# CAE Inc.

#  

# Consolidated Financial Statements

 

| **Management’s Report on Internal Control  Over Financial Reporting**         | 1      |
|-------------------------------------------------------------------------------------|--------|
| **Report of Independent Registered Public  Accounting Firm**                        | 1      |
| **Consolidated Financial Statements**                                               |   |
| Consolidated Statement of Financial Position                                        | 3      |
| Consolidated Income Statement                                                       | 4      |
| Consolidated Statement of Comprehensive Income                                      | 5      |
| Consolidated Statement of Changes in Equity                                         | 6      |
| Consolidated Statement of Cash Flows                                                | 7      |
| **Notes to the Consolidated Financial  Statements**                                 |   |
| Note 1 – Nature of Operations and Summary of  Significant Accounting Policies | 8      |
| Note 2 – Changes in Accounting Policies                                       | 19     |
| Note 3 – Business Combinations                                                | 23     |
| Note 4 – Accounts Receivable                                                  | 23     |
| Note 5 – Inventories                                                          | 24     |
| Note 6 – Property, Plant and Equipment                                        | 24     |
| Note 7 – Intangible Assets                                                    | 25     |
| Note 8 – Other Assets                                                         | 26     |
| Note 9 – Accounts Payable and Accrued Liabilities                             | 27     |
| Note 10 – Contracts in Progress                                               | 27     |
| Note 11 – Provisions                                                          | 27     |
| Note 12 – Debt Facilities                                                     | 28     |
| Note 13 – Government Assistance                                               | 30     |
| Note 14 – Employee Benefits Obligations                                       | 31     |
| Note 15 – Deferred Gains and Other Non-Current  Liabilities                   | 35     |
| Note 16 – Income Taxes                                                        | 35     |
| Note 17 – Share Capital, Earnings per Share and  Dividends                    | 38     |
| Note 18 – Accumulated Other Comprehensive Income  (Loss)                      | 39     |
| Note 19 – Employee Compensation                                               | 39     |
| Note 20 – Impairment of Non-Financial Assets                                  | 39     |
| Note 21 – Other Gains – Net                                             | 40     |
| Note 22 – Restructuring, Integration and  Acquisition Costs                   | 40     |
| Note 23 – Finance Expense – Net                                         | 40     |
| Note 24 – Share-Based Payments                                                | 41     |
| Note 25 – Supplementary Cash Flows Information                                | 45     |
| Note 26 – Contingencies                                                       | 45     |
| Note 27 – Commitments                                                         | 45     |
| Note 28 – Capital Risk Management                                             | 46     |
| Note 29 – Fair Value of Financial Instruments                                 | 47     |
| Note 30 – Financial Risk Management                                           | 50     |
| Note 31 – Operating Segments and Geographic  Information                      | 56     |
| Note 32 – Related Party Relationships                                         | 58     |
| Note 33 – Related Party Transactions                                          | 61     |

 

# ** **

 

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Consolidated FinancialStatements 

Consolidated Financial Statements 

# Management’s Report onInternal Control Over Financial Reporting

 

Management ofCAE is responsible for establishing and maintaining adequate internal controlover financial reporting (as defined in Rule 13a-15(f), 15d-15(f) under theSecurities Exchange Act of 1934). CAE’s internal control over financialreporting is a process designed under the supervision of CAE’s President andChief Executive Officer and Chief Financial Officer to provide reasonableassurance regarding the reliability of financial reporting and the preparationof the Company’s financial statements for external reporting purposes inaccordance with Canadian generally accepted accounting principles. 

 

As ofMarch 31, 2014, management conducted an assessment of theeffectiveness of the Company’s internal control over the financial reportingbased on the framework and criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on this assessment, management concluded that theCompany’s internal control over financial reporting as ofMarch 31, 2014 was effective.

 

 

 

                                            

 

 

 

M. Parent                                                         S.Lefebvre

President and ChiefExecutive Officer                Vice-president, Finance and Chief FinancialOfficer

 

 

Montreal (Canada)

May 15, 2014

# ** **

 

Report of Independent Registered Public Accounting Firm 

** **

**Tothe Shareholders of CAE Inc.**

** **

Wehave audited the accompanying consolidated statement offinancial position of CAE Inc. and its subsidiaries as of March 31, 2014 andMarch 31, 2013 and the related consolidatedincome statement, statement of comprehensive income, statement of changes inequity, and statement of cash flows for the years then ended.We also have audited CAE Inc.  and itssubsidiaries’ internal control over financialreporting as of March 31, 2014, based on criteria established inInternal Control - Integrated Framework (1992) issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these consolidated financial statements, for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on these consolidated financialstatements and an opinion on the company’s internal control over financialreporting based on our integrated audits. 

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audits of the consolidated   financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overallconsolidated financial statement presentation. Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that: (i)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements. Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.   

CAE Year-End Financial Results 2014 | 1

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Consolidated Financial Statements 

 

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of CAE Inc. and its subsidiaries asof March 31, 2014 and March 31, 2013 and the results of theiroperations and their cash flows for the years then ended in conformity with InternationalFinancial Reporting Standards as issued by the International AccountingStandards Board.Also, in our opinion, CAE Inc. and its subsidiaries maintained, in all materialrespects, effective internal control over financial reporting as of March 31,2014, based on criteria established in Internal Control - Integrated Framework(1992) issued by COSO.

