EXFO Inc.
EXFO INC. (Form: 6-K/A, Received: 01/10/2017 07:10:13)
 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549


FORM 6-K/A


Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934

For the month of January 2017


EXFO Inc.
(Translation of registrant's name into English)

400 Godin Avenue, Quebec City, Quebec, Canada  G1M 2K2
(Address of principal executive offices)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.


Form 20-F 
Form 40-F 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes 
No 


If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______.
 
 

 
 

 
 
TABLE OF CONTENTS
 
 
Signatures
Cover Letter
Independent Auditor's Report
Consolidated Balance Sheet
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations
Cover Letter
Notice of Annual Meeting of Shareholders
Form of Proxy
Management Proxy Circular
 
 

 
 
On January 9, 2017, EXFO Inc., a Canadian corporation, amended and re-filed its Annual Report on Form 20-F for the fiscal year ended August 31, 2016, along with revised consolidated financial statements and management's discussion and analysis (MD&A) for the year ended August 31, 2016, as well as amended Management's Annual Report on internal control over financial reporting and certifications from the CEO and CFO, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. At the same time, it also issued a cover letter. This report on Form 6-K sets forth said documents with the exception of the amended Annual Report on Form 20-F/A which was filed separately. Please refer to the explanatory note on page 1 of the amended Annual Report on Form 20-F/A for a summary description of the amendments. 

The Form 6-K containing the Corporation's revised consolidated financial statements and management's discussion and analysis (MD&A) for the year ended August 31, 2016, as well as amended Management's Annual Report on internal control over financial reporting and certifications from the CEO and CFO, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and a cover letter are hereby incorporated as documents by reference to Form F-3 (Registration Statement under the Securities Act of 1933) declared effective as of July 30, 2001 and to Form F 3 (Registration Statement under the Securities Act of 1933) declared effective as of March 11, 2002 and to amend certain material information as set forth in these two Form F-3 documents.
 
 
 
1

 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



 
EXFO INC.
 
 
 
By:          /s/ Germain Lamonde
Name:    Germain Lamonde
Title:      President and Chief Executive Officer
   


Date: January 9, 2017

 
 
 


January 9, 2017
SEDAR FILING

British Columbia Securities Commission
Alberta Securities Commission
Financial and Consumer Affairs Authority of Saskatchewan
The Manitoba Securities Commission
Ontario Securities Commission
Autorité des marchés financiers (Québec)
Financial and Consumer Services Commission (New Brunswick)
Nova Scotia Securities Commission
Prince Edward Island Securities Office
Government of Newfoundland and Labrador Financial Services Regulation Division
Dear Sirs/Mesdames:
Re:
Filing of Amended Annual Report for Fiscal 2016
Please be advised that we have amended and are re-filing our Annual Report on Form 20-F for the fiscal year ended August 31, 2016, along with revised consolidated financial statements and management's discussion and analysis (MD&A) for the year ended August 31, 2016, as well as amended Management's Annual Report on internal control over financial reporting and certifications from the CEO and CFO, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Please refer to the explanatory note on page 1 of our amended Annual Report on Form 20-F/A for a summary description of the amendments.
Yours truly,



(s) Benoit Ringuette
General Counsel and Corporate Secretary
EXFO Inc.
 
 
 
Independent Auditor's Report

To the Shareholders of
EXFO Inc.


We have completed integrated audits of EXFO Inc.'s and its subsidiaries' 2016, 2015 and 2014 consolidated financial statements and their internal control over financial reporting as at August 31, 2016. Our opinions, based on our audits are presented below.

Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of EXFO Inc. and its subsidiaries (the company), which comprise the consolidated balance sheets as at August 31, 2016 and August 31, 2015 and the consolidated statements of earnings, comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period ended August 31, 2016, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board 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 and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards also require that we comply with ethical requirements.

An audit involves performing procedures to obtain audit evidence, on a test basis, 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 company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements.
 
 
 
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of EXFO Inc. and its subsidiaries as at August 31, 2016 and August 31, 2015 and their financial performance and their cash flows for each of the three years in the period ended August 31, 2016 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
 
Revision to Consolidated Financial Statements
Without modifying our opinion on the consolidated financial statements, we draw attention to Note 1 to these consolidated financial statements, which explains that the consolidated financial statements for the year ended August 31, 2016 have been revised from those on which we originally reported on November 28, 2016.
 
Report on internal control over financial reporting
We have also audited EXFO Inc.'s and its subsidiaries' internal control over financial reporting as at August 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management's responsibility for internal control over financial reporting
Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in "Management's Annual Report on Internal Control over Financial Reporting (restated)" appearing under Item 15b) of the Annual Report on Form 20-F/A for the fiscal year ended August 31, 2016.

Auditor's responsibility
Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances.

We believe that our audit provides a reasonable basis for our audit opinion on the company's internal control over financial reporting.

Definition of internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 

Inherent limitations
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Opinion
In our opinion, EXFO Inc. and its subsidiaries did not maintain, in all material respects, effective internal control over financial reporting as at August 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO because a material weakness in internal control over financial reporting existed at that date related to the failure to maintain appropriate controls over the accounts receivable ledger, which included the lack of appropriate segregation of duties and  supervisory review and monitoring of journal entries recorded in the trade account receivable ledger. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.  The material weakness referred to above is described under "Management's Annual Report on Internal Control over Financial Reporting (restated)" appearing under Item 15(b) of the Annual Report on Form 20-F/A for the fiscal year ended August 31, 2016.  We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the August 31, 2016 consolidated financial statements, and our opinion regarding the effectiveness of the EXFO Inc.'s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

Management and we previously concluded that EXFO Inc. and its subsidiaries maintained effective internal control over financial reporting as at August 31, 2016. However, management has subsequently determined that the material weakness described above existed as at August 31, 2016. Accordingly, Management's Report on Internal Control over Financial Reporting has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report.




Montréal, Quebec
January 9, 2017

























1 CPA auditor, CA, public accountancy permit No. A119427
 
 
 
EXFO Inc.
Consolidated Balance Sheets
 
(in thousands of US dollars)
 
 
   
As at August 31,
 
   
2016
   
2015
 
Assets
           
             
Current assets
           
Cash
 
$
43,208
   
$
25,864
 
Short-term investments (note 5)
   
4,087
     
1,487
 
Accounts receivable (note 5)
               
Trade
   
42,993
     
45,985
 
Other
   
2,474
     
2,384
 
Income taxes and tax credits recoverable (note 18)
   
4,208
     
3,855
 
Inventories (note 6)
   
33,004
     
27,951
 
Prepaid expenses
   
3,099
     
2,801
 
                 
     
133,073
     
110,327
 
                 
Tax credits recoverable (note 18)
   
34,594
     
35,625
 
Property, plant and equipment (notes 7 and 20)
   
35,978
     
35,695
 
Intangible assets (notes 8 and 20)
   
3,391
     
4,096
 
Goodwill (notes 8 and 20)
   
21,928
     
21,860
 
Deferred income tax assets (note 18)
   
8,240
     
9,459
 
Other assets
   
589
     
416
 
                 
   
$
237,793
   
$
217,478
 
Liabilities
               
                 
Current liabilities
               
Accounts payable and accrued liabilities (note 10)
 
$
37,174
   
$
34,126
 
Provisions
   
299
     
427
 
Income taxes payable
   
971
     
779
 
Deferred revenue
   
9,486
     
7,647
 
                 
     
47,930
     
42,979
 
                 
Deferred revenue
   
5,530
     
2,957
 
Deferred income tax liabilities (note 18)
   
