AUDITING & ASSURANCE SERVICES PAPER

AdoreU Children Fashion Ltd Mini Audit Project

QUESTIONS

Part A: Professional Ethics and Audit Planning

BACKGROUND INFORMATION

Wallace & Davey Partners, Chartered Accountants is a medium size accounting firm located in Auckland with four audit partners, seven business advisory partners and four tax partners. The firm has been appointed to audit AdoreU Children Fashion Ltd for the year ended 31 December 2018. The former auditor has been rotated off the client. The engagement partner is Patrick Wallace, and you are the audit manager assigned to this client. Your firm does not have experience in the children fashion industry, but Wallace thinks it is a good opportunity to learn about the industry. The fee for the financial audit of AdoreU is $150,000, which is about 16% of total audit fees your firm generates. The company would also require advice on taxation and treasury. Since this is a first time audit, you accompanied Wallace to meet the senior management of the client. The following is a summary of your notes from the interviews with senior management of AdoreU Children Fashion.

NOTES FROM CLIENT INTERVIEW

The company profile

AdoreU Children Fashion is an Auckland company incorporated in 1990. It was founded by Sally Hall, a former childrenswear buyer, and a mum. Hall spotted a gap in the market for quality and fashionable childrenswear and started the brand with a mail order catalogue. Halls mail order catalogue was very popular and soon after she opened the first AdoreU retail store. By 1994, AdoreU headed into Australia as a mail order catalogue, opening its first Australian store three years later. AdoreUs rise seemed unstoppable in the early 2000s. It secured its first US wholesale partner Nordstrom in 2002, and in 2003 added Australian department store David Jones as a distribution channel. In 2004 it listed on the New Zealand stock exchange and opened franchise partner stores across the Middle East. Retail stores in the US, franchises in Singapore, Malaysia, Indonesia, South Africa and Pakistan followed, along with the companys first ecommerce website in 2006. Around that time, the founder Hall stepped down from the Board, leaving the Directors to find a new managing director. Since then, the company has changed three Managing Directors. The fast expansion of AdoreU was heavily financed through debts, which contributed to a highly geared financial position. It created pressure for the company in serving the high level of debts. The companys expansion ceased in 2007 and its shares price peaked in January 2007 at $4.95 per share. By November 2018, the share price dropped by 60% to $1.98. As of 2015, the company closed its stores in nearly all international markets, with just 92 stores remaining across Australia, New Zealand and Ireland. Market commentators believe that the deterioration of AdoreU financial performance was largely because of its inability to sustain the rapid global expansion.

Despite the highly competitive retail market, the core retail businesses in New Zealand and Australia have performed well in the current financial period and progress has been made to improve stock efficiency. Despite the difficulties in performance, the new Managing Director Neil Jenkins, who was appointed in June 2017, is confident that the company can be turned around because the brand is still strong and well recognised. The company also has reduced net banking debt by $20 million, and its banking facilities are secured until the end of 2018. Before he was appointed as the managing director, Jenkins was an experienced director and was the CFO of a large retailing chain in NZ. At the meeting, you discovered that Jenkins daughter works for your firm as an audit graduate.

The new Managing Director Neil Jenkins is changing its business strategy, which aimed at repositioning itself in the market. The new MD has a turnaround plan. He says that AdoreUs must redirect its focus to customers, the style of clothes parents desire to buy for their kids and enhance customers experience in the stores. To achieve this, an investment will be required in the new design of products, marketing channels and various customer communication mediums.

Competition in the market

In recent years, clothing retailers in Australia and New Zealand have struggled. Although AdoreU is the biggest player in the Australasian market, it claims to have 12% of the children fashion market. It competes with brands carried by department stores as well as small boutiques such as Seed, H&M and Cotton On Kids etc.

Financial situation

AdoreU delivered a $9,079,000 after-tax loss for the year ended 31 December 2018, an improvement compared to the prior year loss of $11,495,000. Jenkins said "the financial position of the company has improved significantly over the last year in particular and we have formed a very strong working relationship with the bank. Over the last 12 months, we have made significant progress in reducing inventory level. Our debts (interest bearing liabilities) also have dropped from over $60 million last year to around $40 million this year. In our view, this is material and has created the platform for us to move forward."

The structure of the Board of Directors

The Board of Directors consists of five members: the Managing Director and four independent directors at the end of 2018 financial year. Three of the four independent directors are also members of the Audit Committee. The Company has a formal Code of Conduct and Ethics Policy. This policy provides guidance to all Directors, managers, employees and contractors of AdoreU Limited expected conduct when undertaking business on behalf of the company.

Communication with the prior auditor

With the clients approval, the predecessor auditor shared their audit file for the last financial year. You noted in the audit file, a concern regarding the valuation of inventory. The predecessor auditor believed that one of the inventory range called Comfort maternity wear had a long turnover time and should be written off. The value of this particular label was 10% of the total inventory. However, management believed that it can still be sold at cost. Eventually, no write-off was made for this inventory range in the last financial statements. The previous auditor also noted that they questioned about the companys risk of breaching its bank covenant because the turnover was disappointing. The management argued that the company is in a transition period and the poor performance was partially contributed by the failure of two suppliers because of major flooding in a key supply region in China. They had to find other reputable suppliers which caused delays in production.