As discussed in Note 2 – Changes inAccounting Policies to the financial statements, due to the adoption of IAS 19– Employee benefits (revised 2011) and IFRS 11 - Joint arrangements, thecompany has changed its method of accounting for employee benefits obligationand investments in joint arrangements in the year ended March 31, 2014, whichresulted in the inclusion of April 1, 2012 balance sheet.

 

 

1  [1] 

 

 

Montreal,Quebec 

May15, 2014

 

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1  CPA auditor, CA, public accountancy permit No. A123498

2 | CAE Year-End Financial Results 2014

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Consolidated Financial Statements 

| Consolidated Statement of Financial Position                                             |
|------------------------------------------------------------------------------------------|
|                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *As at March 31*                                                                         |   | **March 31** |   |   | March 31 |   | April 1 |   |
| *(amounts in millions of Canadian dollars)*                                              | Notes |   |   | **2014 ** |   |   | 2013  |   |   | 2012  |
|                                                                                     |   |   |   |   |   |   |   | Restated |   |   | Restated |   |
| **Assets**                                                                               |   |   |   |   |   |   |   | (Note 2) |   |   | (Note 2) |
| Cash and cash equivalents                                                                |   |   | **$** | **312.3 ** |   | $ | 260.0  |   | $ | 254.7  |
| Accounts receivable                                                                      | 4 |   |   | **453.9 ** |   |   | 401.4  |   |   | 302.3  |
| Contracts in progress : assets                                                           | 10 |   |   | **256.4 ** |   |   | 265.6  |   |   | 259.8  |
| Inventories                                                                              | 5 |   |   | **219.5 ** |   |   | 176.2  |   |   | 146.9  |
| Prepayments                                                                              |   |   |   | **76.6 ** |   |   | 53.5  |   |   | 46.1  |
| Income taxes recoverable                                                                 |   |   |   | **24.8 ** |   |   | 141.9  |   |   | 95.5  |
| Derivative financial assets                                                              | 29 |   |   | **7.3 ** |   |   | 9.0  |   |   | 10.3  |
| **Total current assets**                                                                 |   |   | **$** | **1,350.8 ** |   | $ | 1,307.6  |   | $ | 1,115.6  |
| Property, plant and equipment                                                            | 6 |   |   | **1,341.2 ** |   |   | 1,142.8  |   |   | 993.2  |
| Intangible assets                                                                        | 7 |   |   | **870.7 ** |   |   | 794.4  |   |   | 527.9  |
| Investment in equity accounted investees                                                 | 32 |   |   | **234.6 ** |   |   | 196.9  |   |   | 172.9  |
| Deferred tax assets                                                                      | 16 |   |   | **31.8 ** |   |   | 31.3  |   |   | 16.9  |
| Derivative financial assets                                                              | 29 |   |   | **7.5 ** |   |   | 6.4  |   |   | 7.2  |
| Other assets                                                                             | 8 |   |   | **400.1 ** |   |   | 211.9  |   |   | 195.2  |
| **Total assets**                                                                         |   |   | **$** | **4,236.7 ** |   | $ | 3,691.3  |   | $ | 3,028.9  |
|                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and equity**                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                                                 | 9 |   | **$** | **685.0 ** |   | $ | 644.2  |   | $ | 556.2  |
| Provisions                                                                               | 11 |   |   | **28.6 ** |   |   | 49.0  |   |   | 21.6  |
| Income taxes payable                                                                     |   |   |   | **8.3 ** |   |   | 10.0  |   |   | 9.4  |
| Contracts in progress : liabilities                                                      | 10 |   |   | **167.4 ** |   |   | 122.3  |   |   | 110.4  |
| Current portion of long-term debt                                                        | 12 |   |   | **50.6 ** |   |   | 70.6  |   |   | 119.3  |
| Derivative financial liabilities                                                         | 29 |   |   | **24.6 ** |   |   | 10.3  |   |   | 8.9  |
| **Total current liabilities**                                                            |   |   | **$** | **964.5 ** |   | $ | 906.4  |   | $ | 825.8  |
| Provisions                                                                               | 11 |   |   | **6.4 ** |   |   | 7.9  |   |   | 5.5  |
| Long-term debt                                                                           | 12 |   |   | **1,117.9 ** |   |   | 1,002.8  |   |   | 588.4  |
| Royalty obligations                                                                      |   |   |   | **161.5 ** |   |   | 160.6  |   |   | 161.6  |
| Employee benefits obligations                                                            | 14 |   |   | **115.5 ** |   |   | 136.1  |   |   | 114.3  |
| Deferred gains and other non-current liabilities                                         | 15 |   |   | **204.2 ** |   |   | 191.4  |   |   | 182.5  |
| Deferred tax liabilities                                                                 | 16 |   |   | **166.1 ** |   |   | 129.9  |   |   | 90.0  |
| Derivative financial liabilities                                                         | 29 |   |   | **18.4 ** |   |   | 9.8  |   |   | 9.4  |
| **Total liabilities**                                                                    |   |   | **$** | **2,754.5 ** |   | $ | 2,544.9  |   | $ | 1,977.5  |
| **Equity**                                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Share capital                                                                            | 17 |   | **$** | **517.5 ** |   | $ | 471.7  |   | $ | 454.5  |
| Contributed surplus                                                                      |   |   |   | **19.5 ** |   |   | 21.9  |   |   | 19.2  |
| Accumulated other comprehensive income (loss)                                            | 18 |   |   | **129.5 ** |   |   | (12.0) |   |   | (6.0) |
| Retained earnings                                                                        |   |   |   | **775.1 ** |   |   | 633.0  |   |   | 563.4  |
| Equity attributable to equity holders of the Company                                     |   |   | **$** | **1,441.6 ** |   | $ | 1,114.6  |   | $ | 1,031.1  |
| Non-controlling interests                                                                |   |   |   | **40.6 ** |   |   | 31.8  |   |   | 20.3  |
| **Total equity**                                                                         |   |   | **$** | **1,482.2 ** |   | $ | 1,146.4  |   | $ | 1,051.4  |
| **Total liabilities and equity**                                                         |   |   | **$** | **4,236.7 ** |   | $ | 3,691.3  |   | $ | 3,028.9  |
|                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The accompanying notes form an integral part of these Consolidated Financial Statements. |

