EXFO Inc.
EXFO INC. (Form: 6-K, Received: 11/24/2017 09:48:11)
 


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


FORM 6-K


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

For the month of November 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
Independent Auditor's Report
Consolidated Balance Sheets
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 and Special Meeting of Shareholders
Form of Proxy
Management Proxy Circular
 
 
 
 
In November 2017, EXFO Inc., a Canadian corporation, issued its annual audited financial statements and management's discussion and analysis thereof for its fiscal year ended August 31, 2017. At the same time, it also issued a cover letter, its notice of its annual and special shareholders' meeting, its form of proxy and its management proxy circular. This report of Form 6-K sets forth said documents.

The Form 6-K containing the Corporation's annual audited financial statements and management's discussion and analysis for its fiscal year ended August 31, 2017, a cover letter, its notice of annual and special shareholders' meeting, its form of proxy and its management proxy circular 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.

 
 
 
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/ Philippe Morin
Name:       Philippe Morin
Title:         Chief Executive Officer
   


Date: November 24, 2017
 
 
2

 
 
Independent Auditor's Report

To the Shareholders of
EXFO Inc.


We have completed integrated audits of EXFO Inc.'s and its subsidiaries' 2017, 2016 and 2015 consolidated financial statements and their internal control over financial reporting as at August 31, 2017. 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, which comprise the consolidated balance sheets as at August 31, 2017 and August 31, 2016 and the consolidated statements of earnings, comprehensive income (loss), changes in shareholder's equity and cash flows   for each of the three years in the period ended August 31, 2017, 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.

 
PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.
1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Quebec, Canada H3B 4Y1
T: +1 514 205 5000, F: +1 514 876 1502

"PwC" refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership.
 
 
 
 
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, 2017 and August 31, 2016 and their financial performance and their cash flows for each of the three years in the period ended August 31, 2017 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

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, 2017, 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" included in Item 15b) of the Annual Report on Form 20-F for the fiscal year ended August 31, 2017.

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.

As described in the Management's Annual Report on Internal Control over Financial Reporting, management has excluded Ontology Partners Limited from its assessment of internal control over financial reporting as of Augusts 31, 2017, because it was acquired by the company in a purchase business combination during 2017. We have also excluded Ontology Partners Limited from our audit of internal control over financial reporting. Ontology Partners Limited is a wholly-owned subsidiary whose total assets and total revenues represent 6% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended August 31, 2017.

Opinion
In our opinion, EXFO Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as at August 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.




Montréal, Quebec
November 24, 2017
 
 
-------------------------------------------------
1 CPA auditor, CA, public accountancy permit No. A119427
 
 
 
 
EXFO Inc.
Consolidated Balance Sheets

(in thousands of US dollars)

   
As at August 31,
 
   
2017
   
2016
 
Assets
           
             
Current assets
           
Cash
 
$
38,435
   
$
43,208
 
Short-term investments (note 6)
   
775
     
4,087
 
Accounts receivable (note 6)
               
Trade
   
41,130
     
42,993
 
Other
   
3,907
     
2,474
 
Income taxes and tax credits recoverable (note 19)
   
4,955
     
4,208
 
Inventories (note 7)
   
33,832
     
33,004
 
Prepaid expenses
   
4,202
     
3,099
 
                 
     
127,236
     
133,073
 
                 
Tax credits recoverable (note 19)
   
38,111
     
34,594
 
Property, plant and equipment (notes 8 and 21)
   
40,132
     
35,978
 
Intangible assets (notes 9 and 21)
   
11,183
     
3,391
 
Goodwill (notes 9 and 21)
   
35,077
     
21,928
 
Deferred income tax assets (note 19)
   
6,555
     
8,240
 
Other assets
   
947
     
589
 
                 
   
$
259,241
   
$
237,793
 
Liabilities
               
                 
Current liabilities
               
Accounts payable and accrued liabilities (note 11)
 
$
36,776
   
$
37,174
 
Provisions (note 11)
   
3,889
     
299
 
Income taxes payable
   
663
     
971
 
Deferred revenue
   
11,554
     
9,486
 
                 
     
52,882
     
47,930
 
                 
Deferred revenue
   
6,257
     
5,530
 
Deferred income tax liabilities (note 19)
   
3,116
     
2,857
 
Other liabilities
   
196
     
75
 
                 
     
62,451
     
56,392
 
Commitments (notes 12 and 22)
               
                 
Shareholders' equity
               
Share capital (note 13)
   