Part A Audit Planning and Professional Ethics

Required:

1. Referring to the case facts, identify and explain three potential threats to professional ethics. Discuss possible safeguard to address each threat. (10 marks)

2. Following the above meeting, the engagement partner asks you to review the unaudited financial statements for the year 31 December 2018 (attached as a separate Excel document) and to produce the audit planning workpaper discussing the potential risks of material misstatement that the firm may encounter in this audit. (30 marks)

Your audit planning workpaper must cover the following:

a) Identify ten risks factors (conditions) that the financial statements maybe misstated.

b) Explain the potential impact of each of the identified risk factor on the assertions of the financial statements or the audit.

c) Determine the audit strategies or procedures that should address each identified risk.

Use the following format to present your answer.

Identify the risks (facts) (a)

The potential impact on the assertions of financial statements or the audit. (b)

Audit strategies or procedures to address the risks (c)

AdoreU Children Fashion Ltd STATEMENTS OF COMPREHENSIVE INCOME For the year ended 31 Dec 2018 Unaudited 31-Dec-18 31-Dec-17 $'000 $'000 Notes Revenue 240,902 -120,120 100.0% 2 238,537 100.0% Cost of goods sold Gross profit Other operating income Expenses Selling expenses Finance expenses Administrative and general expenses Loss from continuing operations before income tax Income tax (expense)/credit Net loss from continuing operations Profit from discontinuing operations (net of tax) Loss for the year Other comprehensive loss Items that may be reclassified subsequently to loss: Exchange differences on translation of foreign operations Net movement on cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive income/(loss) for the year Total comprehensive loss for the year, net of tax Total comprehensive loss for the year is attributable to equity holders -48.6 % 2.202.07 Inventory turnover -115,901 -49.9% 122,636 51.4% 120,782 50.1% 231 173 3 -108,223 -45.4% -109,016 -45.3% 3.23 Interests coverage ratio -4,011 -1.7% -3,352 -1.4% 0.85 -18,056 -7.6% -22,778 9.5% -7,423 -14,191 -3.19% -5.9% -1,656 2,579 -9,079 -11,612 0 -117 -11,495 -9,079 2,093 -59 1,818 -4,128 -509 1,157 3,402 -3030 -5,677 -14,525 -5,677 -14,525 BALANCE SHEETS As at 31 December 2018 12/31/2018 12/31/2017 12/31/2016 $000 $'000 $000 Notes ASSETS Current assets Cash and cash equivalents 3,679 1,870 1,077 0.21328 0.58460 0.32539 Quick ratio Trade and other receivables Derivative financial instruments Inventories 14,957 7 13,458 16,845 5,808 1,009 8,348 8 41,230 64,318 51,957 Current tax receivables 1,016 Total current assets 63,382 83,249 78,941 0.881922 2.715497 1.378328 Current ratio Non-current assets Property, plant and equipment 10 28,420 32,436 40,113 Intangible assets 11 2,803 5,756 9,690 Non-current tax receivables 3,567 3,475 2,958 Derivative financial instruments 278 614 Deferred tax assets 5,550 7,932 3,563 Total non-current assets 40,340 49,877 56,938 Total assets 103,722 135,879 133,126 LIABILITIES Current liabilities Trade and other payables Interest bearing liabilities 12 25,451 27,305 24,608 41,000 25,000 662 Lease Provisions 13 1,210 356 Derivative financial instruments Other Provisions 2,968 1,112 5,509 1,239 1,884 1,494 Total current liabilities 57,273 71,868 30,657 Non-current liabilities Interest bearing liabilities Lease Provisions 66,000 27,000 488 13 518 512 Deferred landlord contributions 2,105 2,102 2,971 Derivative financial instruments Total non-current liabilities Total liabilities Net assets 1,054 74 57 3,677 68,664 30,540 1.273023 1.674015 Debt/equity 75,545 99,321 87,813 28,177 33,805 48,066 EQUITY Share capital 15 59,343 59,331 59,147 Reserves 3,006 433 3,734 Retained earnings /(deficit) Total equity 34,172 28,177 25,093 14,815 33,805 48,066 STATEMENTS OF CHANGES IN EQUITY For the year ended 31 December 2018 ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share Treasury Retained Total capital deficit equity $'000 Reserves stock $'000 $'000 $'000 Balance at 1 January 2017 Comprehensive income 268 Note 59,415 3,734 14,815 48,066 11,495 11,495 Loss for the year |Other comprehensive loss Total comprehensive income Movement in treasury stock Movement in share based payment reserve Balance at 31 December 2017 Balance at 1 January 2018 3,030 3,030 3,030 11,495 14,525 15 184 184 1,137 1,217 80 59,415 25,093 433 84 33,805 59,415 433 84 25,093 33,805 Comprehensive income Loss for the year |Other comprehensive income 9,079 9,079 3,402 3,402 Total comprehensive income Movement in treasury stock Movement in share based payment reserve 3,402 9,079 5,677 15 12 12 37 37 Balance at 31 December 2018 59,415 3,006 72 34,172 28,177 The following is an analysis of the Company's revenue and results by operating segment. Revenue reported below represents revenue from the sale of children's clothing products to external customers. Revenue is allocated based on the country where the sale is generated. There were no inter-segment sales in the year (2015: nil). Geographic segment profit represents the profit earned by each segment without allocation of central administration costs, finance costs, income tax, store impairment and lease provisions. These costs are recorded