2,857
     
1,524
 
Other liabilities
   
75
     
791
 
                 
     
56,392
     
48,251
 
Commitments (note 11)
               
                 
Shareholders' equity
               
Share capital (note 12)
   
85,516
     
86,045
 
Contributed surplus
   
18,150
     
17,778
 
Retained earnings
   
126,309
     
117,409
 
Accumulated other comprehensive loss (note 13)
   
(48,574
)
   
(52,005
)
                 
     
181,401
     
169,227
 
                 
   
$
237,793
   
$
217,478
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
On behalf of the Board
 
/s/ Germain Lamonde
/s/ Claude Séguin
Germain Lamonde
Claude Séguin
Chairman, President and CEO
Chairman, Audit Committee
 
 
 
EXFO Inc.
Consolidated Statements of Earnings
 
(in thousands of US dollars, except share and per share data)
 
 
   
Years ended August 31,
 
   
2016
   
2015
   
2014
 
                   
Sales (note 20 )
 
$
232,583
   
$
222,089
   
$
230,806
 
                         
Cost of sales (1) (note 16 )
   
87,066
     
85,039
     
86,836
 
Selling and administrative (2) (note 16)
   
82,169
     
82,200
     
86,429
 
Net research and development   (note 16)
   
42,687
     
44,003
     
44,846
 
Depreciation of property, plant and equipment (note 16)
   
3,814
     
4,835
     
4,995
 
Amortization of intangible assets (note 16)
   
1,172
     
2,883
     
4,398
 
Interest and other income
   
(828
)
   
(155
)
   
(326
)
Foreign exchange gain
   
(161
)
   
(7,212
)
   
(1,634
)
Unusual charge (note 1)
   
     
603
     
720
 
                         
Earnings before income taxes
   
16,664
     
9,893
     
4,542
 
                         
Income taxes (note 18 )
   
7,764
     
5,036
     
4,286
 
                         
Net earnings for the year
 
$
8,900
   
$
4,857
   
$
256
 
                         
Basic net earnings per share
 
$
0.17
   
$
0.09
   
$
0.00
 
                         
Diluted net earnings per share
 
$
0.16
   
$
0.08
   
$
0.00
 
                         
Basic weighted average number of shares outstanding (000's)
   
53,863
     
56,804
     
60,329
 
                         
Diluted weighted average number of shares outstanding (000's) (note 19 )
   
54,669
     
57,457
     
61,015
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)
Selling and administrative is exclusive of unusual charge, which represents bad debt expenses.
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
EXFO Inc.
Consolidated Statements of Comprehensive Income (Loss)
 
(in thousands of US dollars)
 

   
Years ended August 31,
 
   
2016
   
2015
   
2014
 
                   
Net earnings for the year
 
$
8,900
   
$
4,857
   
$
256
 
Other comprehensive income (loss), net of income taxes
                       
Items that will not be reclassified subsequently to net earnings
                       
Foreign currency translation adjustment
   
707
     
(39,175
)
   
(7,086
)
Items that may be reclassified subsequently to net earnings
                       
Unrealized gains/losses on forward exchange contracts
   
862
     
(5,583
)
   
(618
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings
   
2,797
     
2,107
     
959
 
Deferred income tax effect of gains/losses on forward exchange contracts
   
(935
)
   
905
     
(91
)
                         
Other comprehensive income (loss)
   
3,431
     
(41,746
)
   
(6,836
)
                         
Comprehensive income (loss) for the year
 
$
12,331
   
$
(36,889
)
 
$
(6,580
)

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
EXFO Inc.
Consolidated Statements of Changes in Shareholders' Equity
 
(in thousands of US dollars)
 

   
Year ended August 31, 2014
 
   
Share
capital
   
Contributed
surplus
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Total
shareholders'
equity
 
                               
Balance as at September 1, 2013
 
$
109,837
   
$
17,186
   
$
112,296
   
$
(3,423
)
 
$
235,896
 
Exercise of stock options (note 12)
   
225
     
     
     
     
225
 
Redemption of share capital (note 12)
   
(831
)
   
(106
)
   
     
     
(937
)
Reclassification of stock-based compensation costs (note 12)
   
2,260
     
(2,260
)
   
     
     
 
Stock-based compensation costs
   
     
1,683
     
     
     
1,683
 
Net earnings for the year
   
     
     
256
     
     
256
 
Other comprehensive income (loss)
                                       
Foreign currency translation adjustment
   
     
     
     
(7,086
)
   
(7,086
)
Changes in unrealized losses on forward exchange contracts, net of deferred income taxes of $91
   
     
     
     
250
     
250
 
                                         
Total comprehensive loss for the year
                                   
(6,580
)
                                         
Balance as at August 31, 2014
 
$
111,491
   
$
16,503
   
$
112,552
   
$
(10,259
)
 
$
230,287
 
 
 
   
Year ended August 31, 2015
 
   
Share
capital
   
Contributed
surplus
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Total
shareholders'
equity
 
                               
Balance as at September 1, 2014
 
$
111,491
   
$
16,503
   
$
112,552
   
$
(10,259
)
 
$
230,287
 
Redemption of share capital (note 12)
   
(26,827
)
   
1,333
     
     
     
(25,494
)
Reclassification of stock-based compensation costs (note 12)
   
1,381
     
(1,381
)
   
     
     
 
Stock-based compensation costs
   
     
1,323
     
     
     
1,323
 
Net earnings for the year
   
     
     
4,857
     
     
4,857
 
Other comprehensive loss
                                       
Foreign currency translation adjustment
   
     
     
     
(39,175
)
   
(39,175
)
Changes in unrealized losses on forward exchange contracts, net of deferred income taxes of $905
   
     
     
     
(2,571
)
   
(2,571
)
                                         
Total comprehensive loss for the year
                                   
(36,889
)
                                         
Balance as at August 31, 2015
 
$
86,045
   
$
17,778
   
$
117,409
   
$
(52,005
)
 
$
169,227
 
 
 
   
Year ended August 31, 2016
 
   
Share
capital
   
Contributed
surplus
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Total
shareholders'
equity
 
                               
Balance as at September 1, 2015
 
$
86,045
   
$
17,778
   
$
117,409
   
$
(52,005
)
 
$
169,227
 
Redemption of share capital (note 12)
   
(1,768
)
   
217
     
     
     
(1,551
)
Reclassification of stock-based compensation costs (note 12)
   
1,239
     
(1,239
)
   
     
     
 
Stock-based compensation costs
   
     
1,394
     
     
     
1,394
 
Net earnings for the year
   
     
     
8,900
     
     
8,900
 
Other comprehensive income (loss)
                                       
Foreign currency translation adjustment
   
     
     
     
707
     
707
 
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $935
   
     
     
     
2,724
     
2,724
 
                                         
Total comprehensive income for the year
                                   
12,331
 
                                         
Balance as at August 31, 2016
 
$
85,516
   
$
18,150
   
$
126,309
   
$
(48,574
)
 
$
181,401
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
EXFO Inc.
Consolidated Statements of Cash Flows
 
(in thousands of US dollars)
 
 

   
Years ended August 31,
 
   
2016
   
2015
   
2014
 
Cash flows from operating activities
                 
Net earnings for the year
 
$
8,900
   
$
4,857
   
$
256
 
Add (deduct) items not affecting cash
                       
Stock-based compensation costs
   
1,378
     
1,295
     
1,696
 
Depreciation and amortization
   
4,986
     
7,718
     
9,393
 
Unusual charge
   
     
603
     
720
 
Deferred revenue
   
4,238
     
396
     
(804
)
Deferred income taxes
   
1,578
     
403
     
698
 
Changes in foreign exchange gain/loss
   
(332
)
   
