sell all items for 3 or less. As of February 3, 2013, it maintains retail operations in every Canadian province. The Corporation s corporate headquarters, distribution centre and warehouses are located in the Montréal area, Canada. The Corporation is listed on the Toronto Stock Exchange and is incorporated and domiciled in Canada. The Corporation s registered head office is located at 5805 Royalmount Avenue, Montréal, Quebec. As of February 3, 2013, the significant entities within the legal structure of the Corporation are as follows: Dollarama Inc. Dollarama Group L.P. Dollarama L.P. Dollarama Corporation Dollarama L.P. and Dollarama Corporation operate the chain of stores and perform related logistical and administrative support activities. 2 Basis of preparation Basis of measurement The Corporation prepares its consolidated financial statements in accordance with generally accepted accounting principles in Canada as set out in the Handbook of the Canadian Institute of Chartered Accountants Part I, which incorporates International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. These consolidated financial statements have been prepared on a historical cost basis except for derivative financial instruments, which are measured at fair value. These consolidated financial statements were approved by the Board of Directors for issue on April 12, 2013. (1)
3 Summary of significant accounting policies Subsidiaries Subsidiaries are all entities (including special-purpose entities) over which the Corporation has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Corporation controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Corporation. They are deconsolidated from the date on which control ceases. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Subsidiaries accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Corporation. Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Corporation s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The consolidated financial statements are presented in Canadian dollars, which is also the Corporation s functional currency. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at the year-end exchange rate of monetary assets and liabilities denominated in foreign currencies are recognized in earnings, except where hedge accounting is applied as described below under derivative financial instruments. Segment information The Corporation manages its business on the basis of one reportable segment, which is consistent with the internal reporting provided to the chief operating decision-maker. Financial assets The Corporation classifies its financial assets in the following categories: financial assets at fair value through profit or loss, and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (2)
a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading unless they are designated as hedges. Financial assets carried at fair value through profit or loss are initially and subsequently recognized at fair value; transaction costs are expensed in earnings. b) Loans and receivables Loans and receivables comprise cash and cash equivalents and accounts receivable. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are neither quoted in an active market nor intended for trading. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. Loans and receivables are subsequently carried at amortized cost using the effective interest method. Financial liabilities Financial liabilities comprise accounts payable and accrued liabilities, dividend payable, derivative financial instruments, long-term debt and other liabilities. Long-term debt is recognized initially at fair value, net of transaction costs incurred, and is subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statement of comprehensive income over the period of the debt using the effective interest method. Fees paid on the establishment of revolving credit facilities are capitalized as a prepayment for liquidity services and amortized over the period of the facility to which it relates. Financial liabilities are classified as current liabilities unless the Corporation has an unconditional right to defer settlement of the financial liabilities for at least 12 months after the statement of financial position date. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. Derivative financial instruments The Corporation may use derivative financial instruments in the management of its foreign currency risk on purchases and long-term debt. The Corporation may also use derivative financial instruments in the management of its interest rate exposure. The Corporation designates certain derivatives as hedges of a particular risk associated with a highly probable forecast transaction (cash flow hedge). (3)