in the centralised support segment Internation Centralised Total Australia New Zealand Support $'000 al S000 $'000 S'000 S'000 2018 Revenue 46,833 151,923 39,781 238,537 135,734 16,189 38,611 37,857 1,924 33,758 33,758 245,960 7,423 1,656 9,079 98,172 34,790 3,865 Expenses Segment result before income tax 8,222 Income tax Loss for the year 18,653 39,844 18,910 3,028 18,745 4,869 20,930 10,921 Segment total assets (other than deferred tax) Segment non-current assets (other than deferred t Acquisitions of property, plant and equipment, intangibles and other non-current segment 90 188 649 Depreciation and amortisation expense Finance expense 3,438 1,275 8,927 97 4,117 4,011 4,011 2017 Revenue Expenses Segment result before income tax Income tax 3Income tax Profit from discontinuing operations (net of tax) 149,914 43,017 47,971 39,527 8,444 240,902 255,093 14,191 2,579 130,993 18,921 38,845 4,172 45,728 45,728 117 2,696 11,495 125,194 Loss for the year 51,217 25,410 31,632 16,935 7Segment total assets (other than deferred tax) Segment non-current assets (other than deferred t 9Acquisitions of property, plant and equipment, Depreciation and amortisation expense Finance expense 20,139 4,045 4,471 6,639 471 14,696 3,542 5,077 3,352 41,945 8,567 11,010 3,352 757 223 1,335 127 (i) The Company's liabilities are not analysed on a segmental basis and therefore have not been reported. (ii) Revenue comprises the fair value for the sale of goods and services, net of sales tax and discounts and after eliminating sales within the Company. Sales of goods retail Sales of goods are recognised when a Company entity sells a product to the customer. Retail sales are usually in cash or by credit card either in store or online. Sales of goods-wholesale Wholesale sales are recognised in accordance with the terms of sales when the title has transferred and the benefits of ownership and risk pass to the customer. This is Bdependent on customer specific terms of trade Interest income Interest income is recognised using the effective interest method. 31-Dec-18 31-Dec-17 2 Other income 3Interest received 941 830 3 EXPENSES 12/31/2013 12/31/2017 Lrfur. inc-ne tez includer the fulluuisqspecific expoarer: Doprociation of proporty, plant &equipment 5,720 7,169 1,167 Impairment ofstore arrotr 5,905 Gaint(larr)an dirparal of arrotr 33 43 Amartiratian of intangibler 3,841 3,207 Impairment af intangibler 3,074 Leare pravirian expenre 1,471 397 11,532 20,429 E-playa .nafit oxper Salarier&uager 58,449 57,549 Share bared paymentr 37 Emplayee related roarganiration cart 59 2,034 58.445 60,563 Rontal eNo relatinq tu-perating lerer Rental and aperating leare onpenrer 48,889- 49,875 - Fissce crtr Interertexpenre 4,011 3,352 Sandry paarer 5 - Bad deber uritten aff 34 71x Directar's fe e 418 359 Danatian 40 24 Daybtful debtr oxpenre 2,090 2,606 417 R rtin af suditurr (kred n the amuut agread apn cagagement) Audit af financialetatement - Statutory audit 150 156 otherrervicer -Trearury advic 25 20 -Taxatian advice 1c Tatal feor paid to auditor 189 176 7 TRADE RECEIVABLES, PREPAYMENTS AND OTHER ASSETS Accaunting Palicy Trade rocoivabler are recognired initially at fair value andrubrequently at amartired cart lerr provirion for doubtful debr Callectibility of trado rocoivablerir rovioued on an anqoing barir. Deber uhich are knaun to bo uncalloctible are uritton off. A provirion for doubtful rocoivabler ir ortablirhed uhen there ir abjective ovidence that the Company uill not bo able to collect all amauntr due according to the original tormr of recolvabler. The amaunt of the provirion ir the differen co botueon the arret'r corrying amaunt and the prorent valuo of ortimated future carh flour. The amaunt of the provirion ir recoqnired in the in come Statomont. Significant financial difficultior of the debtor, prob ability that the dobtor uill entor bankruptcy ar finan cial rearqaniration, and default or delinquency in paymentr are canridered in dicatorr that the trade rocoivable ir impaired. 31De 31Dec 201 2017 $000 $000 Trade rocoivabler 6,531 12,704 5,454 Fropaymentr 2,739 Otherreceivablor 1,473 1,402 13,45 16,845 The carrying amauntr of the Company's trade and other recoivabler are donaminatod in the follouing currencior N2D 2,974 3,357 USD 6,21% 12,479 AUD 3,728 70 GBP 251 5$8 EUR 236 351 13,45 16,845 The Campany har arrerro d total trado rocoivabler ar boing impaired and har recognired a daubtful debt provirion of $2.1m bared an additional information in relation to conamic devolopmentrrubro quent to yoar end. All other remaining balancer at 31 Dec 2013 are conridered current and uithin terma. 