CAE Year-End Financial Results 2014 | 3

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Consolidated Financial Statements 

| Consolidated Income Statement                                                            |
|------------------------------------------------------------------------------------------|
|                                                                                     |   |   |   |   |   |   |
| *Years ended March 31*                                                                   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions of Canadian dollars, except per share amounts)*                    | Notes |   |   | **2014 ** |   |   | 2013  |
|                                                                                     |   |   |   |   |   |   |   | Restated |   |
|                                                                                     |   |   |   |   |   |   |   | (Note 2) |
| Revenue                                                                                  | 31 |   | **$** | **2,114.9 ** |   | $ | 2,035.2  |
| Cost of sales                                                                            |   |   |   | **1,518.0 ** |   |   | 1,450.4  |
| **Gross profit**                                                                         |   |   | **$** | **596.9 ** |   | $ | 584.8  |
| Research and development expenses                                                        |   |   |   | **68.4 ** |   |   | 60.1  |
| Selling, general and administrative expenses                                             |   |   |   | **287.1 ** |   |   | 264.5  |
| Other gains – net                                                                  | 21 |   |   | **(20.4)** |   |   | (22.4) |
| After tax share in profit of equity accounted investees                                  | 31 |   |   | **(30.0)** |   |   | (20.1) |
| Restructuring, integration and acquisition costs                                         | 22 |   |   | **- ** |   |   | 68.7  |
| **Operating profit**                                                                     |   |   | **$** | **291.8 ** |   | $ | 234.0  |
| Finance income                                                                           | 23 |   |   | **(9.8)** |   |   | (9.4) |
| Finance expense                                                                          | 23 |   |   | **80.5 ** |   |   | 74.5  |
| Finance expense – net                                                              |   |   | **$** | **70.7 ** |   | $ | 65.1  |
| **Earnings before income taxes**                                                         |   |   | **$** | **221.1 ** |   | $ | 168.9  |
| Income tax expense                                                                       | 16 |   |   | **30.0 ** |   |   | 28.2  |
| **Net income**                                                                           |   |   | **$** | **191.1 ** |   | $ | 140.7  |
| Attributable to:                                                                         |   |   |   |   |   |   |   |
| Equity holders of the Company                                                            |   |   | **$** | **190.0 ** |   | $ | 137.7  |
| Non-controlling interests                                                                |   |   |   | **1.1 ** |   |   | 3.0  |
|                                                                                     |   |   | **$** | **191.1 ** |   | $ | 140.7  |
| **Earnings per share from continuing operations**                                        |   |   |   |   |   |   |
| **attributable to equity holders of the Company**                                        |   |   |   |   |   |   |   |
| Basic and diluted                                                                        | 17 |   | **$** | **0.73 ** |   | $ | 0.53  |
|                                                                                     |   |   |   |   |   |   |   |   |
| The accompanying notes form an integral part of these Consolidated Financial Statements. |
|                                                                                     |   |   |   |   |   |   |   |   |
|                                                                                     |   |   |   |   |   |   |   |   |   |   |

