Pethealth Inc. Consolidated Financial Statements. December 31, 2011

Transcription

1 Consolidated Financial Statements,

2 To the Shareholders of Pethealth Inc. KPMG LLP Telephone (416) Chartered Accountants Fax (416) Bay Adelaide Centre Internet Bay Street Suite 4600 Toronto ON M5H 2S5 Canada INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated financial statements of Pethealth Inc., which comprise the consolidated statements of financial position as at,,, and January 1,, the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years ended, and,, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our 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, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Pethealth Inc. as at,,, and January 1,, and its consolidated financial performance and its consolidated cash flows for the years ended, and, in accordance with International Financial Reporting Standards. Chartered Accountants, Licensed Public Accountants March 7, 2012 Toronto, Canada KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

3 Consolidated statements of financial position (in thousands) Notes January 1 Assets Cash and cash equivalents 4 5,828 5,082 7,310 Segregated cash 5 4,872 4,193 3,489 Trade and other receivables 6 1, ,245 Inventory Prepaid and other current assets Total current assets 13,135 11,180 14,280 Notes receivable 8 1,520 1,475 1,437 Property and equipment ,039 1,074 Goodwill 10 3,649 3,584 3,905 Intangible assets 11 8,527 7,417 6,079 Deferred income taxes Total non current assets 14,642 13,724 12,495 Total assets 27,777 24,904 26,775 Liabilities Trade and other payables 12 4,082 3,093 3,744 Income taxes payable 482 Due to insurance carriers 5 4,872 4,193 3,489 Unearned revenue Loans and borrowings ,769 2,681 Total current liabilities 9,400 9,248 10,614 Loans and borrowings ,908 Deferred income taxes Total non current liabilities ,908 Total liabilities 9,656 9,390 12,522 Shareholders Equity Share capital 15 14,497 14,497 14,450 Contributed surplus 1,936 1,719 1,610 Accumulated other comprehensive income (535) (708) Retained earnings (deficit) 2,223 6 (1,807) Total shareholders equity attributable to equity holders of the Company 18,121 15,514 14,253 Total liabilities and shareholders equity 27,777 24,904 26,775 (Notes on pages 5 to 48 are an integral part of these consolidated financial statements) On behalf of the Board: Richard Renaud David Atkins Director Director 1

4 Consolidated income statements (in thousands, except for EPS) Notes Year ended Revenue Insurance commissions and fees 22,263 23,430 Microchip technology and non insurance revenue 10,911 8,778 Other income 30 Revenue 33,204 32,208 Cost of goods sold 5,518 4,630 Selling and marketing 10,800 12,413 Administrative 13,508 13,087 Foreign currency translation loss(gain) 160 (30) Expenses 16 29,986 30,100 Results from operating activities 3,218 2,108 Finance revenue Finance costs (28) (159) Net finance revenue(costs) (105) Profit before income tax 3,259 2,003 Income tax expense(recovery) (420) Profit for the period 2,827 2,423 Earnings per share 18 Basic earnings per share Diluted earnings per share Pethealth Inc. Consolidated statement of comprehensive income (in thousands, except for EPS) Year ended Profit for the period 2,827 2,423 Other comprehensive income (loss), net of income taxes: Foreign currency translation gain(loss) from foreign 173 (708) operations Total comprehensive income for the period, net of income taxes 3,000 1,715 (Notes on pages 5 to 48 are an integral part of these consolidated financial statements) 2