8 INYENTORIES Accaunting Palicy Finirhed qandr are stated at the louer of cart and not roalirable value. Cartr are arriqned to in dividual itomr of inventory on the barir of weightod average carts, and include xponditure ineurred in acquirinq the arrotr and brinqing thom to thoir exirting location and condition. Not roalirable valus ir the ortimatedrolling price in the ordinary cour af buriners The Campany annually revieur tho carrying value af inventory to onrure it remainr ualued at louer of cart or not roalirable valus. An inventory provirian ir cro ated to roflect. instancer uhere the fore cartrollinq value ir louer than cart. 31Dec2018 31Dec2017 $000 $000 64,31 Finirhed Gaodr 41,230 Inventary provirionr of $1,093,000o (2017: $1,566,000) have boon included in the income Statomont to refloct the recovorable value of the companyy aqedrtack provirion Notes 3,7,8 Balance Sheet Equity P&L Note 2 1 10 PROPERTY, PLANT AND EQUIPMENT 2 Accounting Policy All property, plant and equipment is stated at historical cost less depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the Income Statement during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight line method to allocate their costs, net of their residual values, over their estimated 4 useful lives, as follows: 5-Shop fitout 6 -Office equipment (including furniture and fittings (F&F) 7-Computer equipment (including point of sale equipment (POS) |- Plant and machinery 9 The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date 0 An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount 1 Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Income Statement 5-10 years 5-10 years 3-5 years 3-7 years Computer Shop Office equipment Plant and equipment and 2 Year ended 31 December 2018 Total $'000 machinery Land $'000 $'000 fitout and F&F POS $'000 $'000 $'000 4 5 Opening net book amount 6 Exchange differences 7 Additions 8 Disposals 9 Impairment charge recognised in income sta 0 Depreciation charge 1 Closing net book amount 17,219 2,648 9,163 902 2,504 32,436 18 14 43 1 74 2,848 314 385 64 3,611 210 7 48 401 666 1,167 1,167 3,384 15,288 574 1,714 48 5,720 2,367 7,743 518 2,504 28,420 2 3 At 31 December 2018 4 Cost 5 Accumulated depreciation 6 Net book amount 92,868 13,666 25,126 6,263 2,504 140,427 77.580 11,299 112,007 17,383 5,745 15,288 2,367 7,743 518 2,504 28,420 7 The performance of all AdoreU stores is reviewed throughout the year to ascertain whether any indicators of impairment exist in relation to the carrying value of store assets. During the year such a review highlighted that the carrying value of shop fitout of a number of stores in the retail network did not reflect their current and forecast trading performance. As a result a charge of $1,167,000 (2017: $5,905,000) has been recorded in the administrative and general expenses account in the financial statements for the year ending 31 December 2018, which reflects the full impairment of the shop fitout of the stores identified. The recoverable amount of the assets has been determined based on a value-in-use calculation. The assumption used to determine the recoverable amount is a key accounting estimate 28 Balance Sheet Equity Notes 3,7,8 Notes 11,12,13 Note 2 Note 10 P&L Note 15 A B C E G H J K M 0 P T w 11 INTANGIBLE ASSETS 1 2 Accounting Policy (i)Trademarks Trademarks have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost of trademarks and licences over their estimated useful lives (three to five years). ( Software costs Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (three to five years) 3 5 Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Company, and that will probably generate economic benefits exceeding costs beyond one year, are recognised sintangible assets. Direct costs include the software development employee costs. T Computer software costs recognised as assets are amortised over their estimated useful lives (three to five years) Trademar Software Total s'000 ka s000 Year ended 31 Dec 2017 I1 Opening net book amount 5,756 472 5,284 Additio 53 135 254 12 13 Disposals Imparirment expenses Amortisation axpenses 14 165 3,042 2,437 3,207 6Closing net book amount 366 2,803 At 31 Dec 2017 17 Cost 2,236 1,330 29,011 31,307 28,504 Accumulated amortisation 26,574 2,437 o Net book amount The carrying value of software assets have been assessed to determine whether any indicators of impairment exist. No indicators were identified and accordingly no 1impairment charge was recorded in the year ending 31 Dec 2018 (2017: $3,074,000) 2 12 TRADE AND OTHER PAYABLES 366 2,803 23 Accounting Policy Trade and other payables are initially recognised at fair value and subsequently at amortised cost These amounts represent liabilities for goods and services provided to the Company prior to the end of financial year which are unpaid. Trade Payable amounts are unsecured and are usually paid within 30 days of recoqnition. 24 31 Dec 31 Dec 2018 2017 2Trade payables 9 Sundry Accruals so Sales tax payable Employee Benefits 11,414 10,025 12,021 11,206 1,004 826 3,186 3,074 27,305 1 25,451 2 3 The carrying amounts of Company's trade and other payables are denominated in the 85 4 following currencies: NZD 6,265 9,830 7,384 6,574 12,573 7,059 7USD AUD GBP :# 437 402 EUR 875 697 25,451 1 27,305 12 13 LEASE PROVISIONS 4 Accounting Policy Provisions are recognised when the Company has a present leqal or constructive obliqation as a result of past events, it is probable that an outflow of resources will be 3 15 31 Dec 31 Dec 2018 2017 de 7Current Provipiong 1 Lease provision Non-Current Provisions Lease provicion 1,210 356 1,210 356 488 518 518 488 50 Onerous Lease and Make Good Provision 1 s2 The Company recognised a lease provicion for onerous contracts and make good under existing lease agreements as follows: The provision for onerous lease represents the lesser of the discounted future lease payments or the estimated costs on the basis that the forecast future profit of the relevant stores is not sufficient to cover the contracted costs of leasing the store. The provision for