4 | CAE Year-End Financial Results 2014

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Consolidated Financial Statements 

| Consolidated Statement of Comprehensive Income                                   |
|----------------------------------------------------------------------------------|
|                                                                             |   |   |   |   |   |
| *Years ended March 31*                                                           |   |   |   |   |   |   |   |   |
| *(amounts in millions of Canadian dollars)*                                      | Notes |   | **2014 ** |   |   | 2013  |
|                                                                             |   |   |   |   |   |   | Restated |   |
|                                                                             |   |   |   |   |   |   |   |   | (Note 2) |
| **Net income**                                                                   |   | **$** | **191.1 ** |   | $ | 140.7  |
| **Items that may be reclassified to net income**                                 |   |   |   |   |   |   |   |   |
| **Foreign currency translation**                                                 |   |   |   |   |   |   |
| Net currency translation difference on the translation of financial              |   |   |   |   |   |   |
|                                                                             |   | statements of foreign operations |   | **$** | **184.8 ** |   | $ | 6.0  |
| Net losses on certain long-term debt denominated in foreign                      |   |   |   |   |   |   |
|                                                                             |   | currency and designated as hedges of net investments in foreign operations |   |   | **(37.5)** |   |   | (8.8) |
| Income taxes                                                                     | 16 |   | **(4.3)** |   |   | 0.7  |
| Share in foreign currency translation difference of equity accounted investees   |   |   | **16.5 ** |   |   | 4.6  |
|                                                                             |   |   | **$** | **159.5 ** |   | $ | 2.5  |
| **Net changes in cash flow hedges**                                              |   |   |   |   |   |   |
| Effective portion of changes in fair value of cash flow hedges                   |   | **$** | **(49.1)** |   | $ | (0.5) |
| Reclassification to income or to the related non-financial asset(1)(2)(3)        |   |   | **27.4 ** |   |   | (11.9) |
| Income taxes                                                                     | 16 |   | **5.6 ** |   |   | 3.2  |
| After tax share in net changes of cash flow hedges of equity accounted investees |   |   | **(0.9)** |   |   | 0.8  |
|                                                                             |   |   | **$** | **(17.0)** |   | $ | (8.4) |
| **Net change in available-for-sale financial instruments**                       |   |   |   |   |   |   |
| Net change in fair value of available-for-sale financial assets                  | 29 | **$** | **0.2 ** |   | $ | -  |
|                                                                             |   |   | **$** | **0.2 ** |   | $ | -  |
| **Items that are never reclassified to net income**                              |   |
| **Defined benefit plan remeasurements**                                          |   |   |   |   |   |   |
| Defined benefit plan remeasurements                                              | 14 | **$** | **13.4 ** |   | $ | (26.0) |
| Income taxes                                                                     | 16 |   | **(3.7)** |   |   | 7.1  |
|                                                                             |   | **$** | **9.7 ** |   | $ | (18.9) |
| **Other comprehensive income (loss)**                                            |   | **$** | **152.4 ** |   | $ | (24.8) |
| **Total comprehensive income**                                                   |   | **$** | **343.5 ** |   | $ | 115.9  |
| Attributable to:                                                                 |   |   |   |   |   |   |
| Equity holders of the Company                                                    |   | **$** | **341.2 ** |   | $ | 112.8  |
| Non-controlling interests                                                        |   |   | **2.3 ** |   |   | 3.1  |
|                                                                             |   | **$** | **343.5 ** |   | $ | 115.9  |

 

(1)                    Fiscal 2014 include net losses of $20.0 million reclassified to revenue (2013 - net gains of $7.5 million) and net losses of $3.6 million reclassified to finance expense - net (2013 - net gains of $0.8 million).

(2)                    Fiscal 2014 include net losses of $3.8 million reclassified to the related non-financial asset (2013 - net gains of $3.6 million).

(3)                    An estimated net amount of $31.9 million of losses is expected to be reclassified from other comprehensive income during the next 12 months. Future fluctuation in market rate (foreign exchange rate or interest rate) will impact the amount expected to be reclassified.

The accompanying notes form an integral part of these Consolidated Financial Statements.

CAE Year-End Financial Results 2014 | 5

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Consolidated Financial Statements 

 