(3,842
)
   
(491
)
     
20,748
     
11,430
     
11,468
 
Changes in non-cash operating items
                       
Accounts receivable
   
2,682
     
(10,828
)
   
3,578
 
Income taxes and tax credits
   
939
     
(2,062
)
   
1,447
 
Inventories
   
(4,713
)
   
820
     
(734
)
Prepaid expenses
   
(280
)
   
(982
)
   
210
 
Other assets
   
170
     
61
     
92
 
Accounts payable and accrued liabilities and provisions
   
4,882
     
8,132
     
3,832
 
Other liabilities
   
(65
)
   
(87
)
   
(107
)
     
24,363
     
6,484
     
19,786
 
Cash flows from investing activities
                       
Additions to short-term investments
   
(3,546
)
   
(20,067
)
   
(34,222
)
Proceeds from disposal and maturity of short-term investments
   
873
     
23,685
     
33,208
 
Purchases of capital assets (notes 7 and 8)
   
(4,356
)
   
(5,933
)
   
(7,931
)
     
(7,029
)
   
(2,315
)
   
(8,945
)
Cash flows from financing activities
                       
Repayment of long-term debt
 
   
     
(307
)
Exercise of stock options (note 12)
 
   
     
225
 
Redemption of share capital (note 12)
   
(1,551
)
   
(25,494
)
   
(937
)
     
(1,551
)
   
(25,494
)
   
(1,019
)
                         
Effect of foreign exchange rate changes on cash
   
1,561
     
(6,932
)
   
(1,087
)
                         
Change in cash
   
17,344
     
(28,257
)
   
8,735
 
Cash – Beginning of year
   
25,864
     
54,121
     
45,386
 
Cash – End of year
 
$
43,208
   
$
25,864
   
$
54,121
 
                         
Supplementary information
                       
Income taxes paid
 
$
2,015
   
$
1,491
   
$
1,272
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
1
Nature of Activities and Incorporation

EXFO Inc. and its subsidiaries (together "EXFO" or the company) design, manufacture and market test, service assurance and analytics solutions for fixed and mobile network operators, communications service providers, web-scale operators as well as network equipment manufacturers in the global telecommunications industry.

EXFO is a company incorporated under the Canada Business Corporations Act and domiciled in Canada. The address of its headquarters is 400 Godin Avenue, Quebec, Province of Quebec, Canada, G1M 2K2.

These consolidated financial statements were authorized for issue by the Board of Directors on January 9, 2017.

Revision of Consolidated Financial Statements
 
The company has revised its previously issued consolidated financial statements (filed on November 28, 2016) to properly record a bad debt expense associated with a single trade receivable account. During the first quarter of fiscal 2017, the company identified certain errors in the aging of the trade accounts receivable ledger which were traced back to an outstanding trade receivable balance arising from one customer, which dated back to the period from 2012 to 2015. This resulted in an understatement of the prior years' allowance for doubtful accounts against this trade receivable account and a corresponding adjustment to deferred taxes as a result of the additional expense.

The company evaluated the aggregate effects of the errors to its previously issued consolidated financial statements in accordance with IAS 8 - Accounting Policies, Accounting Estimates and Errors ("IAS 8") , as well as and in consideration of the guidance in SEC Staff Accounting Bulletins No. 99 and No. 108.  Based upon quantitative and qualitative factors, the company has determined that the errors were not material to the previously issued consolidated financial statements and disclosures in its Annual Report on Form 20-F for the year ended August 31, 2016.  However, the cumulative effect of the errors may be significant to our financial results for the year ending August 31, 2017.  Accordingly, the company has revised its previously issued consolidated financial statements for the year ended August 31, 2016.

All financial information presented in the accompanying notes to these consolidated financial statements was revised to reflect the correction of these errors.

The following tables present the effect of the aforementioned revisions on the company's consolidated balance sheets and the consolidated statement of earnings for each period.  These revisions are non-cash and therefore do not impact the company's statement of cash flows for any prior period. The revision also does not impact the consolidated statement of earnings for the year ended August 31, 2016:

   
As at August 31, 2016
 
   
As reported
   
Adjustment
   
Revised
 
Revision to Consolidated Balance Sheet
 
                 
Accounts receivable - Trade
 
$
45,076
   
$
(2,083
)
 
$
42,993
 
Deferred income tax assets
 
$
7,681
   
$
559
   
$
8,240
 
Retained earnings
 
$
127,833
   
$
(1,524
)
 
$
126,309
 
Total assets
 
$
239,317
   
$
(1,524
)
 
$
237,793
 
Shareholders' equity
 
$
182,925
   
$
(1,524
)
 
$
181,401
 
                         
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
   
As at and for the year ended August 31, 2015
 
   
As reported
   
Adjustment
   
Revised
 
Revision to Consolidated Balance Sheet
 
                 
Accounts receivable - Trade
 
$
48,068
   
$
(2,083
)
 
$
45,985
 
Deferred income tax assets
 
$
8,900
   
$
559
   
$
9,459
 
Retained earnings
 
$
118,933
   
$
(1,524
)
 
$
117,409
 
Total assets
 
$
219,002
   
$
(1,524
)
 
$
217,478
 
Shareholders' equity
 
 
$
170,751
   
$
(1,524
)
 
$
169,227
 
Revision to Consolidated Statement of Earnings and Consolidated Statement of Comprehensive Income (Loss)
 
                       
Unusual charge (1)
 
$
   
$
603
   
$
603
 
Earnings before income taxes
 
$
10,496
   
$
(603
)
 
$
9,893
 
Deferred income tax expense
 
$
565
   
$
(162
)
 
$
403
 
Net earnings for the year
 
$
5,298
   
$
(441
)
 
$
4,857
 
Basic net earnings per share for the year
 
$
0.09
   
$
   
$
0.09
 
Diluted net earnings per share for the year
 
$
0.09
   
$
(0.01
)
 
$
0.08
 
Comprehensive loss for the year
 
$
(36,448
)
 
$
(441
)
 
$
(36,889
)
 
(1)
Adjustment to recognize bad debt expense in connection with a past due trade receivable balance, for which, upon correction of the aging, management would have provided an allowance in accordance with the company's credit provision policies.

 
   
As at and for the year ended August 31, 2014
 
   
As reported
   
Adjustment
   
Revised
 
 
Revision to Consolidated Balance Sheet
 
                 
Retained earnings
 
 
$
113,635
   
$
(1,083
)
 
$
112,552
 
Revision to Consolidated Statement of Earnings and Consolidated Statement of Comprehensive Income (Loss)
 
                       
Unusual charge (2)
 
$
   
$
720
   
$
720
 
Earnings before income taxes
 
$
5,262
   
$
(720
)
 
$
4,542
 
Deferred income tax expense
 
$
891
   
$
(193
)
 
$
698
 
Net earnings for the year
 
$
783
   
$
(527
)
 
$
256
 
Basic and diluted net earnings per share for the year
 
$
0.01
   
$
(0.01
)
 
$
0.00
 
Comprehensive loss for the year
 
$
(6,053
)
 
$
(527
)
 
$
(6,580
)
 
(2)
Adjustment to recognize bad debt expense in connection with a past due trade receivable balance, for which, upon correction of the aging, management would have provided an allowance in accordance with the company's credit provision policies.
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
   
As at August 31, 2013
 
   
As reported
   
Adjustment
   
Revised
 
 
Revision to Consolidated Balance Sheet
 
                 
Retained earnings (3)
 
$
112,852
   
$
(556
)
 
$
112,296
 
 
(3)
Adjustment  to opening retained earnings as at September 1, 2013 in connection with a past due trade receivable balance, for which, upon correction of the aging, management would have provided an allowance in accordance with the company's credit provision policies.
 