make qood represents the obligation to restore certain leasehold sites to their original condition upon store closure or relocation. This provision represents the present value of the expected future make qood commitment. At 31 Dec 2018 the provision relating to leases of stores identified being onerous and make qood provisions totalled $1,728,000 (2017: $844,0001 54 Morement in provisioas Lease provision exit the lease. The leases are deemed to be onerous 31 Dec 31 Dec 2018 844 2017 5 Opening provision 7 1,174 Utilised during the year Lease provision expense Closing provision 587 727 1,471 1,728 337 844 Balance Sheet P&L Equity Notes 3,7,8 Note 2 Note 10 Notes 11,12,13 15 SHARE CAPITAL |Accounting Policy Ordinary shares are classified as capital Incremental costs directly attributable to the issue of new shares or instruments are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases or controls the Company's equity share capital (treasury stock), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Group's equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs and the related income tax effects) is included in equity attributable to the Group's equity holders. 31 Dec 2018 31 Dec 2017 $'000 $'000 Opening balance of issued and paid up capital Issues of ordinary shares during the year Shares held as Treasury stock 59,415 59,415 72 84 Closing balance of issued and paid up capital (a) Ordinary shares As at 31 Dec 2018 there were 169,078,908 ordinary shares on issue (2017: 169,078,908). 169,078,908 ordinary shares include treasury shares. All ordinary shares are fully paid and rank equally with one vote attaching to each share (b) Treasury stock As at 31 Dec 2018 there were 1,096,974 shares (2017: 1,097,754) which have been issued under the DF7 (Income Tax Act 1994) Scheme and other employee schemes but at balance date have not been allocated to employees. The shares are held in trust by Cool & Cute Children Fashion Limited. 59,343 59,331 (c)Earnings per share Basic earnings per share is calculated by dividing the loss attributable to the equity holders of the company by the weighted average number of ordinary shares on issue during the year, 169,078,908 shares (2017: 169,078,908 shares). Diluted earnings per shares is calculated by dividing the loss by the weighted average number of ordinary shares on issue during the year adjusted to assume conversion of dilutive potential of ordinary shares as a result of the issue of share options, 169,078,908 shares (2017: 169,078,908 shares). Where the market price is lower than the exercise price of the option, there is no effect on diluted earnings per share. Oth ... + Balance Sheet Notes 11,12,13 Equity Note 2 Notes 3,7,8 P&L Note 10 Note 15 Inventory rage Nature of the range Retailing Stores Value $000 Label #of stores Age Location Infants Cuties New Zealand 0-2 8,431 25 Young children School-aged child ren Cool monkeys 2-5 Australia 18,654 61 Fun kids 10,765 Ireland 5-12 6 Adults Comfort Total Maternity wear 4,473 92 Total 42,323 O Closing balance of inventory 41,230 1 Provision for inventory write-offs 1,093 7 Notes 3,7,8 Balance Sheet Equity Note 2 Notes 11,12,13 Others Note 10 Note 15 AdoreU Children Fashion Ltd STATEMENTS OF COMPREHENSIVE INCOME For the year ended 31 Dec 2018 Unaudited 31-Dec-18 31-Dec-17 $'000 $'000 Notes Revenue 240,902 -120,120 100.0% 2 238,537 100.0% Cost of goods sold Gross profit Other operating income Expenses Selling expenses Finance expenses Administrative and general expenses Loss from continuing operations before income tax Income tax (expense)/credit Net loss from continuing operations Profit from discontinuing operations (net of tax) Loss for the year Other comprehensive loss Items that may be reclassified subsequently to loss: Exchange differences on translation of foreign operations Net movement on cash flow hedges Income tax relating to components of other comprehensive income Other comprehensive income/(loss) for the year Total comprehensive loss for the year, net of tax Total comprehensive loss for the year is attributable to equity holders -48.6 % 2.202.07 Inventory turnover -115,901 -49.9% 122,636 51.4% 120,782 50.1% 231 173 3 -108,223 -45.4% -109,016 -45.3% 3.23 Interests coverage ratio -4,011 -1.7% -3,352 -1.4% 0.85 -18,056 -7.6% -22,778 9.5% -7,423 -14,191 -3.19% -5.9% -1,656 2,579 -9,079 -11,612 0 -117 -11,495 -9,079 2,093 -59 1,818 -4,128 -509 1,157 3,402 -3030 -5,677 -14,525 -5,677 -14,525 BALANCE SHEETS As at 31 December 2018 12/31/2018 12/31/2017 12/31/2016 $000 $'000 $000 Notes ASSETS Current assets Cash and cash equivalents 3,679 1,870 1,077 0.21328 0.58460 0.32539 Quick ratio Trade and other receivables Derivative financial instruments Inventories 14,957 7 13,458 16,845 5,808 1,009 8,348 8 41,230 64,318 51,957 Current tax receivables 1,016 Total current assets 63,382 83,249 78,941 0.881922 2.715497 1.378328 Current ratio Non-current assets Property, plant and equipment 10 28,420 32,436 40,113 Intangible assets 11 2,803 5,756 9,690 Non-current tax receivables 3,567 3,475 2,958 Derivative financial instruments 278 614 Deferred tax assets 5,550 7,932 3,563 Total non-current assets 40,340 49,877 56,938 Total assets 103,722 135,879 133,126 LIABILITIES Current liabilities Trade and other payables Interest bearing liabilities 12 25,451 27,305 24,608 41,000 25,000 662 Lease Provisions 