90,411
     
85,516
 
Contributed surplus
   
18,184
     
18,150
 
Retained earnings
   
127,160
     
126,309
 
Accumulated other comprehensive loss (note 14)
   
(38,965
)
   
(48,574
)
                 
     
196,790
     
181,401
 
                 
   
$
259,241
   
$
237,793
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
On behalf of the Board
 
/ s/ Philippe Morin
PHILIPPE MORIN
Chief Executive Officer
 
 
/s/ Claude Séguin
CLAUDE SÉGUIN
Chairman, Audit Committee
 
 
 
 
EXFO Inc.
Consolidated Statements of Earnings

(in thousands of US dollars, except share and per share data)

 
   
Years ended August 31,
 
   
2017
   
2016
   
2015
 
                   
Sales (note 21 )
 
$
243,301
   
$
232,583
   
$
222,089
 
                         
Cost of sales (1) (note 17 )
   
94,329
     
87,066
     
85,039
 
Selling and administrative (2) (note 17)
   
86,256
     
82,169
     
82,200
 
Net research and development   (note 17)
   
47,168
     
42,687
     
44,003
 
Depreciation of property, plant and equipment (note 17)
   
3,902
     
3,814
     
4,835
 
Amortization of intangible assets (note 17)
   
3,289
     
1,172
     
2,883
 
Change in fair value of cash contingent consideration (note 3)
   
(383
)
   
     
 
Interest and other (income) expense
   
303
     
(828
)
   
(155
)
Foreign exchange (gain) loss
   
978
     
(161
)
   
(7,212
)
Unusual charge
   
     
     
603
 
                         
Earnings before income taxes
   
7,459
     
16,664
     
9,893
 
                         
Income taxes (note 19 )
   
6,608
     
7,764
     
5,036
 
                         
Net earnings for the year
 
$
851
   
$
8,900
   
$
4,857
 
                         
Basic net earnings per share
 
$
0.02
   
$
0.17
   
$
0.09
 
                         
Diluted net earnings per share
 
$
0.02
   
$
0.16
   
$
0.08
 
                         
Basic weighted average number of shares outstanding (000's)
   
54,423
     
53,863
     
56,804
 
                         
Diluted weighted average number of shares outstanding (000's) (note 20 )
   
55,555
     
54,669
     
57,457
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)
Selling and administrative is exclusive of a one-time charge relating to an unusual bad debt expense in fiscal 2015.
 
 
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,
 
   
2017
   
2016
   
2015
 
                   
Net earnings for the year
 
$
851
   
$
8,900
   
$
4,857
 
Other comprehensive income (loss), net of income taxes
                       
Items that will not be reclassified subsequently to net earnings
                       
Foreign currency translation adjustment
   
8,262
     
707
     
(39,175
)
Items that may be reclassified subsequently to net earnings
                       
Unrealized gains/losses on forward exchange contracts
   
1,403
     
862
     
(5,583
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings
   
423
     
2,797
     
2,107
 
Deferred income tax effect of gains/losses on forward exchange contracts
   
(479
)
   
(935
)
   
905
 
                         
Other comprehensive income (loss)
   
9,609
     
3,431
     
(41,746
)
                         
Comprehensive income (loss) for the year
 
$
10,460
   
$
12,331
   
$
(36,889
)
 
 
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, 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 13)
   
(26,827
)
   
1,333
     
     
     
(25,494
)
Reclassification of stock-based compensation costs (note 13)
   
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 13)
   
(1,768
)
   
217
     
     
     
(1,551
)
Reclassification of stock-based compensation costs (note 13)
   
1,239
     
(1,239
)
   
     
     
 
Stock-based compensation costs
   
     
1,394
     
     
     
1,394
 
Net earnings for the year
   
     
     
8,900
     
     
8,900
 
Other comprehensive income
                                       
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
 

   
Year ended August 31, 2017
 
   
Share
capital
   
Contributed
surplus
   
Retained
earnings
   
Accumulated
other
comprehensive
loss
   
Total
shareholders'
equity
 
                               
Balance as at September 1, 2016
 
$
85,516
   
$
18,150
   
$
126,309
   
$
(48,574
)
 
$
181,401
 
Issuance of share capital (note 13)
   
3,490
     
     
     
     
3,490
 
Reclassification of stock-based compensation costs (note 13)
   
1,405
     
(1,405
)
   
     
     
 
Stock-based compensation costs
   
     
1,439
     
     
     
1,439
 
Net earnings for the year
   
     
     