| Consolidated Statement of Changes in Equity                                                                                                                                                                                                                 |                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|
| Attributable to equity holders of the Company                                                                                                                                                                                                               |                                                    |   |   |   |   |   |   |
| *Year ended March 31, 2014*                                                                                                                                                                                                                                 |                                                    | Common shares |   |   | Accumulated other |   |   |   |   |   |   |   | Non- |   |   |   |   |
| *(amounts in millions of Canadian dollars,*                                                                                                                                                                                                                 |                                                    | Number of |   |   | Stated |   | Contributed |   | comprehensive |   | Retained |   |   |   |   | controlling |   |   | **Total** |   |
| *except number of shares)*                                                                                                                                                                                                                                  | Notes                                                   | shares |   |   | value |   |   | surplus |   | income (Note 18) |   | earnings |   |   | Total |   | interests |   |   | **equity** |   |
| Balances, beginning of year - restated                                                                                                                                                                                                                      | 2                                                       | 259,979,059  |   | $ | 471.7  | $ | 21.9  | $ | (12.0) | $ | 633.0  | $ | 1,114.6  | $ | 31.8  | **$** | **1,146.4 ** |
| Net income                                                                                                                                                                                                                                                  |                                                    | -  |   | -  |   | -  |   | -  |   | 190.0  |   | 190.0  |   | 1.1  |   | **191.1 ** |
| Other comprehensive income (loss):                                                                                                                                                                                                                          |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                        | Foreign currency translation                            |   | -  |   | -  |   | -  |   | 158.3  |   | -  |   | 158.3  |   | 1.2  |   | **159.5 ** |
|                                                                                                                                                                                                                                                        | Net changes in cash flow hedges                         |   | -  |   | -  |   | -  |   | (17.0) |   | -  |   | (17.0) |   | -  |   | **(17.0)** |
|                                                                                                                                                                                                                                                        | Net changes in available-for-sale financial instruments | -  |   | -  |   | -  |   | 0.2  |   | -  |   | 0.2  |   | -  |   | **0.2 ** |
|                                                                                                                                                                                                                                                        | Defined benefit plan remeasurements                     | -  |   | -  |   | -  |   | -  |   | 9.7  |   | 9.7  |   | -  |   | **9.7 ** |
| Total comprehensive income                                                                                                                                                                                                                                  |                                                    | -  | $ | -  | $ | -  | $ | 141.5  | $ | 199.7  | $ | 341.2  | $ | 2.3  | **$** | **343.5 ** |
| Stock options exercised                                                                                                                                                                                                                                     | 24                                                      | 2,387,556  |   | 22.2  |   | -  |   | -  |   | -  |   | 22.2  |   | -  |   | **22.2 ** |
| Optional cash purchase                                                                                                                                                                                                                                      |                                                    | 1,410  |   | -  |   | -  |   | -  |   | -  |   | -  |   | -  |   | **- ** |
| Transfer upon exercise of stock options                                                                                                                                                                                                                     |                                                    | -  |   | 6.1  |   | (6.1) |   | -  |   | -  |   | -  |   | -  |   | **- ** |
| Share-based payments                                                                                                                                                                                                                                        | 24                                                      | -  |   | -  |   | 3.7  |   | -  |   | -  |   | 3.7  |   | -  |   | **3.7 ** |
| Additions to non-controlling interests                                                                                                                                                                                                                      |                                                    | -  |   | -  |   | -  |   | -  |   | -  |   | -  |   | 6.5  |   | **6.5 ** |
| Stock dividends                                                                                                                                                                                                                                             | 17                                                      | 1,403,418  |   | 17.5  |   | -  |   | -  |   | (17.5) |   | -  |   | -  |   | **- ** |
| Cash dividends                                                                                                                                                                                                                                              | 17                                                      | -  |   | -  |   | -  |   | -  |   | (40.1) |   | (40.1) |   | -  |   | **(40.1)** |
| Balances, end of year                                                                                                                                                                                                                                       | 263,771,443                                        | $ | 517.5  | $ | 19.5  | $ | 129.5  | $ | 775.1  | $ | 1,441.6  | $ | 40.6  | **$** | **1,482.2 ** |
|                                                                                                                                                                                                                                                        |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                        |                                                    |   |   | Attributable to equity holders of the Company |   |   |   |   |   |   |   |
| *Year ended March 31, 2013*                                                                                                                                                                                                                                 |                                                    | Common shares |   |   | Accumulated other |   |   |   |   |   |   |   |   | Non- |   |   |   |   |
| *(amounts in millions of Canadian dollars,*                                                                                                                                                                                                                 |                                                    | Number of |   |   | Stated |   | Contributed |   | comprehensive |   | Retained |   |   |   |   | controlling |   |   | Total |   |
| *except number of shares)*                                                                                                                                                                                                                                  | Notes                                                   | shares |   |   | value |   |   | surplus |   | loss (Note 18) |   | earnings |   |   | Total |   | interests |   |   | equity |   |
| Balances, beginning of year - restated                                                                                                                                                                                                                      | 2                                                       | 258,266,295  | $ | 454.5  | $ | 19.2  | $ | (6.0) | $ | 563.4  | $ | 1,031.1  | $ | 20.3  | $ | 1,051.4  |
| Net income                                                                                                                                                                                                                                                  |                                                    | -  |   | -  |   | -  |   | -  |   | 137.7  |   | 137.7  |   | 3.0  |   | 140.7  |
| Other comprehensive income (loss):                                                                                                                                                                                                                          |                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                        | Foreign currency translation                            |   | -  |   | -  |   | -  |   | 2.4  |   | -  |   | 2.4  |   | 0.1  |   | 2.5  |
|                                                                                                                                                                                                                                                        | Net changes in cash flow hedges                         |   | -  |   | -  |   | -  |   | (8.4) |   | -  |   | (8.4) |   | -  |   | (8.4) |
|                                                                                                                                                                                                                                                        | Defined benefit plan remeasurements                     | -  |   | -  |   | -  |   | -  |   | (18.9) |   | (18.9) |   | -  |   | (18.9) |
| Total comprehensive income                                                                                                                                                                                                                                  |                                                    | -  | $ | -  | $ | -  | $ | (6.0) | $ | 118.8  | $ | 112.8  | $ | 3.1  | $ | 115.9  |
| Stock options exercised                                                                                                                                                                                                                                     | 24                                                      | 482,250  |   | 3.9  |   | -  |   | -  |   | -  |   | 3.9  |   | -  |   | 3.9  |
| Optional cash purchase                                                                                                                                                                                                                                      |                                                    | 1,683  |   | -  |   | -  |   | -  |   | -  |   | -  |   | -  |   | -  |
| Transfer upon exercise of stock options                                                                                                                                                                                                                     |                                                    | -  |   | 1.2  |   | (1.2) |   | -  |   | -  |   | -  |   | -  |   | -  |
| Share-based payments                                                                                                                                                                                                                                        | 24                                                      | -  |   | -  |   | 3.9  |   | -  |   | -  |   | 3.9  |   | -  |   | 3.9  |
| Additions to non-controlling interests                                                                                                                                                                                                                      |                                                    | -  |   | -  |   | -  |   | -  |   | -  |   | -  |   | 8.4  |   | 8.4  |
| Stock dividends                                                                                                                                                                                                                                             | 17                                                      | 1,228,831  |   | 12.1  |   | -  |   | -  |   | (12.1) |   | -  |   | -  |   | -  |
| Cash dividends                                                                                                                                                                                                                                              | 17                                                      | -  |   | -  |   | -  |   | -  |   | (37.1) |   | (37.1) |   | -  |   | (37.1) |
| Balances, end of year - restated (Note 2)                                                                                                                                                                                                                   | 259,979,059                                        | $ | 471.7  | $ | 21.9  | $ | (12.0) | $ | 633.0  | $ | 1,114.6  | $ | 31.8  | $ | 1,146.4  |
| The total retained earnings and accumulated other comprehensive income (loss) for the year ended March 31, 2014 was $904.6 million (2013 – $621.0 million).