13 1,210 356 Derivative financial instruments Other Provisions 2,968 1,112 5,509 1,239 1,884 1,494 Total current liabilities 57,273 71,868 30,657 Non-current liabilities Interest bearing liabilities Lease Provisions 66,000 27,000 488 13 518 512 Deferred landlord contributions 2,105 2,102 2,971 Derivative financial instruments Total non-current liabilities Total liabilities Net assets 1,054 74 57 3,677 68,664 30,540 1.273023 1.674015 Debt/equity 75,545 99,321 87,813 28,177 33,805 48,066 EQUITY Share capital 15 59,343 59,331 59,147 Reserves 3,006 433 3,734 Retained earnings /(deficit) Total equity 34,172 28,177 25,093 14,815 33,805 48,066 STATEMENTS OF CHANGES IN EQUITY For the year ended 31 December 2018 ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share Treasury Retained Total capital deficit equity $'000 Reserves stock $'000 $'000 $'000 Balance at 1 January 2017 Comprehensive income 268 Note 59,415 3,734 14,815 48,066 11,495 11,495 Loss for the year |Other comprehensive loss Total comprehensive income Movement in treasury stock Movement in share based payment reserve Balance at 31 December 2017 Balance at 1 January 2018 3,030 3,030 3,030 11,495 14,525 15 184 184 1,137 1,217 80 59,415 25,093 433 84 33,805 59,415 433 84 25,093 33,805 Comprehensive income Loss for the year |Other comprehensive income 9,079 9,079 3,402 3,402 Total comprehensive income Movement in treasury stock Movement in share based payment reserve 3,402 9,079 5,677 15 12 12 37 37 Balance at 31 December 2018 59,415 3,006 72 34,172 28,177 The following is an analysis of the Company's revenue and results by operating segment. Revenue reported below represents revenue from the sale of children's clothing products to external customers. Revenue is allocated based on the country where the sale is generated. There were no inter-segment sales in the year (2015: nil). Geographic segment profit represents the profit earned by each segment without allocation of central administration costs, finance costs, income tax, store impairment and lease provisions. These costs are recorded in the centralised support segment Internation Centralised Total Australia New Zealand Support $'000 al S000 $'000 S'000 S'000 2018 Revenue 46,833 151,923 39,781 238,537 135,734 16,189 38,611 37,857 1,924 33,758 33,758 245,960 7,423 1,656 9,079 98,172 34,790 3,865 Expenses Segment result before income tax 8,222 Income tax Loss for the year 18,653 39,844 18,910 3,028 18,745 4,869 20,930 10,921 Segment total assets (other than deferred tax) Segment non-current assets (other than deferred t Acquisitions of property, plant and equipment, intangibles and other non-current segment 90 188 649 Depreciation and amortisation expense Finance expense 3,438 1,275 8,927 97 4,117 4,011 4,011 2017 Revenue Expenses Segment result before income tax Income tax 3Income tax Profit from discontinuing operations (net of tax) 149,914 43,017 47,971 39,527 8,444 240,902 255,093 14,191 2,579 130,993 18,921 38,845 4,172 45,728 45,728 117 2,696 11,495 125,194 Loss for the year 51,217 25,410 31,632 16,935 7Segment total assets (other than deferred tax) Segment non-current assets (other than deferred t 9Acquisitions of property, plant and equipment, Depreciation and amortisation expense Finance expense 20,139 4,045 4,471 6,639 471 14,696 3,542 5,077 3,352 41,945 8,567 11,010 3,352 757 223 1,335 127 (i) The Company's liabilities are not analysed on a segmental basis and therefore have not been reported. (ii) Revenue comprises the fair value for the sale of goods and services, net of sales tax and discounts and after eliminating sales within the Company. Sales of goods retail Sales of goods are recognised when a Company entity sells a product to the customer. Retail sales are usually in cash or by credit card either in store or online. Sales of goods-wholesale Wholesale sales are recognised in accordance with the terms of sales when the title has transferred and the benefits of ownership and risk pass to the customer. This is Bdependent on customer specific terms of trade Interest income Interest income is recognised using the effective interest method. 31-Dec-18 31-Dec-17 2 Other income 3Interest received 941 830 3 EXPENSES 12/31/2013 12/31/2017 Lrfur. inc-ne tez includer the fulluuisqspecific expoarer: Doprociation of proporty, plant &equipment 5,720 7,169 1,167 Impairment ofstore arrotr 5,905 Gaint(larr)an dirparal of arrotr 33 43 Amartiratian of intangibler 3,841 3,207 Impairment af intangibler 3,074 Leare pravirian expenre 1,471 397 11,532 20,429 E-playa .nafit oxper Salarier&uager 58,449 57,549 Share bared paymentr 37 Emplayee related roarganiration cart 59 2,034 58.445 60,563 Rontal eNo relatinq tu-perating lerer Rental and aperating leare onpenrer 48,889- 49,875 - Fissce crtr Interertexpenre 4,011 3,352 Sandry paarer 5 - Bad deber uritten aff 34 71x Directar's fe e 418 359 Danatian 40 24 Daybtful debtr oxpenre 2,090 2,606 417 R rtin af suditurr (kred n the amuut agread apn cagagement) Audit af financialetatement - Statutory audit 150 156 otherrervicer -Trearury advic 25 20 -Taxatian advice 1c Tatal feor paid to auditor 189 176 7 TRADE RECEIVABLES, PREPAYMENTS AND OTHER ASSETS Accaunting Palicy Trade rocoivabler are recognired initially at fair value andrubrequently at amartired cart lerr provirion for doubtful debr Callectibility of trado rocoivablerir rovioued on an anqoing barir. Deber uhich are knaun to bo uncalloctible are uritton off. A provirion for doubtful rocoivabler ir ortablirhed uhen there ir abjective ovidence that the Company uill not bo able to collect all amauntr due according to the original tormr of recolvabler. The amaunt of the provirion ir the differen co botueon the arret'r corrying amaunt and the prorent valuo of ortimated future carh flour. The amaunt of the provirion ir recoqnired in the in come Statomont. Significant financial difficultior of the debtor, prob ability that the dobtor uill entor bankruptcy ar finan cial rearqaniration, and default or delinquency in paymentr are canridered in dicatorr that the trade rocoivable ir impaired. 