851
     
     
851
 
Other comprehensive income
                                       
Foreign currency translation adjustment
   
     
     
     
8,262
     
8,262
 
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $479
   
     
     
     
1,347
     
1,347
 
                                         
Total comprehensive income for the year
                                   
10,460
 
                                         
Balance as at August 31, 2017
 
$
90,411
   
$
18,184
   
$
127,160
   
$
(38,965
)
 
$
196,790
 
 
 
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,
 
   
2017
   
2016
   
2015
 
Cash flows from operating activities
                 
Net earnings for the year
 
$
851
   
$
8,900
   
$
4,857
 
Add (deduct) items not affecting cash
                       
Stock-based compensation costs
   
1,477
     
1,378
     
1,295
 
Depreciation and amortization
   
7,191
     
4,986
     
7,718
 
Change in fair value of cash contingent consideration
   
(383
)
   
     
 
Unusual charge
   
     
     
603
 
Deferred revenue
   
1,723
     
4,238
     
396
 
Deferred income taxes
   
1,054
     
1,578
     
403
 
Changes in foreign exchange gain/loss
   
1,096
     
(332
)
   
(3,842
)
     
13,009
     
20,748
     
11,430
 
Changes in non-cash operating items
                       
Accounts receivable
   
3,955
     
2,682
     
(10,828
)
Income taxes and tax credits
   
(2,386
)
   
939
     
(2,062
)
Inventories
   
911
     
(4,713
)
   
820
 
Prepaid expenses
   
(918
)
   
(280
)
   
(982
)
Other assets
   
(121
)
   
170
     
61
 
Accounts payable and accrued liabilities and provisions
   
(1,745
)
   
4,882
     
8,132
 
Other liabilities
   
165
     
(65
)
   
(87
)
     
12,870
     
24,363
     
6,484
 
Cash flows from investing activities
                       
Additions to short-term investments
   
(2,910
)
   
(3,546
)
   
(20,067
)
Proceeds from disposal and maturity of short-term investments
   
6,374
     
873
     
23,685
 
Purchases of capital assets (notes 8 and 9)
   
(7,175
)
   
(4,356
)
   
(5,933
)
Business combinations, net of cash acquired (note 3)
   
(12,792
)
   
     
 
     
(16,503
)
   
(7,029
)
   
(2,315
)
Cash flows from financing activities
                       
Repayment of long-term debt (note 3)
   
(1,480
)
 
   
 
Redemption of share capital (note 13)
   
     
(1,551
)
   
(25,494
)
     
(1,480
)
   
(1,551
)
   
(25,494
)
                         
Effect of foreign exchange rate changes on cash
   
340
     
1,561
     
(6,932
)
                         
Change in cash
   
(4,773
)
   
17,344
     
(28,257
)
Cash – Beginning of year
   
43,208
     
25,864
     
54,121
 
Cash – End of year
 
$
38,435
   
$
43,208
   
$
25,864
 
                         
Supplementary information
                       
Income taxes paid
 
$
2,866
   
$
2,015
   
$
1,491
 
 
 
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) develops, manufactures and markets smarter network test, monitoring and analytics solutions for the world's leading communications service providers, network equipment manufacturers and webscale companies.

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 November 24, 2017.


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, available-for-sale investments and the contingent liability.

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 sales of goods, which represent 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 shareholders' equity.

Foreign currency translation

(a)
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.

(b)
Foreign operations

Each foreign operation determines its own functional currency and items included in the financial statements of each foreign operation are measured using that functional currency. The financial statements of each foreign operation that has a functional currency different from the company are translated into Canadian dollars 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 shareholders' equity.

 
 
 
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 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
Forward exchange contracts
Derivatives used for hedging

Financial liabilities

Accounts payable and accrued liabilities
Other financial liabilities
Contingent liability
Financial liabilities at fair value through profit or loss
Forward exchange contracts
Derivatives used for hedging

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   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.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss are non-derivative financial liabilities initially measured at fair value plus transaction costs and are subsequently measured at fair value. After their initial recognition, any changes in their fair value are reflected 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)

 
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 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 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:

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, forward exchange contracts and contingent liability 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. The company's contingent liability is classified within level 3 of the fair value hierarchy because it is valued using unobservable inputs such as expected future sales of Ontology.

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 consolidated 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.
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
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.

Intangible assets, goodwill and amortization

Intangible assets

Intangible assets with finite useful lives primarily include the cost of core technology, customer relationships 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 one to five years for core technology, five years for customer relationships, 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.
 