When hedge accounting is used, the Corporation documents at inception the relationships between the hedging instruments and the hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking derivatives to specific assets and liabilities on the consolidated statement of financial position or to specific firm commitments or forecasted transactions. The Corporation also assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Movements on the hedging reserve in shareholders equity are shown in the consolidated statement of changes in shareholders equity. The fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in earnings. Amounts accumulated in shareholders equity are reclassified to earnings in the periods when the hedged item affects earnings. The gain or loss relating to the effective portion of the derivatives is recognized in the consolidated statement of comprehensive income in cost of sales or net financing costs. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in shareholders equity is immediately transferred to earnings. Foreign exchange forward contracts are designated as cash flow hedges of specific anticipated transactions. Derivatives that do not qualify for hedge accounting Derivative financial instruments which are not designated as hedges or have ceased to be effective prior to maturity are recorded at their estimated fair values under assets or liabilities, with changes in their estimated fair values recorded in earnings. Foreign currency swap agreements If the Corporation has significant long-term debt denominated in US dollars, it may use foreign currency swap agreements to mitigate risks from fluctuations in the exchange rate. When foreign currency swap agreements are not designated as hedges or when they have ceased to be effective prior to maturity, changes in fair value are reported in earnings under net financing costs. Foreign currency swap agreements are classified as non-current assets or non-current liabilities on the consolidated statement of financial position. (4)
Property and equipment Property and equipment are carried at cost and depreciated under the straight-line method over the estimated useful lives of the assets as follows: Store and warehouse equipment Computer equipment Vehicles 5 years Leasehold improvements Computer software 8 to 10 years 5 years Term of lease 5 years The Corporation recognizes in the carrying amount of property and equipment the cost of replacing parts of an item when that cost is incurred, if it is probable that the future economic benefits embodied within the item will flow to the Corporation and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes are accounted for prospectively as a change in accounting estimate. If the expected residual value of an asset is equal to or greater than its carrying value, depreciation on that asset is ceased. Depreciation is resumed when the expected residual value falls below the asset s carrying value. Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of the item and are recognized directly in the consolidated statement of comprehensive income. Intangible assets Goodwill Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the consideration transferred over the share of the net identifiable assets acquired of the acquiree and the fair value of the non-controlling interest in the acquiree. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is tested for impairment annually, as of the statement of financial position date, or more frequently if events or circumstances indicate that it may be impaired. For the purposes of annual impairment testing, goodwill is allocated to one group of cashgenerating units ( CGUs ) that is expected to benefit from the business combination, and which represent the lowest level within the Corporation at which goodwill is monitored for internal management purposes, according to operating segment. Negative goodwill arising on an acquisition is recognized directly in the consolidated statement of comprehensive income. (5)
Trade name Trade name is recorded at cost and is not subject to amortization, having an indefinite life. It is tested for impairment annually, as of the statement of financial position date, or more frequently if events or circumstances indicate that it may be impaired. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. As the trade name does not generate cash flows that are independent from other assets or individual CGUs, the Corporation estimates the recoverable amount of the CGU to which the asset belongs. Impairment of other non-financial assets Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs these are individual stores). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Cash and cash equivalents Cash and cash equivalents include highly liquid investments with original maturities from the date of purchase of three months or less. Merchandise inventories Merchandise inventories at the distribution centre, warehouses and stores are stated at the lower of cost and net realizable value. Cost is determined on a weighted average cost basis and is assigned to store inventories using the retail inventory method. Costs of inventories include amounts paid to suppliers, duties and freight into the warehouses as well as costs directly associated with warehousing and distribution. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Accounts payable and accrued liabilities Accounts payable and accrued liabilities are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable and accrued liabilities are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Accounts payable and accrued liabilities are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. (6)