5 Consolidated statements of cash flows (in thousands) Year ended Notes Cash flows from operating activities Profit for the period 2,827 2,423 Adjustments for: Depreciation Amortisation of intangible assets 11 1,642 1,423 Net finance costs 17 (41) 105 Deferred income taxes (209) Foreign exchange movements (37) (113) Share based payment transactions ,242 3,997 Changes in: Trade and other receivables (280) 1,178 Inventories (39) 364 Prepaid and other current assets (122) (72) Trade and other payables 767 (75) Income taxes payable/(recoverable) (213) Unearned revenue 120 (22) Cash flows from operating activities 5,688 5,157 Interest paid 17 (28) (159) Income tax recovered 189 Income tax paid (52) (466) Net cash from operating activities 5,797 4,532 Cash flows from investing activities Purchase of intangible assets (2,722) (2,881) Purchase of property and equipment (79) (158) Interest received Net cash from investing activities (2,777) (3,023) Cash flows from financing activities Issuance of common shares, on exercise of options 51 Additional share issue cost (4) Repayment of loans and borrowings (1,746) (2,678) Dividend and tax on preferred shares paid (610) (610) Net cash from financing activities (2,356) (3,241) Net increase(decrease) in cash and cash equivalents 664 (1,732) Unrestricted cash and cash equivalents at beginning of year 5,082 7,310 Effect of exchange rate fluctuations on cash held 82 (496) Unrestricted cash and cash equivalents at end of year 4 5,828 5,082 Memo note: (in thousands) Year ended Segregated cash at beginning of year 4,193 3,489 Change during the period Segregated cash at end of year 4,872 4,193 3

6 Consolidated statement of changes in equity (in thousands) Year ended, Share capital Contributed Surplus Translation reserve Retained earnings (deficit) Total Equity Balance at January 1, 14,497 1,719 (708) 6 15,514 Total comprehensive income for the year Profit for the year - 2,827 2,827 Other comprehensive income: Foreign currency translation differences Total other comprehensive income Total comprehensive income for the year 173 2,827 3,000 Transactions with owners of the company, recorded directly in equity Dividends paid to equity holders (610) (610) (including tax of $25) Share based payment transactions Total transactions with owners of the Company 217 (610) (393) Balance at, 14,497 1,936 (535) 2,223 18,121 Year ended, Balance at January 1, 14,450 1,610 (1,807) 14,253 Total comprehensive income for the year Profit for the period - 2,423 2,423 Other comprehensive income: Foreign currency translation differences (708) (708) Total other comprehensive income (708) (708) Total comprehensive income for the year (708) 2,423 1,715 Transactions with owners of the company, recorded directly in equity Issuance of common shares Dividends paid to equity holders (610) (610) (including tax of $25) Share based payment transactions Share options exercised Total transactions with owners of the Company (610) (454) Balance at, 14,497 1,719 (708) 6 15,514 4

7 Year ended, and, 1. Nature of operations and general information The consolidated financial statements of the Company for the twelve months ended, include the accounts of the Company and its subsidiaries (together referred to as the Company ). The Company, domiciled in Canada with its head office at 710 Dorval Drive, Oakville, Ontario is a leading provider of companion animal services and the second largest provider of medical insurance for dogs and cats to pet owners in North America, operating in Canada, the United States and the United Kingdom. The Company offers a unique range of products and services for veterinarians, animal welfare organizations, and pet owners. In addition, the Company is the leading provider of management software to North American animal welfare organizations through its cloud based application PetPoint. As a cloud based application, PetPoint provides exclusive data management and reporting capabilities to licensed organizations while at the same time significantly reducing, if not eliminating, their IT related infrastructural costs. The Company is also the leading provider of pet recovery database management services to the North American companion animal industry under the brand 24PetWatch. Early in, the Company introduced its pet recovery database services in the U.K. market under its petprotect brand. Petango.com, launched in 2009, is the only adoptable pet search site that exclusively publishes pets available for adoption with a real time live feed powered by PetPoint. The Petango brand has evolved from an adoptable search portal to an online destination for pet lovers to learn about pets, search for pets, engage with other pet lovers as well as purchase pet supplies and medications through ThePetangoStore.com. These consolidated financial statements were approved by the Board of Directors on March 7, Statement of compliance (a) Statement of Compliance These consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRSs"), as issued by the International Accounting Standards Board ("IASB"). These are the Company s first annual financial statements prepared in accordance with IFRS and IFRS I First Time Adoption of International Financial Reporting Standards has been applied. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in note 22. This note includes reconciliations of equity, profit and total comprehensive income for the comparative year,, and of equity at the date of transition January 1,, reported under Canadian GAAP ( previous GAAP ) to those reported under IFRS. 5