31De 31Dec 201 2017 $000 $000 Trade rocoivabler 6,531 12,704 5,454 Fropaymentr 2,739 Otherreceivablor 1,473 1,402 13,45 16,845 The carrying amauntr of the Company's trade and other recoivabler are donaminatod in the follouing currencior N2D 2,974 3,357 USD 6,21% 12,479 AUD 3,728 70 GBP 251 5$8 EUR 236 351 13,45 16,845 The Campany har arrerro d total trado rocoivabler ar boing impaired and har recognired a daubtful debt provirion of $2.1m bared an additional information in relation to conamic devolopmentrrubro quent to yoar end. All other remaining balancer at 31 Dec 2013 are conridered current and uithin terma. 8 INYENTORIES Accaunting Palicy Finirhed qandr are stated at the louer of cart and not roalirable value. Cartr are arriqned to in dividual itomr of inventory on the barir of weightod average carts, and include xponditure ineurred in acquirinq the arrotr and brinqing thom to thoir exirting location and condition. Not roalirable valus ir the ortimatedrolling price in the ordinary cour af buriners The Campany annually revieur tho carrying value af inventory to onrure it remainr ualued at louer of cart or not roalirable valus. An inventory provirian ir cro ated to roflect. instancer uhere the fore cartrollinq value ir louer than cart. 31Dec2018 31Dec2017 $000 $000 64,31 Finirhed Gaodr 41,230 Inventary provirionr of $1,093,000o (2017: $1,566,000) have boon included in the income Statomont to refloct the recovorable value of the companyy aqedrtack provirion Notes 3,7,8 Balance Sheet Equity P&L Note 2 1 10 PROPERTY, PLANT AND EQUIPMENT 2 Accounting Policy All property, plant and equipment is stated at historical cost less depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to the Income Statement during the financial period in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight line method to allocate their costs, net of their residual values, over their estimated 4 useful lives, as follows: 5-Shop fitout 6 -Office equipment (including furniture and fittings (F&F) 7-Computer equipment (including point of sale equipment (POS) |- Plant and machinery 9 The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date 0 An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount 1 Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Income Statement 5-10 years 5-10 years 3-5 years 3-7 years Computer Shop Office equipment Plant and equipment and 2 Year ended 31 December 2018 Total $'000 machinery Land $'000 $'000 fitout and F&F POS $'000 $'000 $'000 4 5 Opening net book amount 6 Exchange differences 7 Additions 8 Disposals 9 Impairment charge recognised in income sta 0 Depreciation charge 1 Closing net book amount 17,219 2,648 9,163 902 2,504 32,436 18 14 43 1 74 2,848 314 385 64 3,611 210 7 48 401 666 1,167 1,167 3,384 15,288 574 1,714 48 5,720 2,367 7,743 518 2,504 28,420 2 3 At 31 December 2018 4 Cost 5 Accumulated depreciation 6 Net book amount 92,868 13,666 25,126 6,263 2,504 140,427 77.580 11,299 112,007 17,383 5,745 15,288 2,367 7,743 518 2,504 28,420 7 The performance of all AdoreU stores is reviewed throughout the year to ascertain whether any indicators of impairment exist in relation to the carrying value of store assets. During the year such a review highlighted that the carrying value of shop fitout of a number of stores in the retail network did not reflect their current and forecast trading performance. As a result a charge of $1,167,000 (2017: $5,905,000) has been recorded in the administrative and general expenses account in the financial statements for the year ending 31 December 2018, which reflects the full impairment of the shop fitout of the stores identified. The recoverable amount of the assets has been determined based on a value-in-use calculation. The assumption used to determine the recoverable amount is a key accounting estimate 28 Balance Sheet Equity Notes 3,7,8 Notes 11,12,13 Note 2 Note 10 P&L Note 15 A B C E G H J K M 0 P T w 11 INTANGIBLE ASSETS 1 2 Accounting Policy (i)Trademarks Trademarks have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost of trademarks and licences over their estimated useful lives (three to five years). ( Software costs Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (three to five years) 3 5 Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Company, and that will probably generate economic benefits exceeding costs beyond one year, are recognised sintangible assets. Direct costs include the software development employee costs. T Computer software costs recognised as assets are amortised over their estimated useful lives (three to five years) Trademar Software Total s'000 ka s000 Year