Provisions A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation that can be estimated reliably, and if it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are not recognized for future operating losses. If the effect of time value of money is material, provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as interest expense. Share capital Common shares are classified as shareholders equity. Incremental costs directly attributable to the issue of shares or options are shown in shareholders equity as a deduction, net of tax, from the proceeds. Dividends declared Dividend distributions to the Corporation s shareholders are recognized as a liability in the Corporation s consolidated financial statements in the period in which the dividends are declared by the Board of Directors. Employee future benefits A defined contribution plan is a post-employment benefit plan under which the Corporation pays fixed contributions into a separate legal entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution retirement plans are recognized as an expense in earnings when they are due. The Corporation offers a group defined contribution pension plan to eligible employees whereby it matches an employee s contributions of up to 3% of the employee s salary to a maximum of three thousand dollars per year. Short-term employee benefits Liabilities for bonus plans are recognized based on a formula that takes into consideration individual performance and contributions to the profitability of the Corporation. Termination benefits Termination benefits are generally payable when employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Corporation recognizes termination benefits when it is demonstrably committed to providing termination benefits as a result of an offer made. (7)
Income tax The income tax expense for the year comprises current and deferred tax. Tax is recognized in earnings, except to the extent that it relates to items recognized in other comprehensive income or directly in shareholders equity. In this case, the tax is also recognized in other comprehensive income or directly in shareholders equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the statement of financial position date and any adjustment to tax payable in respect of previous years. Deferred income tax is recognized using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax liability is not accounted for if it arises from initial recognition of goodwill or if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income tax levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Revenue recognition The Corporation recognizes revenue at the time the customer tenders payment for and takes possession of the merchandise. All sales are final. Revenue is shown net of sales tax, rebates and discounts. Gift cards sold are recorded as a liability, and revenue is recognized when gift cards are redeemed. Cost of sales Cost of sales includes the cost of merchandise inventories, outbound transportation costs, warehousing and distribution costs, store, warehouse and distribution centre occupancy costs, as well as the transfer from accumulated other comprehensive income of any gains (losses) on qualifying cash flow hedges related to the purchases of inventories. General, administrative and store operating expenses The Corporation includes store and head office salaries and benefits, repairs and maintenance, professional fees, store supplies and other related expenses in general, administrative and store operating expenses. (8)
Pre-opening costs Costs associated with the opening of new stores are expensed as incurred, and included in general, administrative and store operating expenses in the consolidated statement of comprehensive income. Vendor rebates The Corporation records vendor rebates, consisting of volume purchase rebates, when it is probable that they will be received and the amounts are reasonably estimable. The rebates are recorded as a reduction of inventory purchases and are reflected as a reduction of cost of sales in the consolidated statement of comprehensive income. Earnings per common share Earnings per common share is determined using the weighted average number of common shares outstanding during the year. Diluted earnings per common share is determined using the treasury stock method to evaluate the dilutive effect of stock options. Under this method, instruments with a dilutive effect are considered to have been exercised at the beginning of the year, or at the time of issuance, if later, and the proceeds received are considered to have been used to redeem common shares at the average market price during the year. Operating leases The Corporation leases stores, warehouses, distribution centres and corporate headquarters. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. The Corporation recognizes rental expense incurred and inducements received from landlords on a straight-line basis over the term of the lease. Any difference between the calculated expense and the amounts actually paid is reflected as deferred lease inducements in the Corporation s consolidated statement of financial position. Contingent rental expense is recognized when the achievement of specified sales targets is considered probable. Favourable and unfavourable lease rights represent the fair value of lease rights as established on the date of their acquisition or assumption and are amortized on a straight-line basis over the terms of the related leases. Deferred leasing costs and deferred tenant allowances are recorded on the consolidated statement of financial position and amortized using the straight-line method over the term of the respective lease. Share-based compensation The Corporation recognizes a compensation expense for options granted based on the fair value of the options at the grant date, using the Black-Scholes option pricing model. The options granted by the Corporation vest in tranches (graded vesting); accordingly, the expense is recognized in award tranches. The total amount to be expensed is determined by reference to the fair value of the options granted, including any market performance conditions. (9)
The impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and retaining an employee of the entity over a specified time period) are excluded from the fair value calculation. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the Corporation revises its estimates of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognizes the impact of the revision to original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to shareholders equity. The option holders have the right to exercise their options on a cash or cashless basis. The cash subscribed for the shares issued when the options are exercised is credited, together with the related compensation costs, to share capital (nominal value), net of any directly attributable transaction costs. Accounting standards and amendments issued but not yet adopted The following is an overview of accounting standard changes that the Corporation will be required to adopt in future years. Except as otherwise noted below for IFRS 9 and IAS 32, the standards are effective for the Corporation s annual periods beginning on February 4, 2013, with earlier application permitted. The Corporation did not adopt any of these standards before their effective dates. Except as otherwise indicated and based on current facts and circumstances, the Corporation does not expect a material impact on its consolidated statement of operations and financial position upon the adoption of those standards which are effective on February 4, 2013. The Corporation continues to evaluate the impact of these standards on its consolidated financial statements. IFRS 9, Financial Instruments, addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39, Financial Instruments: Recognition and Measurement, with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are recognized either at fair value through profit or loss or at fair value through other comprehensive income. Where such equity instruments are measured at fair value through other comprehensive income, dividends, to the extent that they do not clearly represent a return on investment, are recognized in profit or loss; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely. IFRS 9 is effective for annual periods beginning on or after January 1, 2015. (10)
In May 2011, the IASB issued the following standards which have not yet been adopted by the Corporation: IFRS 10, Consolidated Financial Statements; IFRS 11, Joint Arrangements; IFRS 12, Disclosure of Interests in Other Entities; IFRS 13, Fair Value Measurement; IAS 27, Consolidated and Separate Financial Statements; and IAS 28, Investments in Associates and Joint Ventures (amended in 2011). Each of the new standards is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Corporation is in the process of assessing the impact that the new and amended standards will have on its consolidated financial statements. The following is a brief summary of the new standards: o IFRS 10 Consolidated Financial Statements IFRS 10 requires an entity to consolidate an investee when the entity is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of another entity so as to obtain benefits from its activities. IFRS 10 replaces SIC 12, Consolidation Special Purpose Entities, and parts of IAS 27. o IFRS 11 Joint Arrangements IFRS 11 requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting, whereas for a joint operation, the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities Non-Monetary Contributions by Venturers. o IFRS 12 Disclosure of Interests in Other Entities IFRS 12 establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special-purpose vehicles and off-balance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity s interests in other entities. o IFRS 13 Fair Value Measurement IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures. (11)
o Amendments to IAS 1 Presentation of Financial Statements The amendments to IAS 1 require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be recycled to profit or loss in the future. Items that will not be recycled such as remeasurements related to IAS 19 will be presented separately from items that may be recycled in the future, such as deferred gains and losses on cash flow hedges. Entities that choose to present other comprehensive income items before tax will be required to show the amount of tax related to the two groups separately. o Amendments to other standards In addition, there have been amendments to existing standards, including IFRS 7, Financial Instruments: Disclosures, IAS 27, Separate Financial Statements (amended in 2011), IAS 28 (amended in 2011), and IAS 32, Financial Instruments: Presentation. IFRS 7 amendments require disclosure about the effects of offsetting financial assets and financial liabilities and related arrangements on an entity s financial position. IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to 13. IAS 32 addresses inconsistencies when applying the offsetting requirements and is effective for annual periods beginning on or after January 1, 2014. 4 Critical accounting estimates and judgments The preparation of financial statements requires management to use judgment in applying its accounting policies and estimates and assumptions about the future. Estimates and other judgments are continually evaluated and are based on management s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. The following discusses the most significant accounting judgments and estimates that the Corporation has made in the preparation of the consolidated financial statements. (12)