 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

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 mainly comprise salaries and related expenses, material costs as well as fees paid to third-party consultants. As at August 31, 2016 and 2017, 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.

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, 2016 and 2017, 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.

 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
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.

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.

 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
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 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 is 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.

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, 2015, 2016 and 2017. Entity-wide disclosures are presented in note 21.

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.

 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

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.

(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 19).

 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
(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.

(e)
Purchase price allocation in business combinations

The fair value of the total consideration transferred in business combinations (purchase price) must be allocated based on estimated fair value of acquired net assets at the date of acquisition. Allocating the purchase price requires management to make estimates and judgments to determine assets acquired and liabilities assumed, useful lives of certain long-lived assets and the respective fair value of assets acquired and liabilities assumed; this may require the use of unobservable inputs, including management's expectations of future revenue growth, operating costs and profit margins as well as discount rates.

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 has performed an assessment to identify significant areas of impact, if any, between the company's current accounting treatment under IAS 18, " Revenue " and the new requirements of IFRS 15. Based on the assessments to date, the company anticipates that the main areas of impact will relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangement that contain customer acceptance clauses, and the sale of licenses that provide customers with the "right to use" the company's intellectual property. The company will adopt this new standard on September 1, 2018 using the modified retrospective method, with the cumulative effect of the initial application of the standard recognized as an adjustment to the opening balance of retained earnings as at the date of initial application. The company will apply this standard retrospectively only to contracts that are not completed at the date of initial application.

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.

Foreign Currency Transactions and Advance Consideration

IFRIC 22, " Foreign Currency Transactions and Advance Consideration ", was issued in December 2016. IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The company will adopt this interpretation on September 1, 2018 and is currently assessing the impact that it will have on its consolidated financial statements.

Uncertainty over Income Tax Treatments

IFRIC 23, " Uncertainty over Income Tax Treatment ", was issued in June 2017. IFRIC 23 provides guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept the company's tax treatments. A company is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. The company will adopt this interpretation on September 1, 2019 and is currently assessing the impact that it 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)

 
3
Business Combinations

Absolute Analysis Inc.

On October 31, 2016, the company acquired substantially all the assets of Absolute Analysis Inc. (Absolute), a privately held company located in the United States, supplying solutions for radio frequency testing of fiber-based radio access networks. The acquisition-date fair value of the total consideration transferred amounted to $8,490,000 and consisted of $5,000,000 in cash and the issuance of 793,070 subordinate voting shares valued at $3,490,000.

This acquisition was accounted for by applying the acquisition method as required by IFRS 3, " Business Combinations ", and the requirements of IFRS 10, " Consolidated Financial Statements "; consequently, the fair value of the total consideration transferred was allocated to the assets acquired and liability assumed based on management's estimate of their fair value as at the acquisition date. The results of operations of the acquired business have been included in the consolidated financial statements of the company since October 31, 2016, being the date of acquisition.

During the second quarter of fiscal 2017, the company completed the detailed valuation and finalized the allocation of the purchase price.

The fair value of the total consideration transferred was allocated based on a final estimate of fair value of acquired net assets at the date of acquisition as follows:

Assets acquired
     
Core technology
 
$
4,130
 
Other assets
   
236
 
     
4,366
 
Liability assumed
       
Deferred income taxes
   
279
 
Net identifiable assets acquired
   
4,087
 
Goodwill
   
4,403
 
Fair value of the total consideration transferred
 
$
8,490
 

Intangible assets are amortized on a straight-line basis over their estimated useful lives of one to five years.

Acquired goodwill mainly represents synergies with the company's products as well as the Absolute acquired workforce. Acquired goodwill is deductible for tax purposes. Goodwill is allocated to the EXFO cash generating unit.

Ontology Partners Limited

On March 2, 2017, the company acquired all of the issued and outstanding shares of Ontology Partners Limited (Ontology), a privately held company located in the United Kingdom, a supplier of real-time network topology discovery and service-chain mapping. The acquisition-date fair value of the total consideration transferred amounted to $9,180,000 and consisted of $7,780,000 in cash, net of Ontology's cash of $2,156,000 at the acquisition date, plus a cash contingent consideration based on certain sales volumes of Ontology products over the 12-month period following the acquisition, with an estimated fair value of $1,400,000 at the acquisition date.