The accompanying notes form an integral part of these Consolidated Financial Statements. |                                                    |   |

6 | CAE Year-End Financial Results 2014

----

Consolidated Financial Statements 

 

| Consolidated Statement of Cash Flows                                                     |
|------------------------------------------------------------------------------------------|
|                                                                                     |   |   |   |   |   |   |   |   |   |   |
|                                                                                     |   |   |   |   |
| *Years ended March 31*                                                                   |   |   |   |   |   |   |   |   |
| *(amounts in millions of Canadian dollars)*                                              | Notes |   | **2014 ** |   |   | 2013  |
|                                                                                     |   |   |   |   |   |   |   | Restated |   |
| **Operating activities**                                                                 |   |   |   |   |   | (Note 2) |
| Net income                                                                               |   | **$** | **191.1 ** |   | $ | 140.7  |
| Adjustments to reconcile net income to cash flows from operating activities:             |   |   |   |   |   |   |
|                                                                                     | Depreciation of property, plant and equipment | 6 |   | **99.5 ** |   |   | 93.9  |
|                                                                                     | Amortization of intangible and other assets |   |   | **67.6 ** |   |   | 48.8  |
|                                                                                     | Financing cost amortization | 23 |   | **1.5 ** |   |   | 1.6  |
|                                                                                     | After tax share in profit of equity accounted investees |   |   | **(30.0)** |   |   | (20.1) |
|                                                                                     | Deferred income taxes | 16 |   | **27.6 ** |   |   | 27.6  |
|                                                                                     | Investment tax credits |   |   | **(15.6)** |   |   | (22.6) |
|                                                                                     | Share-based compensation | 24 |   | **9.8 ** |   |   | (4.2) |
|                                                                                     | Defined benefit pension plans | 14 |   | **(9.1)** |   |   | (4.6) |
|                                                                                     | Amortization of other non-current liabilities |   |   | **(25.8)** |   |   | (15.4) |
|                                                                                     | Other |   |   | **(11.8)** |   |   | (6.6) |
| Changes in non-cash working capital                                                      | 25 |   | **(28.8)** |   |   | (84.6) |
| **Net cash provided by operating activities**                                            |   | **$** | **276.0 ** |   | $ | 154.5  |
| **Investing activities**                                                                 |   |   |   |   |   |   |
| Business combinations, net of cash and cash equivalents acquired                         | 3 | **$** | **(3.8)** |   | $ | (285.3) |
| Capital expenditures for property, plant and equipment                                   | 6 |   | **(157.4)** |   |   | (96.7) |
| Proceeds from disposal of property, plant and equipment                                  |   |   | **15.4 ** |   |   | 9.2  |
| Capitalized development costs                                                            | 7 |   | **(48.1)** |   |   | (49.6) |
| Enterprise resource planning (ERP) and other software                                    | 7 |   | **(13.6)** |   |   | (19.2) |
| Net proceeds (payments) from equity accounted investees                                  |   |   | **4.2 ** |   |   | (1.4) |
| Dividends received from equity accounted investees                                       |   |   | **15.0 ** |   |   | 11.9  |
| Other                                                                                    |   |   | **(10.2)** |   |   | (2.6) |
| **Net cash used in investing activities**                                                |   | **$** | **(198.5)** |   | $ | (433.7) |
| **Financing activities**                                                                 |   |   |   |   |   |   |
| Net change in restricted cash                                                            |   | **$** | **(18.1)** |   | $ | 0.9  |
| Net effect of current financial assets program                                           | 30 |   | **- ** |   |   | (37.1) |
| Proceeds from borrowing under revolving unsecured credit facilities                      | 12 |   | **641.1 ** |   |   | 660.4  |
| Repayment of borrowing under revolving unsecured credit facilities                       | 12 |   | **(655.3)** |   |   | (606.4) |
| Proceeds from long-term debt, net of transaction costs                                   | 12 |   | **67.9 ** |   |   | 697.9  |
| Repayment of long-term debt                                                              | 12 |   | **(38.0)** |   |   | (360.4) |
| Repayment of finance lease                                                               | 12 |   | **(27.8)** |   |   | (36.3) |
| Dividends paid                                                                           |   |   | **(40.1)** |   |   | (37.1) |
| Common stock issuance                                                                    |   |   | **22.2 ** |   |   | 3.9  |
| Other                                                                                    |   |   | **(0.5)** |   |   | (1.3) |
| **Net cash (used in) provided by financing activities**                                  |   | **$** | **(48.6)** |   | $ | 284.5  |
| **Effect of foreign exchange rate changes on cash**                                      |   |   |   |   |   |   |   |   |
|                                                                                     | **and cash equivalents** |   | **$** | **23.4 ** |   | $ | -  |
| **Net increase in cash and cash equivalents**                                            |   |   | **52.3 ** |   |   | 5.3  |
| **Cash and cash equivalents, beginning of period**                                       |   |   | **260.0 ** |   |   | 254.7  |
| **Cash and cash equivalents, end of period**                                             |   | **$** | **312.3 ** |   | $ | 260.0  |
| Supplemental information:                                                                |   |   |   |   |   |   |   |   |
|                                                                                     | Dividends received |   | **$** | **15.4 ** |   | $ | 13.1  |
|                                                                                     | Interest paid |   |   | **55.7 ** | 1  |   | 47.0  |
|                                                                                     | Interest received |   |   | **8.0 ** | 1  |   | 6.5  |
|                                                                                     | Income taxes paid |   |   | **22.9 ** | 1  |   | 22.6  |
|                                                                                     |
| The accompanying notes form an integral part of these Consolidated Financial Statements. |