Valuation of merchandise inventories The valuation of store merchandise inventories is determined by the retail inventory method valued at the lower of cost and net realizable value, with cost being determined by the retail inventory method. Under the retail inventory method, merchandise inventories are converted to a cost basis by applying an average cost-to-sell ratio. Merchandise inventories that are at the distribution centre or warehouses and inventories that are in transit from suppliers are stated at the lower of cost and net realizable value, with cost determined on a weighted average cost basis. Merchandise inventories include items that have been marked down to management s best estimate of their net realizable value and are included in cost of sales in the period in which the markdown is determined. The Corporation estimates its markdown reserve based on the consideration of a variety of factors, including quantities of slow-moving or carryover seasonal merchandise on hand, historical markdown statistics, future merchandising plans and inventory shortages (shrinkage). The accuracy of the Corporation s estimates can be affected by many factors, some of which are beyond its control, including changes in economic conditions and consumer buying trends. Historically, the Corporation has not experienced significant differences in its estimates of markdowns compared with actual results. Impairment of goodwill and trade name Goodwill and trade name are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate that the assets might be impaired. Impairment is identified by comparing the recoverable amount of the CGU to its carrying value. To the extent the CGU s carrying amount exceeds its recoverable amount, an impairment loss is recognized in the consolidated statement of comprehensive income. The recoverable amount of the CGU is based on the fair value less cost to sell. The fair value less cost to sell is the amount for which the CGU could be exchanged between knowledgeable willing parties in an arm s length transaction, less cost to sell. Management undertakes an assessment of relevant market data, which is the market capitalization of the Corporation. As of, impairment reviews were performed by comparing the carrying value of goodwill and the trade name with the recoverable amount of the CGU to which goodwill and the trade name have been allocated. Management determined that there has been no impairment. Fair value of financial instruments and hedging The fair value of financial instruments is based on current interest rates, foreign exchange rates, credit risk, market value and current pricing of financial instruments with similar terms. Unless otherwise disclosed, the carrying value of the financial instruments, especially those with current maturities such as cash and cash equivalents, accounts receivable, deposits and prepaid expenses, accounts payable and accrued liabilities, and dividend payable approximates their fair value. (13)
When hedge accounting is used, formal documentation is set up about relationships between hedging instruments and hedged items, as well as a risk management objective and strategy for undertaking various hedge transactions. This process includes linking derivatives to specific firm commitments or forecast transactions. As part of the Corporation s hedge accounting, an assessment is made to determine whether the derivatives that arose as hedging instruments are effective in offsetting changes in cash flows of hedged items. Income tax Significant judgment is required in determining the provision for income tax. There are transactions and calculations for which the ultimate tax determination is uncertain. The Corporation recognizes liabilities for anticipated tax audit issues based on estimates of whether additional tax will be due. Where the final tax outcome of these matters differs from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. (14)
5 Property and equipment Store and warehouse equipment Computer equipment Vehicles Leasehold improvements Computer software Total For the year ended January 29, 2012 Opening net book value 81,620 1,737 1,662 62,076 4,986 152,081 Additions 27,429 1,890 1,426 19,525 4,483 54,753 Disposals, at cost (49) - (1,095) (15) - (1,159) Accumulated depreciation on writeoff of fully depreciated assets 15-852 4-871 Depreciation charge (18,699) (1,143) (606) (10,452) (2,593) (33,493) Closing net book value 90,316 2,484 2,239 71,138 6,876 173,053 As of January 29, 2012 Cost 171,640 5,485 3,379 118,236 21,171 319,911 Accumulated depreciation (81,324) (3,001) (1,140) (47,098) (14,295) (146,858) Net book value 90,316 2,484 2,239 71,138 6,876 173,053 For the year ended February 3, 2013 Opening net book value 90,316 2,484 2,239 71,138 6,876 173,053 Additions 36,426 700 1,081 31,526 5,430 75,163 Disposals, at cost (492) - (881) (14,925) - (16,298) Accumulated depreciation on writeoff of fully depreciated assets 346-596 14,383-15,325 Depreciation charge (22,579) (1,249) (694) (12,921) (2,103) (39,546) Closing net book value 104,017 1,935 2,341 89,201 10,203 207,697 As of February 3, 2013 Cost 207,574 6,184 3,580 134,837 26,601 378,776 Accumulated depreciation (103,557) (4,249) (1,239) (45,636) (16,398) (171,079) Net book value 104,017 1,935 2,341 89,201 10,203 207,697 (15)