This acquisition was accounted for by applying the acquisition method as required by IFRS 3, " Business Combinations ", and the requirements of IFRS 10, " Consolidated Financial Statements "; consequently, the fair value of the total consideration transferred was allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as at the acquisition date. The results of operations of the acquired business have been included in the consolidated financial statements of the company since March 2, 2017, being the date of acquisition.
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
During the fourth quarter of fiscal 2017, the company completed the detailed valuation and finalized the allocation of the purchase price; this resulted in an increase of goodwill of $650,000 and a corresponding decrease in intangible assets.

The fair value of the total consideration transferred was allocated based on a final estimate of fair value of acquired net assets at the date of acquisition as follows:

Assets acquired
     
Accounts receivable
 
$
1,701
 
Core technology
   
3,802
 
Customer relationships
   
1,607
 
Other assets
   
37
 
     
7,147
 
Liabilities assumed
       
Accounts payable and accrued liabilities
   
3,343
 
Deferred revenue
   
211
 
Long-term debt
   
1,480
 
Net identifiable assets acquired
   
2,113
 
Goodwill
   
7,067
 
Fair value of the total consideration transferred, net of cash acquired
 
$
9,180
 

Acquired intangible assets are amortized on a straight-line basis over their estimated useful life of five years.

Acquired goodwill mainly represents synergies with the company's products as well as Ontology acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the Ontology cash generating unit.

As at August 31, 2017, the fair value of the cash contingent consideration amounted to $1,092,000 with the change in its fair value being accounted for in the consolidated statement of earnings.


4
Restructuring Charges

In May 2017, the company implemented a restructuring plan to streamline its passive monitoring solutions portfolio. This plan resulted in severance expenses of $4,049,000 and inventory writeoffs of $1,030,000, for total restructuring charges of $5,079,000 during the year.

As at August 31, 2017, unpaid severance expenses amounted to $2,477,000, which are expected to be paid in fiscal 2018 (note 11).


5
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.
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
No changes were made to the objectives and policies during the years ended August 31, 2016 and 2017.

The company defines its capital as shareholders' equity, excluding accumulated other comprehensive loss. The capital of the company amounted to $229,975,000 and $235,755,000 as at August 31, 2016 and 2017 respectively.


6
Financial Instruments

The following tables summarize financial instruments by category:
 
   
As at August 31, 2017
 
                                     
   
Loans and
receivable
   
Available
for sale
   
Other
financial
liabilities
   
Financial
liabilities at
fair value
through profit
or loss
   
Derivatives
used for
hedging
   
Total
 
                                     
Financial assets
                                   
Cash
 
$
38,435
   
$
   
$
   
$
   
$
   
$
38,435
 
Short-term investments
 
$
   
$
775
   
$
   
$
   
$
   
$
775
 
Accounts receivable
 
$
43,340
   
$
   
$
   
$
   
$
   
$
43,340
 
Other assets
 
$
36
   
$
   
$
   
$
   
$
   
$
36
 
Forward exchange contracts
 
$
   
$
   
$
   
$
   
$
2,258
   
$
2,258
 
Financial liabilities
                                               
Accounts payable and accrued liabilities
 
$
   
$
   
$
36,776
   
$
   
$
   
$
36,776
 
Contingent liability
 
$
   
$
   
$
   
$
1,092
   
$
   
$
1,092
 

 
   
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
 
 
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.

 
 
 
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 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, 2017
   
As at August 31, 2016
 
   
Level 1
   
Level 2
   
Level 3
   
Level 1
   
Level 2
 
Financial assets
                             
Short-term investments
 
$
775
   
$
     
   
$
4,087
   
$
 
Forward exchange contracts
 
$
   
$
2,258
     
   
$
   
$
980
 
                                         
Financial liabilities
                                       
Forward exchange contracts
 
$
   
$
     
   
$
   
$
1,120
 
Contingent liability
 
$
   
$
     
1,092
   
$
   
$
 
 
Market risk

Currency risk

The functional currency of the company is the Canadian dollar. The company is exposed to 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 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, 2016 and 2017, 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, 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
 
                   
 
As at August 31, 2017
               
 
September 2017 to August 2018
 
$
18,300
     
1.3407
 
 
September 2018 to August 2019
   
10,900
     
1.3426
 
 
Total
 
$
29,200
     
1.3414
 

 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
US dollars – Indian rupees

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
As at August 31, 2016
           
 
September 2016 to August 2017
 
$
3,800
     
70.92
 
                   
 
As at August 31, 2017
               
 
September 2017 to August 2018
 
$
3,400
     
69.49
 
 
September 2018 to February 2019
   
1,600
     
67.26
 
 
Total
 
$
5,000
     
68.78
 
 
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 $140,000 and net gains of $2,258,000 as at August 31, 2016 and 2017 respectively.