 
2
Basis of Presentation

These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). The company has consistently applied the same accounting policies through all periods presented.

These IFRS consolidated financial statements have been prepared based on the following accounting policies:

Basis of measurement

These consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of derivative financial instruments and available-for-sale investments.

Consolidation

These consolidated financial statements include the accounts of the company and its domestic and foreign subsidiaries. Intercompany accounts and transactions have been eliminated.

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sales of goods and services in the ordinary course of business.

Sales of goods

Revenue from the sales of goods, which represents the majority of the sales of the company, is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually upon delivery of the goods. Revenue is recorded based on the price specified in the sales arrangements.

Maintenance contracts

Maintenance contracts are usually offered to customers for periods of 12 to 36 months. They generally include the right to unspecified software upgrades and enhancements on a when-and-if-available basis as well as customer service. Revenue from these contracts is recognized ratably over the terms of the maintenance contracts on a straight-line basis.
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Extended warranties

Extended warranties are usually offered to customers for periods of 6 to 48 months. Revenue from these extended warranties is recognized ratably over the warranty period on a straight-line basis.

Multiple-component arrangements

When a sales arrangement includes multiple separately identifiable components such as goods, extended warranties, maintenance contracts, installation and training, the revenue recognition criteria are applied to each separately identifiable component. A component is considered separately identifiable if the delivered item has value to the customer on a stand-alone basis and the fair value associated with the component can be measured reliably. The company allocates the selling price of a multiple-component arrangement to each component based on the fair value of each component in relation to the fair value of the arrangement as a whole.

Sales arrangements may include acceptance clauses. When a sales arrangement does include an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period. For these sales arrangements, the sale is recognized when acceptance occurs.

Presentation currency

The functional currency of the company is the Canadian dollar. The company has adopted the US dollar as its presentation currency as it is the most commonly used reporting currency in its industry. The consolidated financial statements are translated into the presentation currency as follows: assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet; revenues and expenses are translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation is included in accumulated other comprehensive income in the shareholders' equity.

Foreign currency transactions

Transactions denominated in currencies other than the functional currency are translated into the relevant functional currency as follows: Monetary assets and liabilities are translated at the exchange rate in effect on the date of the balance sheet, and revenues and expenses are translated at the exchange rate in effect on the date of the transaction. Non-monetary assets and liabilities measured at historical cost and denominated in a foreign currency are translated using the exchange rate at the date of the transaction, whereas non-monetary items that are measured at fair value and denominated in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Foreign exchange gains and losses arising from such translation are included in the consolidated statements of earnings.

Financial instruments

The classification of financial instruments depends on the intended purpose when the financial instruments were acquired or issued, as well as on their characteristics and designation by the company.

Classification

Financial assets

Cash
Loans and receivables
Short-term investments
Available for sale
Accounts receivable
Loans and receivables
Other assets
Loans and receivables
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Financial liabilities

Accounts payable and accrued liabilities
Other financial liabilities

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale, or are not classified in any of the other categories. They are initially recognized at fair value plus transaction costs and   they are subsequently measured at fair value. After their initial recognition, any changes in their fair value are reflected in other comprehensive income.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After their initial measurement at fair value   plus transaction costs, they are carried at amortized cost, using the effective interest rate method, which generally corresponds to the nominal amount due to their short-term maturity.

Other financial liabilities

Other financial liabilities are non-derivative financial liabilities initially measured at fair value   plus transaction costs and they are subsequently carried at amortized cost, using the effective interest rate method, which generally corresponds to the nominal amount due to their short-term maturity.

Derivative financial instruments and hedging activities

Forward exchange contracts are utilized by the company to manage its foreign currency exposure. Forward exchange contracts are entered into by the company to hedge anticipated US-dollar-denominated sales and the related accounts receivable as well as Indian-rupee-denominated operating expenses and the related accounts payable. The company's policy is not to utilize those derivative financial instruments for trading or speculative purposes.

The company's forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

They are initially recorded at fair value plus transaction costs and they are subsequently measured at fair value. The fair value of forward exchange contracts is determined using quoted prices and forward exchange rates at the balance sheet date, with the resulting value discounted back to present value. After initial recognition, the effective portion of changes in their fair value is reflected in other comprehensive income. Any ineffective portion is recognized immediately in the consolidated statements of earnings. Upon the recognition of related hedged sales and operating expenses, accumulated changes in fair value of forward exchange contracts are respectively reclassified in sales and net research and development expenses in the consolidated statements of earnings.

At the inception of a hedge relationship, the company formally designates and documents the hedge relationship to which the company wishes to apply hedge accounting, the risk management objectives, the hedging instrument, the hedged item and the method used to test effectiveness. The company assesses effectiveness of the hedge relationship at inception and on an ongoing basis using the dollar-offset method.

Fair value hierarchy

The company classifies its derivative and non-derivative financial assets and liabilities measured at fair value using the fair value hierarchy as follows:
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

Level 1:
Quoted prices (unadjusted) in active market for identical assets or liabilities;

Level 2:
Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly;

Level 3:
Unobservable inputs for the asset or liability.

The company's short-term investments and forward exchange contracts are measured at fair value at each balance sheet date. The company's short-term investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The company's forward exchange contracts are classified within Level 2 of the fair value hierarchy because they are valued using quoted prices and forward foreign exchange rates at the balance sheet dates.

Short-term investments

All investments with original terms to maturity of three months or less and that are not required for the purposes of meeting short-term cash requirements are classified as short-term investments. Short-term investments are classified as available-for-sale financial assets; therefore, they are carried at fair value in the balance sheet, and any changes in their fair value are reflected in other comprehensive income. Upon the disposal or maturity of these assets, accumulated changes in their fair value are reclassified in the consolidated statements of earnings.

Inventories

Inventories are valued on an average cost basis, at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale.

The cost of work in progress and finished goods includes material, labor and an allocation of manufacturing overhead.

Property, plant and equipment and depreciation

Property, plant and equipment are recorded at cost, net of accumulated depreciation and accumulated impairment losses. Such cost is reduced by related research and development tax credits.

Depreciation is provided on a straight-line basis over the estimated useful lives of the asset as follows:

 
Term
Land improvements
15 years
Buildings
20 to 60 years
Equipment
3 to 15 years
Leasehold improvements
The lesser of useful life and remaining lease term

The assets' residual values and useful lives are reviewed at each financial year-end, and adjusted prospectively, if appropriate.

 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Intangible assets, goodwill and amortization

Intangible assets

Intangible assets with finite useful lives primarily include the cost of core technology, customer relationships, brand name and software. The cost of intangible assets acquired in a business combination is the fair value of the assets at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is provided on a straight-line basis over the estimated useful lives of five years for core technology, customer relationships and brand name, and four and eight years for software. None of the company's intangible assets were developed internally.

The amortization method and the useful lives of intangible assets are reviewed at each financial year-end, and adjusted prospectively, if appropriate.

Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of net identifiable assets acquired, and is allocated to each cash-generating unit (CGU) or group of CGUs that are expected to benefit from the related business combination. A group of CGUs represents the lowest level within the company at which the goodwill is monitored for internal management purposes, which is not higher than an operating segment. Goodwill is not amortized but must be tested for impairment on an annual basis or more frequently if events or circumstances indicate that it might be impaired.