8 Year ended, and, (b) Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis except for liabilities for cash settled share based payment arrangements, which are measured at fair value. (c) Functional Currency These consolidated financial statements are presented in Canadian dollars, which is the Company s functional currency. All financial information presented has been rounded to the nearest thousand except Earnings per Share ( EPS ) and as otherwise noted. (d) Use of Estimates and Judgements The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ materially from these estimates. In preparing these consolidated financial statements, the significant judgements made by management in applying the Company s accounting policies and the key sources of estimation uncertainty are as follows: (i) Judgement The key judgement made in applying accounting policies that has the most significant effect on the amounts recognised in these consolidated financial statements is as follows: Non Monetary Commission Revenue Certain commission revenue is related to pet insurance policies sold to arm's length animal welfare organisations in exchange for certain distribution and advertising services. This non monetary commission revenue and the related marketing expenses are recorded on a gross basis. In determining whether to present these transactions on a gross or net basis, management considered whether or not the exchange of products and services was similar in nature and concluded that the sale of pet insurance policies and the provision of distribution and advertising services was dissimilar. (ii) Use of Estimates Information about the assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next twelve months are as follows: Valuation of Goodwill Goodwill is assessed for impairment at the Cash Generating Unit ( CGU ) level on an annual basis and more frequently if there are potential indicators of impairment. An impairment loss is recognized if the carrying value of a CGU exceeds its recoverable amount. 6

9 Year ended, and, The recoverable amount of a CGU is determined from the greater of fair value or value in use calculations based on the net present value of discounted cash flow. Key assumptions used in the calculation of recoverable amounts are future revenues, discount rates, terminal value growth rates and corporate overhead costs. See note 10 for details in respect of the calculation of the recoverable amount of PetProtect Limited CGU. Income Tax, Deferred Tax and the Utilization of Tax Losses Deferred tax assets and liabilities require management s judgement in determining the amount to be recognized. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognized with consideration to the timing and level of future taxable income. The Company assesses its deferred income tax asset on a quarterly basis. The actual income tax for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the tax liability for tax to be paid on past profits which are recognized in the financial statements. The Company considers estimates, assumptions and judgements to be reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements. 3. Summary of significant accounting policies The accounting policies set out below have been applied consistently to all the periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at January 1, for the purposes of the transition to IFRS, unless otherwise indicated. 3.1 Basis of Consolidation The consolidated financial statements comprise the financial statements of Pethealth Inc. and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting periods, using consistent accounting policies. Subsidiaries are all entities over which the Company has the power to control the financial and operating policies, generally accompanying a shareholding of more than one half the voting rights. Subsidiaries are fully consolidated from the date on which control is obtained by the Company and will continue to be consolidated until control ceases. All of Pethealth s subsidiaries are wholly owned Business Combinations Acquisitions prior to January 1, As part of its transition to IFRS the Company elected not to restate those business combinations that occurred prior to January 1,. In respect of acquisitions prior to January 1,, goodwill represents the amount recognised under the Company s previous accounting framework, Canadian GAAP. 7

10 Year ended, and, Transactions Eliminated on Consolidation Inter company transactions, balances and unrealised gains or losses on intra group transactions are eliminated upon consolidation. 3.2 Segmented reporting An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company s other components. All operating segments operating results are reviewed regularly by the Company s management to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available. Segment results that are reported to the Company s management include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditures are the total cost incurred during the period to acquire property and equipment, and intangible assets other than goodwill. 3.3 Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency of Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non monetary items in a foreign currency that are measured at historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognised in the consolidated income statement Foreign Operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at exchange rates at the dates of the transactions. 8

11 Year ended, and, Since January 1,, the Company s date of transition to IFRS, foreign currency differences are recognised and presented in other comprehensive income and in the foreign currency translation reserve (translation reserve) in equity. When a foreign operation is disposed of such that control or significant influence is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the profit or loss on disposal. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented in the translation reserve in equity. 3.4 Intangible assets (a) Goodwill Goodwill relates to acquisitions prior to January 1, and is included on the basis of deemed cost, which represents the amount recorded under previous Canadian GAAP. Goodwill is measured at cost less impairment losses. (b) Other intangible assets Intangible assets that are acquired by the Company and have finite lives are measured at cost less accumulated impairment loss and are amortized over their estimated useful lives and are tested for impairment whenever changing circumstances indicate that impairment may have occurred. Amortisation is calculated from the date available for use on a straight line basis, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset based on the following estimated useful lives: Contractual customer relationships Trademarks Developed software Computer software Licensing and registrations Patents Others 4 years 3 to 10 years 2 to 5 years 3 to 5 years 10 years 5 years 3 to 5 years Amortisation methods, useful lives and residual values are reviewed annually and adjusted if appropriate. (i) Contractual customer relationships acquired in a business combination are recognized at the fair value at the acquisition date. The contractual customer relations have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method over the expected life of the customer relationships. 9