As at August 31, 2017, forward exchange contracts in the amount of $1,697,000 are presented as current assets in other accounts receivable and forward exchange contracts in the amount of $561,000 are presented as long-term assets in other long-term assets in the balance sheet. Forward exchange contracts of $261,000, included in other accounts receivable, 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, 2016, forward exchange contracts in the amount of $635,000 were presented as current assets in other accounts receivable; forward exchange contracts in the amount of $345,000 were presented as long-term assets in other long-term assets; forward exchange contracts in the amount of $1,075,000 were presented as current liabilities in accounts payable and accrued liabilities; and forward exchange contracts in the amount of $45,000 were presented as long-term liabilities in other long-term liabilities in the consolidated balance sheet.

Based on the portfolio of forward exchange contracts as at August 31, 2017, the company estimates that the portion of net unrealized gains 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 $1,436,000.

For the years ended August 31, 2015, 2016 and 2017, the company recorded within its sales the following foreign exchange losses on forward exchange contracts:

   
Years ended August 31,
 
   
2017
   
2016
   
2015
 
                   
Losses on forward exchange contracts
 
$
468
   
$
2,651
   
$
2,562
 

 
 
 
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 table summarizes significant derivative and non-derivative financial assets and liabilities that are subject to currency risk as at August 31, 2016 and 2017 and for which such risk is charged to earnings:
 
   
As at August 31,
 
   
2017
   
2016
 
                         
   
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
 
$
20,120
   
6,235
   
$
13,090
   
2,927
 
Accounts receivable
   
28,420
     
6,164
     
30,141
     
5,963
 
     
48,540
     
12,399
     
43,231
     
8,890
 
Financial liabilities
                               
Accounts payable and accrued liabilities
   
12,447
     
2,725
     
14,251
     
1,081
 
Forward exchange contracts (nominal value)
   
3,600
   
     
4,000
     
 
     
16,047
     
2,725
     
18,251
     
1,081
 
Net exposure
 
$
32,493
   
9,674
   
$
24,980
   
7,809
 
 
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 $33,800,000 and $29,200,000 as at August 31, 2016 and 2017 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$1.3116 = US$1.00 and CA$1.2536 = US$1.00 as at August 31, 2016 and 2017 respectively.

The value of the Canadian dollar compared to the euro was CA$1.4601 = €1.00 and CA$1.4825 = €1.00 as at August 31, 2016 and 2017 respectively.

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, 2016 and 2017:

·
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 $2,342,000, or $0.04 per diluted share, and $2,726,000, or $0.05 per diluted share, as at August 31, 2016 and 2017 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 $830,000, or $0.02 per diluted share, and $1,025,000 or $0.02 per diluted share, as at August 31, 2016 and 2017 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 $2,176,000 and $2,744,000 as at August 31, 2016 and 2017 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 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, British pounds 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, 2016 and 2017, the company's cash balances included an amount of $23,277,000 and $6,681,000 respectively that bears interest at an annual rate of 1.2%.

Short-term investments

Short-term investments consist of the following:
 
   
As at August 31,
 
   
2017
   
2016
 
             
Term deposits denominated in Indian rupees, bearing interest at annual rates of 4.3% to 6.9% in 2017 and 6.0% to 7.3% in 2016, maturing on different dates between October 2017 and October 2018 in 2017 and November 2016 and October 2018 in 2016
 
$
775
   
$
1,419
 
Term deposit denominated in Canadian dollars, bearing interest at an annual rate of 1.5%, matured in May 2017
 
     
2,668
 
   
$
775
   
$
4,087
 
 
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, accounts payable and accrued liabilities and the contingent liability are non-interest-bearing financial assets and liabilities.

 

 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

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, 2017, 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 $3,752,000 and $2,960,000 as at August 31, 2016 and 2017 respectively.