Research and development

All costs related to research are expensed as incurred, net of related tax credits and grants. Development costs are expensed as incurred, net of related tax credits and grants, unless they meet the recognition criteria of IAS 38, " Intangible Assets '', in which case they are capitalized, net of related tax credits and grants and amortized on a straight-line basis over the estimated benefit period. Research and development expenses are mainly comprised of salaries and related expenses, material costs as well as fees paid to third-party consultants. As at August 31, 2015 and 2016, the company had not capitalized any development costs.

The company elected to account for non-refundable research and development tax credits under IAS 20, " Accounting for Governmental Grants and Disclosures of Governmental Assistance '', and as such, these tax credits are presented against gross research and development expenses in the consolidated statements of earnings. Non-refundable research and development tax credits are included in earnings or deducted from the related assets, provided there is reasonable assurance that the company has complied and will comply with the conditions related to the tax credits and that the tax credits will be received.

Impairment of non-financial assets

The company assesses at each reporting date whether there is an indication that the carrying value of property, plant and equipment and finite-life intangible assets may not be recoverable. Non-financial assets that are not amortized (such as goodwill) are subject to an annual impairment test. If any indication exists, or when annual impairment testing is required, the company estimates the asset or asset group's recoverable amount. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). The recoverable amount is the higher of an asset or CGU's fair value less costs of disposal and its value in use. Where the carrying value of an asset or CGU exceeds its recoverable amount, the asset or the CGU is considered impaired and is written down to its recoverable amount. The company performs its annual goodwill impairment test in the fourth quarter of each fiscal year.
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
For property, plant and equipment and finite-life intangible assets, the reversal of impairment is limited so that the carrying value of the asset does not exceed its recoverable amount, nor exceed the carrying value that would have been determined, net of depreciation or amortization, had no impairment loss been recognized for the asset in prior periods. Impairment losses on goodwill are not reversed.

Leases

Operating leases are leases for which the company does not assume substantially all the risks and rewards of ownership of the asset. Operating lease rentals are charged to the consolidated statements of earnings on a straight-line basis over the lease term.

As at August 31, 2015 and 2016, all significant leases of the company were classified as operating leases.

Government grants

Grants related to operating expenses are included in earnings when the related expenses are incurred. Grants related to capital expenditures are deducted from the related assets. Grants are included in the consolidated statements of earnings or deducted from the related assets, provided there is reasonable assurance that the company has complied and will comply with all the conditions related to the grants and that the grants will be received.

Warranty

The company offers its customers basic warranties of one to three years, depending on the specific products and terms of the purchase agreement. The company's typical warranties require it to repair or replace defective products during the warranty period at no cost to the customer. Costs related to basic warranties are accrued at the time of shipment, based upon estimates of expected rework and warranty costs to be incurred. Costs associated with separately priced extended warranties are expensed as incurred.

Income taxes

Income taxes comprise current and deferred income taxes.

Current income taxes

Current income tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered or paid to the taxation authorities. Income tax rates used to calculate the amount are those that are enacted or substantively enacted at the balance sheet dates in the tax jurisdictions where the company generates taxable income/loss.

Deferred income taxes

The company provides for deferred income taxes using the liability method. Under this method, deferred income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities as well as the carry-forward of unused tax losses and deductions, using enacted or substantively enacted income tax rates at the balance sheet dates, that are expected to be in effect for the years in which the assets are expected to be recovered or the liabilities to be settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable income will be available against which the deductible temporary differences as well as unused tax losses and deductions can be utilized.
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Deferred tax liabilities are recognized for all taxable temporary differences and for taxable temporary differences arising on investments in subsidiaries, except where the reversal of these temporary differences can be controlled and it is probable that the differences will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are presented as non-current in the consolidated balance sheets.

Uncertain tax positions

The company is subject to income tax laws and regulations in several jurisdictions. There are many transactions and calculations during the course of business for which the ultimate tax determination is uncertain. The company maintains provisions for uncertain tax positions that it believes appropriately reflect its risk. These provisions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The company reviews the adequacy of these provisions at the end of the reporting periods and any changes in the provisions are recognized in the consolidated statements of earnings when they occur. However, it is possible that at some future dates, liabilities in excess of the company's provisions could result from audits by, or litigation with, the relevant taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will be recognized in the consolidated statement of earnings in the period in which such determination is made.

Earnings per share

Basic earnings per share are calculated by dividing net earnings attributable to common equity holders of the company by the weighted average number of common shares outstanding during the year.

Diluted earnings per share are calculated by dividing net earnings attributable to common equity holders of the company by the weighted average number of common shares outstanding during the year, plus the effect of dilutive potential common shares outstanding during the year. This method requires that diluted earnings per share be calculated (using the treasury stock method) as if all dilutive potential common shares had been exercised at the latest at the beginning of the year or on the date of issuance, as the case may be, and that the funds obtained thereby (plus an amount equivalent to the unamortized portion of related stock-based compensation costs) be used to purchase common shares of the company at the average market price of the common shares during the year.

Stock-based compensation

Equity-settled awards

The company's stock options, restricted share units and deferred share units are equity-settled awards. The company accounts for stock-based compensation costs on equity-settled awards using the Black-Scholes option valuation model. The fair value of equity-settled awards is measured at the date of grant. Stock-based compensation costs are amortized to expense over the vesting periods together with a corresponding change in contributed surplus in the shareholders' equity. For equity-settled awards with graded vesting, each tranche is considered a separate grant with a different vesting date and fair value, and each tranche are accounted for separately.

Cash-settled awards

The company's stock appreciation rights are cash-settled awards. The company accounts for stock-based compensation costs on cash-settled awards using the Black-Scholes option valuation model. The fair value of the cash-settled awards is remeasured at the end of each reporting period, with any changes in the fair value recognized in the consolidated statements of earnings.
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Operating segments

Operating segments are defined as components of an entity engaged in business activities from which it may earn revenues and incur expenses, and whose operating results are regularly reviewed by the chief operating decision maker (CODM) to make decisions about resources to be allocated to segments and assess their performance and for which discrete information is available. The function of the CODM is performed by the Chief Executive Officer who reviews consolidated results for the purposes of allocating resources and evaluating performance. Accordingly, the company determines that it has one operating segment as of, and for the years ended August 31, 2014, 2015 and 2016. Entity-wide disclosures are presented in note 20.

Critical accounting judgments in applying accounting policies and estimates

The preparation of financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those judgments, estimates and assumptions.

Critical judgments, estimates and assumptions are the following:

Critical judgments in applying accounting policies

(a)
Determination of functional currency

The company operates in multiple countries and generates revenue and incurs expenses in several currencies, namely the Canadian dollar, the US dollar, the euro, the British pound, the Indian rupee and the CNY (Chinese currency). The determination of the functional currency of the company and its subsidiaries may require significant judgment. In determining the functional currency of the company and its subsidiaries, management takes into account primary, secondary and tertiary indicators. When indicators are mixed and the functional currency is not obvious, management uses its judgment to determine the functional currency.

(b)
Determination of cash generating units and allocation of goodwill

For the purpose of impairment testing, goodwill must be allocated to each CGU or group of CGUs that are expected to benefit from the synergies of the business combination. Initial allocation and possible reallocation of goodwill to a CGU or a group of CGUs requires judgment.

Critical estimates and assumptions

(a)
Inventories

The company states its inventories at the lower of cost, determined on an average cost basis, and net realizable value, and provides reserves for excess and obsolete inventories. The company determines its reserves for excess and obsolete inventories based on the quantities on hand at the reporting dates compared to foreseeable needs, taking into account changes in demand, technology or market.
 