12 Year ended, and, (ii) Trademarks, licenses and patents Separately acquired trademarks, licenses and patents are recorded initially at historical cost. Trademarks and licenses acquired in a business combination are recognized at the fair value at the acquisition date. The trademarks, licenses and patents have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method over their estimated useful life. (iii) Computer and internally developed software Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. Costs associated with maintaining computer software programmes are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable unique software products controlled by the Company are recognized as intangible assets when the following criteria are met: it is technically feasible to complete the software product so that it will be available for use or sale; management intends to complete the software product and use or sell it; there is an ability to use or sell the software product; it can be demonstrated how the software product will generate future probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell it, are available; the expenditures attributable to the software product during its development can be reliably measured. Costs that are capitalized as part of the software include cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Capitalized development software is measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation of developed software begins when the asset is available for use and capable of operating in the manner intended by management. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use. The Company capitalizes borrowing costs incurred on or after January 1, for certain of its internally generated intangible assets. Other development expenditures which do not meet the above criteria are recognized as an expense when incurred. The Company does not have any indefinite life intangible assets. 10

13 Year ended, and, 3.5 Property and Equipment Recognition and Measurement Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Costs includes expenditures that are directly attributable to the acquisition of the asset including any borrowing costs on qualifying assets for which the commencement date for capitalisation is on or after January 1,. Gains or losses on the disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of the property and equipment, and are recognised net within the statement of income. Subsequent Costs The cost of replacing a component of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced component is derecognized. The costs of day to day servicing of property and equipment are recognised in the consolidated income statement as incurred. Depreciation Depreciation is based on the cost of an asset less its residual value. Depreciation is recognised in the consolidated income statement over the estimated useful life of each item of property and equipment as set out below. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Method Rate Furniture and fixtures Declining balance 20% Computer hardware Declining balance 30% Office equipment Declining balance 30% Leasehold improvements Declining balance 30% The residual values, useful lives and depreciation methods of items of property and equipment are reviewed, and adjusted if appropriate, at each annual reporting date. 3.6 Financial Instruments The Company has financial assets and liabilities consisting of cash and cash equivalents, segregated cash, trade and other receivables, notes receivable, trade and other payables, due to insurance carriers and loans and borrowings. The Company classifies its non derivative financial assets as loans and receivables. Loans and receivables are non derivative financial assets or liabilities with fixed or determinable payments that are not quoted in an active market. They are included in current assets or 11

14 Year ended, and, liabilities, except for settlements due greater than 12 months after the consolidated balance sheet date which are classified as non current assets or liabilities. The Company's financial assets and liabilities are recorded at their cost, or amortised cost when interest bearing, which approximates their fair value. Non derivative Financial Assets The Company initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets are recognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in a statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a new basis or to realise the asset and settle the liability simultaneously. Cash and Cash Equivalents Cash and cash equivalents comprise cash balances with original maturities of three months or less. Loans and Receivables Loans and receivables comprise trade and other receivables, and notes receivables which are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Non derivative Financial Liabilities The Company initially recognises debt securities issued on the date that they are originated. All other financial liabilities are recognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Company classifies non derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. Other financial liabilities comprise loans and borrowings, trade and other payables, and due to insurance carriers. 12

15 Year ended, and, Trade and other payables Trade and other payables are obligations to pay for goods and services that have been acquired in the normal course of business from suppliers. Other payables are classified as current liabilities if payment is due within one year or less. Loans and borrowings Borrowings are recognized initially at fair value, net of transaction costs incurred, and are subsequently amortized to their maturity using the effective interest rate method. 3.7 Inventories Inventories are measured at the lower of cost, including direct expenditures plus other attributable costs incurred in bringing inventories to their current location and condition, and net realizable value. Cost is determined using the first in, first out (FIFO) method. Net realizable value is the estimated selling price in the normal course of business, less the estimated costs of selling expenses. 3.8 Impairment Non derivative Financial Assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the Company and economic conditions that correlate with defaults. Loans and Receivables The Company considers evidence of impairment for loans and receivables at both a specific asset and collective level. All individually significant loans and receivables are assessed for specific impairment. All individually significant loans and receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. 13