ended 31 Dec 2017 I1 Opening net book amount 5,756 472 5,284 Additio 53 135 254 12 13 Disposals Imparirment expenses Amortisation axpenses 14 165 3,042 2,437 3,207 6Closing net book amount 366 2,803 At 31 Dec 2017 17 Cost 2,236 1,330 29,011 31,307 28,504 Accumulated amortisation 26,574 2,437 o Net book amount The carrying value of software assets have been assessed to determine whether any indicators of impairment exist. No indicators were identified and accordingly no 1impairment charge was recorded in the year ending 31 Dec 2018 (2017: $3,074,000) 2 12 TRADE AND OTHER PAYABLES 366 2,803 23 Accounting Policy Trade and other payables are initially recognised at fair value and subsequently at amortised cost These amounts represent liabilities for goods and services provided to the Company prior to the end of financial year which are unpaid. Trade Payable amounts are unsecured and are usually paid within 30 days of recoqnition. 24 31 Dec 31 Dec 2018 2017 2Trade payables 9 Sundry Accruals so Sales tax payable Employee Benefits 11,414 10,025 12,021 11,206 1,004 826 3,186 3,074 27,305 1 25,451 2 3 The carrying amounts of Company's trade and other payables are denominated in the 85 4 following currencies: NZD 6,265 9,830 7,384 6,574 12,573 7,059 7USD AUD GBP :# 437 402 EUR 875 697 25,451 1 27,305 12 13 LEASE PROVISIONS 4 Accounting Policy Provisions are recognised when the Company has a present leqal or constructive obliqation as a result of past events, it is probable that an outflow of resources will be 3 15 31 Dec 31 Dec 2018 2017 de 7Current Provipiong 1 Lease provision Non-Current Provisions Lease provicion 1,210 356 1,210 356 488 518 518 488 50 Onerous Lease and Make Good Provision 1 s2 The Company recognised a lease provicion for onerous contracts and make good under existing lease agreements as follows: The provision for onerous lease represents the lesser of the discounted future lease payments or the estimated costs on the basis that the forecast future profit of the relevant stores is not sufficient to cover the contracted costs of leasing the store. The provision for make qood represents the obligation to restore certain leasehold sites to their original condition upon store closure or relocation. This provision represents the present value of the expected future make qood commitment. At 31 Dec 2018 the provision relating to leases of stores identified being onerous and make qood provisions totalled $1,728,000 (2017: $844,0001 54 Morement in provisioas Lease provision exit the lease. The leases are deemed to be onerous 31 Dec 31 Dec 2018 844 2017 5 Opening provision 7 1,174 Utilised during the year Lease provision expense Closing provision 587 727 1,471 1,728 337 844 Balance Sheet P&L Equity Notes 3,7,8 Note 2 Note 10 Notes 11,12,13 15 SHARE CAPITAL |Accounting Policy Ordinary shares are classified as capital Incremental costs directly attributable to the issue of new shares or instruments are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases or controls the Company's equity share capital (treasury stock), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Group's equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received (net of any directly attributable incremental transaction costs and the related income tax effects) is included in equity attributable to the Group's equity holders. 31 Dec 2018 31 Dec 2017 $'000 $'000 Opening balance of issued and paid up capital Issues of ordinary shares during the year Shares held as Treasury stock 59,415 59,415 72 84 Closing balance of issued and paid up capital (a) Ordinary shares As at 31 Dec 2018 there were 169,078,908 ordinary shares on issue (2017: 169,078,908). 169,078,908 ordinary shares include treasury shares. All ordinary shares are fully paid and rank equally with one vote attaching to each share (b) Treasury stock As at 31 Dec 2018 there were 1,096,974 shares (2017: 1,097,754) which have been issued under the DF7 (Income Tax Act 1994) Scheme and other employee schemes but at balance date have not been allocated to employees. The shares are held in trust by Cool & Cute Children Fashion Limited. 59,343 59,331 (c)Earnings per share Basic earnings per share is calculated by dividing the loss attributable to the equity holders of the company by the weighted average number of ordinary shares on issue during the year, 169,078,908 shares (2017: 169,078,908 shares). Diluted earnings per shares is calculated by dividing the loss by the weighted average number of ordinary shares on issue during the year adjusted to assume conversion of dilutive potential of ordinary shares as a result of the issue of share options, 169,078,908 shares (2017: 169,078,908 shares). Where the market price is lower than the exercise price of the option, there is no effect on diluted earnings per share. Oth ... + Balance Sheet Notes 11,12,13 Equity Note 2 Notes 3,7,8 P&L Note 10 Note 15 Inventory rage Nature of the range Retailing Stores Value $000 Label #of stores Age Location Infants Cuties New Zealand 0-2 8,431 25 Young children School-aged child ren Cool monkeys 2-5 Australia 18,654 61 Fun kids 10,765 Ireland 5-12 6 Adults Comfort Total Maternity wear 4,473 92 Total 42,323 O Closing balance of inventory 41,230 1 Provision for inventory write-offs 1,093 7 Notes 3,7,8 Balance Sheet Equity Note 2 Notes 11,12,13 Others Note 10 Note 15