 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
(b)
Income taxes

The company is subject to income tax laws and regulations in several jurisdictions. Under these laws and regulations, uncertainties exist with respect to the interpretation of complex tax laws and regulations and the amount and timing of future taxable income. The company maintains provisions for uncertain tax positions that it believes appropriately reflect its risk based on its interpretation of laws and regulations. In addition, management has made reasonable estimates and assumptions to determine the amount of deferred tax assets that can be recognized in the consolidated financial statements, based upon the likely timing and level of anticipated future taxable income together with tax planning strategies. The ultimate realization of the company's deferred income tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those assets are expected to be realized.

(c)
Tax credits recoverable

Tax credits are recorded provided that there is reasonable assurance that the company has complied and will comply with all the conditions related to the tax credits and that the tax credits will be received. The ultimate recovery of the company's non-refundable tax credits is dependent upon the generation of sufficient future taxable income during the tax credits carry-forward periods. Management has made reasonable estimates and assumptions to determine the amount of non-refundable tax credits that can be recognized in the consolidated financial statements, based upon the likely timing and level of anticipated future taxable income together with tax planning strategies (note 18).

(d)
Impairment of non-financial assets

Impairment exists when the carrying value of an asset or group of assets (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation for the company's CGUs is based on a market approach that relies on unobservable inputs based on valuation multiples and recent transactions for comparable assets or businesses, within the same industry. The company applies judgment in making adjustments to the unobservable inputs for factors such as size, risk profile or profitability. The company also considers the company's value derived from its market capitalization, adjusting for a control premium considered appropriate based on other comparable companies with significant controlling interests. Depending on the market evidence available, the company, from time to time, may further supplement this market approach with an income approach that considers discounted cash flows to determine fair value less costs of disposal. The discounted cash flow model involves significant judgment with respect to estimating cash flows (based on market participant assumptions) and the appropriate discount rate.

New IFRS pronouncements not yet adopted

Financial instruments

The final version of IFRS 9, " Financial Instruments ", was issued in July 2014 and will replace IAS 39, " Financial Instruments: Recognition and Measurement ". IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements relating to hedge accounting representing a new hedge accounting model have also been added to IFRS 9. The new standard is effective for annual periods beginning on or after January 1, 2018, and must be applied retrospectively. The company will adopt this new standard on September 1, 2018. The company is currently assessing the impact that the new standard will have on its consolidated financial statements.
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Revenue from contracts with customers

IFRS 15, " Revenue from Contracts with Customers ", was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The company is currently assessing the impact that the new standard will have on its consolidated financial statements and whether or not early adopt the new standard.

Leases

IFRS 16, " Leases ", was issued in January 2016.   IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e., the customer (lessee) and the supplier (lessor). IFRS 16 will supersede IAS 17, "Leases", and related Interpretations. This new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15, "Revenue from Contracts with Customers", is also applied. The company has not yet assessed the impact that the new standard will have on its consolidated financial statements.


3
Restructuring Charges

In the fourth quarter of fiscal 2015, the company implemented a restructuring plan to align its cost structure to the challenging market environment. This plan resulted in one-time severance expenses of $1,637,000 for employees laid off during the fourth quarter of 2015 (notes 10 and 16). These expenses were fully paid in fiscal 2016.


4
Capital Disclosures

The company is not subject to any external restrictions on its capital.

The company's objectives when managing capital are:

·
To maintain a flexible capital structure that optimizes the cost of capital at acceptable risk;
·
To sustain future development of the company, including research and development activities, market development and potential acquisitions of complementary businesses or products; and
·
To provide the company's shareholders with an appropriate return on their investment.

No changes were made to the objectives and policies during the years ended August 31, 2015 and 2016.

The company defines its capital as shareholders' equity, excluding accumulated other comprehensive loss. The capital of the company amounted to $221,232,000 and $229,975,000 as at August 31, 2015 and 2016 respectively.
 

 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
5
Financial Instruments

The following tables summarize financial instruments by category:
 

   
As at August 31, 2016
 
                               
   
Loans and
receivable
   
Available
for sale
   
Other
financial
liabilities
   
Derivatives
used for
hedging
   
Total
 
                               
Financial assets
                             
Cash
 
$
43,208
   
$
   
$
   
$
   
$
43,208
 
Short-term investments
 
$
   
$
4,087
   
$
   
$
   
$
4,087
 
Accounts receivable
 
$
45,467
   
$
   
$
   
$
   
$
45,467
 
Other assets
 
$
35
   
$
   
$
   
$
   
$
35
 
Forward exchange contracts
 
$
   
$
   
$
   
$
980
   
$
980
 
Financial liabilities
                                       
Accounts payable and accrued liabilities
 
$
   
$
   
$
36,099
   
$
   
$
36,099
 
Forward exchange contracts
 
$
   
$
   
$
   
$
1,120
   
$
1,120
 

 
   
As at August 31, 2015
 
                               
   
Loans and
receivable
   
Available
for sale
   
Other
financial
liabilities
   
Derivatives
used for
hedging
   
Total
 
                               
Financial assets
                             
Cash
 
$
25,864
   
$
   
$
   
$
   
$
25,864
 
Short-term investments
 
$
   
$
1,487
   
$
   
$
   
$
1,487
 
Accounts receivable
 
$
48,369
   
$
   
$
   
$
   
$
48,369
 
Other assets
 
$
103
   
$
   
$
   
$
   
$
103
 
Financial liabilities
                                       
Accounts payable and accrued liabilities
 
$
   
$
   
$
29,029
   
$
   
$
29,029
 
Forward exchange contracts
 
$
   
$
   
$
   
$
4,154
   
$
4,154
 

Fair value

Cash, accounts receivable and accounts payable and accrued liabilities are financial instruments whose carrying values approximate their fair values due to their short-term maturities. The fair value of other assets approximates their carrying value due to their relatively short-term maturities.

The fair value of derivative and non-derivative financial assets and liabilities measured at fair value by level of hierarchy is as follows:
 
   
As at August 31, 2016
   
As at August 31, 2015
 
   
Level 1
   
Level 2
   
Level 1
   
Level 2
 
Financial assets
                       
Short-term investments
 
$
4,087
   
$
   
$
1,487
   
$
 
Forward exchange contracts
 
$
   
$
980
   
$
   
$
 
                                 
Financial liabilities
                               
Forward exchange contracts
 
$
   
$
1,120
   
$
   
$
4,154
 
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Market risk

Currency risk

The functional currency of the company is the Canadian dollar. The company is exposed to a currency risk as a result of its export sales of products manufactured in Canada, China and Finland, the majority of which are denominated in US dollars and euros. This risk is partially hedged by forward exchange contracts and certain cost of sales and operating expenses (US dollars and euros). In addition, the company is exposed to a currency risk as a result of its research and development activities in India (Indian rupees). This risk is partially hedged by forward exchange contracts. Forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

As at August 31, 2015 and 2016, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized as follows:

US dollars – Canadian dollars

Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
             
As at August 31, 2015
           
September 2015 to August 2016
 
$
20,200
     
1.1180
 
September 2016 to August 2017
   
8,000
     
1.1530
 
September 2017 to December 2017
   
1,600
     
1.2135
 
Total
 
$
29,800
     
1.1326
 
                 
As at August 31, 2016
               
September 2016 to August 2017
 
$
22,200
     
1.2784
 
September 2017 to August 2018
   
9,900
     
1.3367
 
September 2018 to December 2018
   
1,900
     
1.3639
 
Total
 
$
34,000
     
1.3002
 
 
US dollars – Indian rupees

Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
             
As at August 31, 2015
           
September 2015 to July 2016
 
$
3,900
     
66.41
 
                 
As at August 31, 2016
               
September 2016 to August 2017
 
$
3,800
     
70.92
 
 
The carrying amount of forward exchange contracts is equal to fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net losses of $4,154,000 and $140,000 as at August 31, 2015 and 2016.
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
As at August 31, 2016, forward exchange contracts in the amount of $635,000 are presented as current assets in other accounts receivable; forward exchange contracts in the amount of $345,000 are presented as long-term assets in other long-term assets; forward exchange contracts in the amount of $1,075,000 are presented as current liabilities in accounts payable; and accrued liabilities and forward exchange contracts in the amount of $45,000 are presented as long-term liabilities in other long-term liabilities in the balance sheet. Forward exchange contracts of $277,000, included in accounts payable and accrued liabilities, for which related hedged sales are recognized, are recorded in the consolidated statement of earnings. Otherwise, other forward exchange contracts are not yet recorded in the consolidated statement of earnings and are recorded in other comprehensive income.