For the year ended August 31, 2017, the company's top customer represented 10.1% of sales. For the years ended August 31, 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,
 
   
2017
   
2016
 
             
Current
 
$
35,100
   
$
38,411
 
Past due, 0 to 30 days
   
3,049
     
1,286
 
Past due, 31 to 60 days
   
1,289
     
868
 
Past due, more than 60 days, net of allowance for doubtful accounts of $3,752 and $2,960 as at August 31, 2016 and 2017, respectively
   
1,692
     
2,428
 
   
$
41,130
   
$
42,993
 

Changes in the allowance for doubtful accounts are as follows:

   
Years ended August 31,
 
   
2017
   
2016
 
             
Balance – Beginning of year
 
$
3,752
   
$
2,935
 
Addition charged to earnings
   
654
     
817
 
Writeoff of uncollectible accounts
   
(1,446
)
 
 
Balance – End of year
 
$
2,960
   
$
3,752
 

Liquidity risk

Liquidity risk is defined as the potential that the company cannot meet its obligations as they become due.
 
 
 
 
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 tables summarize the contractual maturity of the company's derivative and non-derivative financial liabilities:
 
   
As at August 31, 2017
 
   
0-12
months
   
13-24
months
 
             
Accounts payable and accrued liabilities
 
$
36,776
   
$
 
Contingent liability
   
1,092
     
 
Forward exchange contracts
               
Outflow
   
21,700
     
12,500
 
Inflow
   
(23,265
)
   
(13,357
)
Total
 
$
36,303
   
$
(857
)

 
   
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, 2017, the company had $39,210,000 in cash and short-term investments and $45,037,000 in accounts receivable. In addition to these financial assets, the company has unused available lines of credit totaling $15,424,000 for working capital and other general corporate purposes, including potential acquisitions as well as unused lines of credit totaling $25,676,000 for foreign currency exposure related to its forward exchange contracts (notes 10 and 22).


7
Inventories

   
As at August 31,
 
   
2017
   
2016
 
             
Raw materials
 
$
18,899
   
$
18,692
 
Work in progress
   
886
     
1,067
 
Finished goods
   
14,047
     
13,245
 
   
$
33,832
   
$
33,004
 

The cost of sales comprised almost exclusively the amount of inventory recognized as an expense during the reporting years, and amounts to $88,098,000, $89,058,000 and $98,503,000 for the years ended August 31, 2015, 2016 and 2017 respectively, including related depreciation and amortization, which are shown separately in operating expenses (note 17).

Inventory writedown amounted to $4,066,000, $3,678,000 and $3,259,000 for the years ended August 31, 2015, 2016 and 2017 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
Property, Plant and Equipment

   
Land and land
improvements
   
Buildings
   
Equipment
   
Leasehold
improvements
   
Total
 
                               
Cost as at September 1, 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
 
Additions
 
     
794
     
5,562
     
319
     
6,675
 
Business combinations (note 3)
 
   
     
130
   
     
130
 
Disposals
 
   
     
(2,568
)
   
(339
)
   
(2,907
)
Foreign currency translation adjustment
   
200
     
1,402
     
1,733
     
150
     
3,485
 
Cost as at August 31, 2017
 
$
4,522
   
$
31,951
   
$
35,574
   
$
3,048
   
$
75,095
 
                                         
Accumulated depreciation as at September 1, 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
 
Depreciation for the year
   
45
     
403
     
3,162
     
292
     
3,902
 
Disposals
 
   
     
(2,210
)
   
(339
)
   
(2,549
)
Foreign currency translation adjustment
   
58
     
328
     
1,353
     
137
     
1,876
 
Accumulated depreciation as at August 31, 2017
 
$
1,295
   
$
7,333
   
$
25,207
   
$
1,128
   
$
34,963
 
                                         
Net carrying value as at:
                                       
August 31, 2016
 
$
3,130
   
$
23,153
   
$
7,815
   
$
1,880
   
$
35,978
 
August 31, 2017
 
$
3,227
   
$
24,618
   
$
10,367
   
$
1,920
   
$
40,132
 

As at August 31, 2016 and 2017, unpaid additions to property, plant and equipment amounted to $499,000 and $522,000 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)

 
9
Intangible Assets and Goodwill

Intangible assets
 
   
Core
technology
   
Customer
relationships
   
Brand name
   
Software
   
Total
 
                               
Cost as at September 1, 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
 
Additions
 
   
   
     
912
     
912
 
Business combinations (note 3)
   
7,932
     
1,607
   
   
     
9,539
 
Disposals
   
(76
)
 
   
     
(407
)
   
(483
)
Foreign currency translation adjustment
   
735
     
82
   
     
553
     
1,370
 
Cost as at August 31, 2017
 
$
12,893
   
$
1,689
   
$
   
$
11,901
   
$
26,483
 
                                         
Accumulated amortization as at September 1, 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
 