16 Year ended, and, In assessing collective impairment the Company uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event (e.g. repayment by a debtor) causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the consolidated income statement. Non financial Assets The carrying amounts of the Company s non financial assets other than inventories and deferred tax assets, being property and equipment and intangible assets, are reviewed at each annual reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. For goodwill and intangible assets that have an indefinite useful life, the recoverable amount is estimated each period at the same time. An impairment loss is recognised if the carrying amount of an asset or its related cash generating unit ( CGU ) exceeds its estimated recoverable amount. Goodwill is allocated to CGUs for the purposes of impairment testing. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows after allocating corporate assets are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Impairment losses are recognised in the consolidated income statement. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of GCUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. The determination of gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each annual reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 14

17 Year ended, and, 3.9 Provisions A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the normal course of the Company s activities. Revenue is shown net of sales taxes. The Company recognises revenue when persuasive evidence exists that the significant risks and rewards of ownership have been transferred and when the amount of revenue can be reliably measured and when specific criteria have been met as described below. Insurance Segment Revenue Commission revenue relates to the sale and/or renewal of pet insurance policies in which the Company acts as agent in the transaction rather than principal. The Company is licensed as an insurance agent / broker in the jurisdictions in which it operates. Other than a limited participation in the underwriting results for core policies sold in the United States and the United Kingdom, the underwriting risk associated with the pet insurance policies sold is borne entirely by the Company s licensed insurance carriers. Revenue from commissions is derived from the sale of insurance policies which premiums are billed principally on a monthly basis. Base commissions are recognised as revenue on the effective dates of the related monthly insurance premiums, except for annually billed policies which are recognised, net of mid term cancellation reserves as revenue on the policies' effective, renewal or anniversary dates. Commission adjustments, related to the Company s limited participation in underwriting results, are made quarterly. The Company earns commission revenue through the sale of certain pet insurance policies to arm's length animal welfare organisations which in turn charge the Company a related fee for access to their distribution network, as well as advertising to pet owners adopting pets from their organisation. Revenue and expenses are recorded based on the fair value of the services provided by the Company for similar cash transactions. Non Insurance Segment Revenues Revenue, net of returns, from the sale of microchips and microchip readers is recorded when the goods are shipped. Revenue from the retail sale of products from the Company s e commerce site is recognised when the goods are shipped. A provision is made for returns based on historical trends. 15

18 Year ended, and, Administration fees are non refundable and are recorded as revenue over the period in which administration services are provided. Unearned administration fees are deferred and recognised as revenue as administrative services are provided. Database and data revenue is recognised either over the period in which the service is provided or, where long term contracts require the performance of more than one service, proportionately by reference to the performance of each service to the extent each has stand alone value Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under the operating leases are charged to the consolidated income statement on a straight line basis over the period of the lease. The Company leases certain property and equipment. Leases of property and equipment where the Company has substantially all the risks and rewards are classified as finance leases. Finance leases are capitalized at the lease s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Subsequent to the initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset. Lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; Temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and Taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. 16

19 Year ended, and, Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is not probable that the related tax benefit will be realised Share Capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares or options are shown as a deduction from equity, net of taxes. Preference share capital is classified as equity if it is non redeemable, or redeemable only at the Company s option, and any dividends are discretionary. Dividends theron are recognised as distributions within equity upon approval by the Company s Board Employee Costs Defined contribution plans A defined contribution plan is a post employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in the periods during which services are rendered by employees. Short term employee benefits Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short term cash bonus plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. Stock options The Company operates an equity settled, share based stock option plan for employees and directors. Under the equity settled share plan, the Company receives services from employees as consideration for share options of the Company. The fair value of the employee services received in exchange for the grant of options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of options granted as calculated using the Black Scholes option pricing model and an estimate of forfeiture rates prior to vesting. The Black Scholes model requires judgements to be made regarding expected volatility, dividend yield, risk free rates of return and expected option lives. Forfeiture rates are 17