As at August 31, 2015, forward exchange contracts in the amount of $3,460,000 were presented as current liabilities in accounts payable and accrued liabilities, and forward exchange contracts in the amount of $694,000 were presented as long-term liabilities in other long-term liabilities in the balance sheet.

Based on the portfolio of forward exchange contracts as at August 31, 2016, the company estimates that the portion of net unrealized losses on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings over the next 12 months, amounts to $163,000.

For the years ended August 31, 2014, 2015 and 2016, the company recorded within its sales the following foreign exchange losses on forward exchange contracts:

   
Years ended August 31,
 
   
2016
   
2015
   
2014
 
                   
Losses on forward exchange contracts
 
$
2,651
   
$
2,562
   
$
909
 

The following table summarizes significant derivative and non-derivative financial assets and liabilities that are subject to currency risk as at August 31, 2015 and 2016 and for which such risk is charged to earnings:

   
As at August 31,
 
   
2016
   
2015
 
                         
   
Carrying/nominal
amount (in thousands
of US dollars)
   
Carrying/nominal
amount (in thousands
of euros)
   
Carrying/nominal
amount (in thousands
of US dollars)
   
Carrying/nominal
amount (in thousands
of euros)
 
                         
Financial assets
                       
Cash
 
$
13,090
   
2,927
   
$
9,226
   
3,448
 
Accounts receivable
   
30,141
     
5,963
     
37,019
     
4,488
 
     
43,231
     
8,890
     
46,245
     
7,936
 
Financial liabilities
                               
Accounts payable and accrued liabilities
   
14,251
     
1,081
     
12,873
     
1,047
 
Forward exchange contracts (nominal value)
   
4,000
     
     
3,800
     
 
     
18,251
     
1,081
     
16,673
     
1,047
 
Net exposure
 
$
24,980
   
7,809
   
$
29,572
   
6,889
 

In addition to these assets and liabilities, the company has derivative financial liabilities for its outstanding forward exchange contracts in the amount (nominal value) of $29,900,000 and $33,800,000 as at August 31, 2015 and 2016 respectively for which the currency risk is charged to other comprehensive income.

The value of the Canadian dollar compared to the US dollar was CA$1.3157 = US$1.00 and CA$1.3116 = US$1.00 as at August 31, 2015 and 2016 respectively.

The value of the Canadian dollar compared to the euro was CA$1.4755 = €1.00 and CA$1.4601 = €1.00 as at August 31, 2015 and 2016 respectively.
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
The following sensitivity analysis summarizes the effect that a change in the value of the Canadian dollar (compared to the US dollar and euro) on derivative and non-derivative financial assets and liabilities denominated in US dollars and euros would have on net earnings, net earnings per diluted share and comprehensive income, based on the foreign exchange rates as at August 31, 2015 and 2016:

·
An increase (decrease) of 10% in the period-end value of the Canadian dollar compared to the US dollar would decrease (increase) net earnings by $2,677,000, or $0.05 per diluted share, and $2,342,000, or $0.04 per diluted share, as at August 31, 2015 and 2016 respectively.

·
An increase (decrease) of 10% in the period-end value of the Canadian dollar compared to the euro would decrease (increase) net earnings by $834,000, or $0.01 per diluted share, and $830,000 or $0.02 per diluted share, as at August 31, 2015 and 2016 respectively.

·
An increase (decrease) of 10% in the period-end value of the Canadian dollar compared to the US dollar would increase (decrease) other comprehensive income by $2,066,000 and $2,176,000 as at August 31, 2015 and 2016 respectively.

The impact of the change in the value of the Canadian dollar compared to the US dollar and the euro on these derivative and non-derivative financial assets and liabilities is recorded in the foreign exchange gain or loss line item in the consolidated statements of earnings, except for outstanding forward contracts, whose impact is recorded in other comprehensive income. The change in the value of the Canadian dollar compared to the US dollar and the euro also affects the company's balances of income tax recoverable or payable, as well as deferred income tax assets and liabilities denominated in US dollars and euros; this may result in additional and significant foreign exchange gains or losses. However, these tax-related assets and liabilities are not considered financial instruments and are therefore excluded from the sensitivity analysis above. The foreign exchange rate fluctuations also flow through the consolidated statements of earnings line items, as a significant portion of the company's cost of sales and operating expenses are denominated in Canadian dollars, euros and Indian rupees, and the company reports its results in US dollars; that effect is not reflected in the sensitivity analysis above.

Interest rate risk

The company has limited exposure to interest rate risk. The company is mainly exposed to interest rate risks through its cash and short-term investments.

Cash

As at August 31, 2015 and 2016, the company's cash balances included an amount of $10,783,000 and $23,277,000 respectively that bears interest at an annual rate of 1.0% and 1.2% respectively.

Short-term investments

Short-term investments consist of the following:
   
As at August 31
 
   
2016
   
2015
 
             
Term deposit denominated in Canadian dollars, bearing interest at an annual rate of 1.5%, maturing in May 2017
 
$
2,668
   
$
 
Term deposits denominated in Indian rupees, bearing interest at annual rates of 6.0% to 7.3% in 2016 and 4.5% to 8.5% in 2015, maturing on different dates between November 2016 and October 2018 in 2016 and November 2015 and October 2018 in 2015
   
1,419
     
1,487
 
   
$
4,087
   
$
1,487
 
 
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Due to their short-term maturity, the company's short-term investments are not subject to a significant fair value interest rate risk. Accordingly, changes in fair value have been nominal to the degree that amortized cost approximates the fair value. Any change in the fair value of the company's short-term investments, all of which are classified as available for sale, is recorded in other comprehensive income.

Other financial instruments

Accounts receivable, other assets and accounts payable and accrued liabilities are non-interest-bearing financial assets and liabilities.

Credit risk

Financial instruments that potentially subject the company to credit risk consist of cash, short-term investments, accounts receivable, other assets and forward exchange contracts (with a positive fair value). As at August 31, 2016, the company's short-term investments consist of debt instruments issued by high-credit quality corporations. These debt instruments are not expected to be affected by a significant credit risk. The company's cash and forward exchange contracts are held with or issued by high-credit quality financial institutions; therefore, the company considers the risk of non-performance on these instruments to be limited.

Generally, the company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended to customers following an evaluation of creditworthiness. In addition, the company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Allowance for doubtful accounts amounted to $2,935,000 and $3,752,000 as at August 31, 2015 and 2016 respectively.

For the years ended August 31, 2014, 2015 and 2016, no customer represented more than 10% of sales.