Amortization for the year
   
2,617
     
167
   
     
505
     
3,289
 
Disposals
   
(54
)
 
   
     
(398
)
   
(452
)
Foreign currency translation adjustment
   
260
     
2
   
     
447
     
709
 
Accumulated amortization as at August 31, 2017
 
$
5,130
   
$
169
   
$
   
$
10,001
   
$
15,300
 
                                         
Net carrying value as at:
                                       
August 31, 2016
 
$
1,995
   
$
   
$
   
$
1,396
   
$
3,391
 
August 31, 2017
 
$
7,763
   
$
1,520
   
$
   
$
1,900
   
$
11,183
 
                                         
Remaining amortization period as at August 31, 2017
 
4 years
   
5 years
   
   
5 years
         

 
Goodwill

   
Years ended August 31,
 
   
2017
   
2016
 
             
Balance – Beginning of year
 
$
21,928
   
$
21,860
 
Business combinations (note 3)
   
11,470
   
 
Foreign currency translation adjustment
   
1,679
     
68
 
Balance – End of year
 
$
35,077
   
$
21,928
 

In the fourth quarter of fiscal 2016 and 2017, the company performed its annual goodwill impairment test for all CGUs.

Goodwill has been allocated to the lowest level within the company at which it is monitored by management to make business decisions, which are the following CGUs:
 
 
 
 
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,
 
   
2017
   
2016
 
             
EXFO CGU
 
$
13,772
   
$
8,663
 
Brix CGU
   
13,878
     
13,265
 
Ontology CGU (note 3)
   
7,427
   
 
Total
 
$
35,077
   
$
21,928
 
 
In performing the goodwill impairment review of its CGUs, the company determined the recoverable amount of goodwill based on fair value less costs of disposal. In estimating the recoverable amount of its CGUs, the company used a market approach, which is based on sales multiples within the range of 0.6 to 2.9 times sales, for comparable businesses with similar operations within the same industry over the past year. The company applied judgment in making certain adjustments for factors such as size, risk profile or profitability of the comparable businesses, when compared to the company's CGU.

Furthermore, as the sales and operations of the EXFO CGU constitutes the significant majority of the company's sales and operations, the company also compared the carrying amount of the EXFO CGU to the company's overall market capitalization, after adjustment for a control premium and the adjustment to deduct the recoverable amount of the Brix and Ontology CGUs. Based on this calculation, management calculated a recoverable amount which resulted in an implied sales multiple that was within the 0.6 to 2.9 times range, as used in the company's market approach described above.

As the valuation techniques used by the company require the use of unobservable inputs, the recoverable amount of the company's CGUs is classified within Level 3 of the fair value hierarchy.

As at August 31, 2017, the recoverable amount for all CGUs exceeded their carrying value. The recoverable amount of EXFO CGU, Brix CGU and Ontology CGU would equal their carrying value if we assume sales multiples of 0.7, 0.6 and 2.2 times sales respectively.


10
Credit Facilities

The company has lines of credit that provide for advances of up to CA$5,800,000 (US$4,627,000) and up to US$6,000,000. The line of credit in Canadian dollars bears interest at the Canadian prime rate and the line of credit in US dollars bears interest at the US prime rate. As at August 31, 2017, an amount of CA$736,000 (US$587,000) was drawn from these lines of credit for letters of guarantee in the normal course of the company's operations for its own selling and purchasing requirements. The company also has a line of credit that provides for advances of up to CA$6,750,000 (US$5,384,000). This line of credit bears interest at the Canadian prime rate (note 22).

In addition, the company has lines of credit totaling $26,731,000 for the foreign currency risk exposure related to its US dollar – Canadian dollar forward exchange contracts (note 6). As at August 31, 2017, an amount of $1,955,000 was reserved from these lines of credit.

Finally, the company has a line of credit of INR 115,385,000 (US$1,800,000) for the foreign currency risk exposure related to its US dollar – Indian rupee forward exchange contracts (note 6). As at August 31, 2017, an amount of INR 57,692,000 (US$900,000) was reserved from this line of credit.

Accounts receivable were pledged as collateral against all these lines of credit, which are also subject to a negative pledge whereby the company has agreed with the banks not to pledge its assets to any other party without its consent.
 
 
 
 
EXFO Inc.
Notes to Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
11
Accounts Payable and Accrued Liabilities and Provisions

Accounts payable and accrued liabilities

   
As at August 31,
 
   
2017
   
2016
 
             
Trade
 
$
19,002
   
$