CAE Year-End Financial Results 2014 | 7

----

Notes to the Consolidated Financial Statements 

Notes to the Consolidated Financial Statements 

*(Unless otherwise stated, all amounts are in millions of Canadian dollars)*

 

The consolidated financial statements were authorized for issue by the board of directors on May 15, 2014.

 

### **NOTE 1 – NATURE OF OPERATIONS AND summary of SIGNIFICANT ACCOUNTING POLICIES**

#### **Nature of operations                                                                             **

CAE Inc. and its subsidiaries (or the Company) design, manufacture and supply simulation equipment services and develop integrated training solutions for the military, commercial airlines, business aircraft operators, aircraft manufacturers, healthcare education and service providers and the mining industry. CAE’s flight simulators replicate aircraft performance in normal and abnormal operations as well as a comprehensive set of environmental conditions utilizing visual systems that contain an extensive database of airports, other landing areas, flying environments, motion and sound cues to create a fully immersive training environment. The Company offers a range of flight training devices based on the same software used on its simulators. The Company also operates a global network of training centres in locations around the world.

 

The Company’s operations are managed through five segments:

 

(i)    Training & Services/Civil (TS/C) – Provides commercial, business and helicopter aviation training for flight, cabin, maintenance and ground personnel and ab initio pilot training and crew sourcing services;

(ii)   Simulation Products/Civil (SP/C) – Designs, manufactures and supplies civil flight simulation training devices and visual systems; 

(iii)  Simulation Products/Military (SP/M) – Designs, manufactures and supplies advanced military training equipment and software tools for air forces, armies and navies;  

(iv)   Training & Services/Military (TS/M) – Supplies turnkey training services, simulation-based integrated enterprise solutions and maintenance and in-service support solutions;

(v)    New Core Markets (NCM) – Provides, designs and manufactures healthcare training services and devices and mining services and tools.

 

CAE is a limited liability company incorporated and domiciled in Canada. The address of the main office is 8585 Côte-de-Liesse, Saint-Laurent, Québec, Canada, H4T 1G6. CAE shares are traded on the Toronto Stock Exchange and on the New York Stock Exchange.

#### ** **

#### **Basis of preparation**

The key accounting policies applied in the preparation of these consolidated financial statements are described below. These policies have been consistently applied to all years presented, unless otherwise stated. 

 

The consolidated financial statements have been prepared in accordance with Part I of the CPA Canada Handbook, referred to as IFRS, as issued by the International Accounting Standards Board (IASB). 

 

The consolidated financial statements have been prepared under the historical cost convention, except for the following items measured at fair value: contingent consideration, derivative financial instruments, financial instruments at fair value through profit and loss, available‐for‐sale financial assets and liabilities for cash-settled share-based arrangements.

  

#### The functional and presentation currency of CAE Inc. is the Canadian dollar.

#### ** **

#### **Basis of consolidation**

#### ***Subsidiaries***

Subsidiaries are all entities over which the Company has control. Control exists when the Company is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through the power over the entity. Subsidiaries are fully consolidated from the date control is obtained and they are no longer consolidated on the date control ceases.