The following table summarizes the age of trade accounts receivable:

   
As at August 31,
 
   
2016
   
2015
 
             
Current
 
$
38,411
   
$
36,723
 
Past due, 0 to 30 days
   
1,286
     
5,164
 
Past due, 31 to 60 days
   
868
     
1,027
 
Past due, more than 60 days, net of allowance for doubtful accounts of $2,935 and $3,752 as at August 31, 2015 and 2016, respectively
   
2,428
     
3,071
 
   
$
42,993
   
$
45,985
 

Changes in the allowance for doubtful accounts are as follows:

   
Years ended August 31,
 
   
2016
   
2015
 
             
Balance – Beginning of year
 
$
2,935
   
$
1,876
 
Addition charged to earnings
   
817
     
1,107
 
Write-off of uncollectible accounts
 
     
(48
)
Balance – End of year
 
$
3,752
   
$
2,935
 
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Liquidity risk

Liquidity risk is defined as the potential that the company cannot meet its obligations as they become due.

The following tables summarize the contractual maturity of the company's derivative and non-derivative financial liabilities:

   
As at August 31, 2016
 
   
0-12
months
   
13-24
months
   
25-36
months
 
                   
Accounts payable and accrued liabilities
 
$
36,099
   
$
   
$
 
Forward exchange contracts
                       
Outflow
   
26,000
     
9,900
     
1,900
 
Inflow
   
(25,653
)
   
(10,089
)
   
(1,976
)
Total
 
$
36,446
   
$
(189
)
 
$
(76
)

   
As at August 31, 2015
 
   
0-12
months
   
13-24
months
   
25-36
months
 
                   
Accounts payable and accrued liabilities
 
$
29,029
   
$
   
$
 
Forward exchange contracts
                       
Outflow
   
24,100
     
8,000
     
1,600
 
Inflow
   
(21,082
)
   
(7,011
)
   
(1,476
)
Total
 
$
32,047
   
$
989
   
$
124
 
 
As at August 31, 2016, the company had $47,295,000 in cash and short-term investments and $45,467,000 in accounts receivable. In addition to these financial assets, the company has unused available lines of credit totaling $14,932,000 for working capital and other general corporate purposes, including potential acquisitions and its share repurchase program as well as unused lines of credit totaling $21,567,000 for foreign currency exposure related to its forward exchange contracts (note 9).


6
Inventories

   
As at August 31,
 
   
2016
   
2015
 
             
Raw materials
 
$
18,692
   
$
15,972
 
Work in progress
   
1,067
     
998
 
Finished goods
   
13,245
     
10,981
 
   
$
33,004
   
$
27,951
 

The cost of sales comprised almost exclusively the amount of inventory recognized as an expense during the reporting years, and amounts to $90,445,000, $88,098,000 and $89,058,000 for the years ended August 31, 2014, 2015 and 2016 respectively, including related depreciation and amortization, which are shown separately in operating expenses (note 16).
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Inventory write-down amounted to $4,600,000, $4,066,000 and $3,678,000 for the years ended August 31, 2014, 2015 and 2016 respectively.


7
Property, Plant and Equipment

   
Land and land
improvements
   
Buildings
   
Equipment
   
Leasehold
improvements
   
Total
 
                               
Cost as at September 1, 2014
 
$
5,222
   
$
35,597
   
$
38,970
   
$
2,442
   
$
82,231
 
Additions
 
     
153
     
3,638
     
1,443
     
5,234
 
Disposals
 
     
(12
)
   
(4,999
)
   
(753
)
   
(5,764
)
Foreign currency translation adjustment
   
(913
)
   
(6,266
)
   
(6,400
)
   
(338
)
   
(13,917
)
Cost as at August 31, 2015
   
4,309
     
29,472
     
31,209
     
2,794
     
67,784
 
Additions
 
     
201
     
3,626
     
226
     
4,053
 
Disposals
 
     
(11
)
   
(4,280
)
   
(121
)
   
(4,412
)
Foreign currency translation adjustment
   
13
     
93
     
162
     
19
     
287
 
Cost as at August 31, 2016
 
$
4,322
   
$
29,755
   
$
30,717
   
$
2,918
   
$
67,712
 
                                         
Accumulated depreciation as at September 1, 2014
 
$
1,327
   
$
6,984
   
$
29,888
   
$
1,252
   
$
39,451
 
Depreciation for the year
   
51
     
485
     
3,919
     
380
     
4,835
 
Disposals
 
     
(12
)
   
(4,999
)
   
(753
)
   
(5,764
)
Foreign currency translation adjustment
   
(236
)
   
(1,514
)
   
(4,595
)
   
(88
)
   
(6,433
)
Accumulated depreciation as at August 31, 2015
   
1,142
     
5,943
     
24,213
     
791
     
32,089
 
Depreciation for the year
   
45
     
639
     
2,811
     
319
     
3,814
 
Disposals
 
     
(11
)
   
(4,258
)
   
(121
)
   
(4,390
)
Foreign currency translation adjustment
   
5
     
31
     
136
     
49
     
221
 
Accumulated depreciation as at August 31, 2016
 
$
1,192
   
$
6,602
   
$
22,902
   
$
1,038
   
$
31,734
 
                                         
Net carrying value as at:
                                       
August 31, 2015
 
$
3,167
   
$
23,529
   
$
6,996
   
$
2,003
   
$
35,695
 
August 31, 2016
 
$
3,130
   
$
23,153
   
$
7,815
   
$
1,880
   
$
35,978
 

As at August 31, 2015 and 2016, unpaid additions to property, plant and equipment amounted to $377,000 and $499,000 respectively.
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
8
Intangible Assets and Goodwill

Intangible assets

   
Core
technology
   
Customer
relationships
   
Brand name
   
Software
   
Total
 
                               
Cost as at September 1, 2014
 
$
12,686
   
$
5,979
   
$
596
   
$
12,925
   
$
32,186
 
Additions
   
153
   
   
     
567
     
720
 
Disposals
   
(93
)
 
   
     
(652
)
   
(745
)
Foreign currency translation adjustment
   
(2,225
)
   
(1,044
)
   
(104
)
   
(2,112
)
   
(5,485
)
Cost as at August 31, 2015
   
10,521
     
4,935
     
492
     
10,728
     
26,676
 
Additions
   
147
   
   
     
313
     
460
 
Disposals
   
(6,414
)
   
(4,935
)
   
(492
)
   
(310
)
   
(12,151
)
Foreign currency translation adjustment
   
48
   
   
     
112
     
160
 
Cost as at August 31, 2016
 
$
4,302
   
$
   
$
   
$
10,843
   
$
15,145
 
                                         
Accumulated amortization as at September 1, 2014
 
$
8,062
   
$
5,346
   
$
534
   
$
10,951
   
$
24,893
 
Amortization for the year
   
808
     
569
     
57
     
1,449
     
2,883
 
Disposals
   
(93
)
 
   
     
(652
)
   
(745
)
Foreign currency translation adjustment
   
(865
)
   
(980
)
   
(99
)
   
(2,507
)
   
(4,451
)
Accumulated amortization as at August 31, 2015
   
7,912
     
4,935
     
492
     
9,241
     
22,580
 
Amortization for the year
   
700
   
   
     
472
     
1,172
 
Disposals
   
(6,414
)
   
(4,935
)
   
(492
)
   
(297
)
   
(12,138
)
Foreign currency translation adjustment
   
109
   
   
     
31
     
140
 
Accumulated amortization as at August 31, 2016
 
$
2,307
   
$
   
$
   
$
9,447
   
$
11,754
 
                                         
Net carrying value as at:
                                       
August 31, 2015
 
$
2,609
   
$
   
$
   
$
1,487