6 Intangible assets and goodwill Intangible assets Trade name Covenants not to compete Deferred leasing costs Favourable lease rights Total Goodwill For the year ended January 29, 2012 Opening net book value 108,200 45 1,623 2,049 111,917 727,782 Amortization charge - (45) (310) (1,031) (1,386) - Closing net book value 108,200-1,313 1,018 110,531 727,782 As of January 29, 2012 Cost 108,200 400 2,850 20,862 132,312 727,782 Accumulated amortization - (400) (1,537) (19,844) (21,781) - Net book value 108,200-1,313 1,018 110,531 727,782 For the year ended February 3, 2013 Opening net book value 108,200-1,313 1,018 110,531 727,782 Additions - - 2,780-2,780 - Amortization charge - (295) (1,018) (1,313) - 108,200-3,798-111,998 727,782 As of February 3, 2013 Cost 108,200-5,630 20,862 134,692 727,782 Accumulated amortization - - (1,832) (20,862) (22,694) - Net book value 108,200-3,798-111,998 727,782 (16)
7 Accounts payable and accrued liabilities As of February 3, 2013 As of January 29, 2012 Accounts payable 50,786 30,751 Accrued liabilities and other Compensation and benefits 28,701 27,913 Merchandise inventories in transit 10,759 5,730 Rent and other 7,603 19,048 Sales tax 4,041 17,859 101,890 101,301 8 Long-term debt Long-term debt outstanding consists of the following: Carrying value Note As of February 3, 2013 As of January 29, 2012 Senior secured revolving credit facility 8(a) 264,420 - Senior secured credit facility Term loan 8(a) - 274,997 264,420 274,997 Less: Current portion (net of financing costs of nil; 2012 135) - 13,967 264,420 261,030 Less: Unamortized financing costs 2,349 2,645 262,071 258,385 a) Senior secured credit facilities On June 10, 2010, Dollarama Group L.P. (Group L.P.), a wholly owned subsidiary of the Corporation, entered into an agreement providing for an all-canadian 600,000 syndicated senior secured credit facility (the 2010 Credit Facility ) consisting of (i) a 75,000 revolving credit facility, and (ii) a 525,000 term loan facility maturing in June 2014. In addition, Group L.P. could, under certain circumstances and subject to receipt of additional commitments from existing lenders or other eligible institutions, request additional term loan tranches or increases to the revolving loan commitments by an aggregate amount of up to 75,000. (17)
Group L.P. used the proceeds from the 2010 Credit Facility to repay all amounts outstanding under its previous senior secured credit facility, to redeem the senior floating rate deferred interest notes issued by its affiliate, Dollarama Group Holdings L.P., to repay the debt-related hedging obligations, to pay related fees and expenses, and used the balance for working capital and other general corporate purposes. On July 29, 2011, the Corporation made an 84,827 payment on the term loan of the 2010 Credit Facility, consisting of a quarterly capital instalment of 4,827 and a prepayment of 80,000. On October 5, 2011, Group L.P. and its lenders entered into the first amending agreement to the 2010 Credit Facility, resulting in a new pricing grid with improved applicable rates, a revised amortization schedule for the repayment of the term loan and a new maturity date of June 10, 2015 for the revolving credit facility. On December 17, 2012, Group L.P. and the Corporation, as co-borrowers, (collectively, the Borrowers, and each a Borrower ) entered into an amended and restated credit agreement (the 2012 Credit Facility ) providing for a 350,000 revolving credit facility maturing in December 2017. In addition, the Borrowers may, under certain circumstances and subject to receipt of additional commitments from existing lenders or other eligible institutions, request increases to the revolving loan commitments by an aggregate amount of up to 350,000. Under this agreement, interest is charged at bankers acceptance rates or at LIBOR, plus a premium ranging from 1.00% to 2.25% determined according to certain financial ratios calculated on a consolidated basis. As of February 3, 2013, an aggregate of 264,420 was outstanding under the 2012 Credit Facility. Letters of credit issued for the purchase of inventories amounted to 246 (January 29, 2012 917 outstanding under the 2010 Credit Facility). The 2012 Credit Facility contains restrictive covenants and requires the Corporation to comply, on a quarterly basis, with a minimum interest coverage ratio test and a maximum lease-adjusted leverage ratio test. As of February 3, 2013, the Corporation were in compliance with all of their financial covenants. The 2012 Credit Facility is guaranteed by all of the Corporation s existing and future restricted subsidiaries (collectively, the Credit Parties ), and secured by hypothecs and security interests in substantially all of the existing and future assets of the Credit Parties, as well as a pledge of existing and future intercompany notes and a pledge of the share capital and partnership units, as applicable, of each of the Corporation s subsidiaries. (18)