20 Year ended, and, based on past experience and are adjusted if subsequent information indicates that the actual forfeitures are likely to differ from the estimate. Share unit plan for directors The Company operates a share unit plan for directors. The fair value of this plan is calculated on each statement of financial position date and the appreciation or depreciation in value is recorded as compensation expense with the counterpart in trade and other payables on the consolidated statement of financial position Finance Income and Finance Costs Interest income consists of interest earned from short term investments, consisting of guaranteed investment certificates and notes receivable and is recognised in finance income. Interest income is recognised as it accrues in the consolidated income statement, using the effective interest method. Finance costs comprise interest expense on borrowings and impairment losses recognised on financial assets (other than trade receivables) Earnings per Share The Company presents basic and diluted earnings per share data for its common shares. Basic earnings per share is calculated by dividing the profit or loss attributable to the common shareholders of the Company by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible preference shares, share options granted to employees and deferred share units granted to certain Company directors Future Accounting and Reporting Changes (i) IFRS 9 Financial instruments IFRS 9 Financial Instruments was issued in November 2009 and modifies previous standard IAS 39 Financial Instruments: Recognition and Measurement. The new standard requires financial instruments to be measured at either fair value or amortized cost. Under the new standard, the existing categories for AFS, held to maturity, and loans and receivables will be eliminated. A fair value option (fair value through income, same as held for trading (HFT)) would continue to be available on the condition that accounting mis matches are reduced. 18

21 Year ended, and, The new standard requires that a) embedded derivatives be assessed for classification together with their financial asset host and b) a single impairment method be used for financial assets. IFRS 9 is effective for annual periods beginning on or after January 1, The Company is currently assessing the full impact of IFRS 9 on its consolidated financial statements. (ii) IFRS 13 New Standard on Fair Value Measurement In May, the IASB published IFRS 13 Fair Value Measurement. IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The standard also establishes a framework for measuring fair value and requires the fair value hierarchy, which was introduced by IFRS 7, Financial Instruments: Disclosures, to be applied to all fair value measurements, including non financial assets and liabilities that are measured at or based on fair value in the statement of financial position as well as non recurring fair value measurements such as assets held for sale. IFRS 13 expands disclosure requirements for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements. IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, Earlier application is permitted with disclosure of that fact. The Company is in the process of assessing the full impact of IFRS 13 on its consolidated financial statements. (iii) IAS 17 Leases The IASB issued an exposure draft for a new standard on lease accounting for lessees and lessors that would replace IAS 17, Leases, and related interpretations. The new accounting model requires both lessees and lessors to record the assets and liabilities on the balance sheet at the present value of the lease payments arising from all lease contracts. The new classification would be the right of use model, replacing the operating and finance lease accounting models that currently exist. The final lease standard is expected to be released in 2012 at which time the Company will assess the full impact on the consolidated financial statements. 4. Cash and cash equivalents Cash and cash equivalents comprise cash, guaranteed investment certificates and short term bank deposits with an original maturity of three months or less and are held in the following currencies (those held in currencies other than Canadian dollars have been converted at the exchange rate at the statement of financial position date): 19

22 Year ended, and, January 1 US dollars 3,285 2,199 (96) Pounds Sterling Canadian dollars 1,845 2,403 6,647 5,828 5,082 7,310 The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The carrying amount of these assets approximates their fair value. 5. Segregated cash and due to insurance carriers Under the terms of the MGA Agreements with its insurance carriers, the Company collects premiums and pays claims on behalf of their respective insurance carriers. These funds, net of the Company s commissions, are held in trust for the benefit of the insurance carriers and cannot be used or applied for other purposes. These funds are shown on the Company s consolidated statement of financial position as segregated cash with a corresponding liability under due to insurance carriers. 6. Trade and other receivables January 1 Trade receivables 1,092 1, Less: amounts provided for doubtful accounts , Profit sharing Commission receivable Other carrier receivables 761 Other receivables , ,245 Trade receivables are non interest bearing. The carrying value of trade and other receivables approximates their fair value. Trade receivables are provided for based on estimated recoverable amounts, determined by reference to past default experience. 20