##### ** **

##### ***Joint arrangements***

Joint arrangements are entities in which the Company exercises joint control as established by contracts requiring unanimous consent for decisions about the activities that significantly affect the arrangement’s returns. When the Company has the rights to the net assets of the arrangement, the arrangement is classified as a joint venture and is accounted for using the equity method. When the Company has rights to the assets and obligations for the liabilities relating to an arrangement, the arrangement is classified as a joint operation and the Company accounts for each of its assets, liabilities and transactions, including its share of those held or incurred jointly, in relation to the joint operation. The Company presently does not have any joint operations. 

 

Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Company’s share of the profits or losses and movements in other comprehensive income (loss) (OCI) of the investee. When the Company’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, the Company does not recognize further losses, unless it will incur obligations or make payments on behalf of the joint ventures. 

 

8 | CAE Year-End Financial Results 2014

----

Notes to the ConsolidatedFinancial Statements 

Unrealizedgains resulting from transactions with joint ventures are eliminated, to theextent of the Company’s share in the joint venture. For sales of products orservices from the Company to its joint ventures, the elimination of unrealizedprofits is considered in the carrying value of the investment in equityaccounted investees in the consolidated statement of financial position and inthe share in profit or loss of equity accounted investees in the consolidatedincome statement.

#### ** **

#### **Business combinations**

Business combinations areaccounted for under the acquisition method. The consideration transferred forthe acquisition of a subsidiary is the fair value of the assets transferred,the liabilities incurred and the equity interests issued by the Company, ifany, at the date control is obtained. The consideration transferred includesthe fair value of any liability resulting from a contingent considerationarrangement. Acquisition-related costs, other than share and debt issue costsincurred to issue financial instruments that form part of the considerationtransferred, are expensed as incurred. Identifiable assets acquired andliabilities assumed in a business combination are measured initially at theirfair value at the acquisition date. If a business combination is achieved instages, the Company remeasures its previously held interest in the acquiree atits acquisition-date fair value and recognizes the resulting gain or loss, ifany, in net income.  

 

Contingent consideration isclassified as a provision and is measured at fair value, with subsequentchanges recognized in income. If the contingent consideration is classified asequity, it is not remeasured until it is finally settled within equity.

 

New information obtainedduring the measurement period, up to 12 months following the acquisition date,about facts and circumstances existing at the acquisition date affect theacquisition accounting.

 

#### **Non-controlling interests**

Non-controlling interests(NCI) represent equity interests in subsidiaries owned by outside parties. Theshare of net assets of subsidiaries attributable to non-controlling interestsis presented as a component of equity. Changes in the Company’s ownershipinterest in subsidiaries that do not result in a loss of control are accountedfor as equity transactions.

 

The Company treatstransactions with non-controlling interests as transactions with equity ownersof the Company. For interests purchased from non-controlling interests, thedifference between any consideration paid and the relevant share acquired ofthe carrying value of net assets of the subsidiary is recorded in equity. Gainsor losses on disposals of non-controlling interests are also recorded inequity.

 

#### **Financial instruments and hedgingrelationships**

#### ***Financialinstruments***

#### *Financial assets and financial liabilities*

A financial instrument isany contract that gives rise to a financial asset of one entity and a financialliability or equity instrument of another entity. Financial assets andfinancial liabilities, including derivatives, are recognized on theconsolidated statement of financial position when the Company becomes a partyto the contractual provisions of the financial instrument. On initialrecognition, all financial instruments are measured at fair value. When thereis a difference between the fair value of the consideration given or receivedat initial recognition and the amount determined using a valuation technique,such difference is recognized immediately in income unless it qualifies forrecognition as some other type of asset or liability.

 

Subsequent measurement ofthe financial instruments is based on their classification as described below.Financial assets can be classified into one of these categories: fair valuethrough profit and loss, held-to-maturity investments, loans and receivables oravailable-for-sale. Financial liabilities can be classified into one of thefollowing categories: fair value through profit and loss or other financialliabilities. The determination of the classification depends on the purpose forwhich the financial instruments were acquired and their characteristics. Exceptin very limited circumstances, the classification is not changed subsequent to the initial recognition.

##### * *

##### *Financial instruments at fair value through profit and loss*

Financial instruments classified at fair value through profit andloss (FVTPL) are carried at fair value at each reporting date with the changein fair value recorded in income. The FVTPL classification is applied when afinancial instrument:

-       Is a derivative, including embedded derivatives accounted forseparately from the host contract, but excluding those derivatives designatedas effective hedging instruments;

-       Has been acquired or incurred principally for the purpose of sellingor repurchasing in the near future;

-       Is part of a portfolio of financial instruments that are managedtogether and for which there is evidence of a recent actual pattern ofshort-term profit-taking; or

-      Has been irrevocably designated as such by theCompany (fair value option).

##### * *

##### *Held-to-maturity investments, loans and receivables andother financial liabilities*

Financialinstruments classified as held-to-maturity investments, loans and receivablesand other financial liabilities are carried at amortized cost using theeffective interest method. Interest income or expense is included in income inthe period as incurred. 

##### * *

##### ** **

CAE Year-End Financial Results 2014 | 9

----

Notes to the Consolidated Financial Statements 

##### *Available-for-sale*

Available-for-salefinancial assets are non-derivative financial assets that are designated asavailable-for-sale or that are not classified in any of the precedingcategories. Financial assets classified as available-for-sale are carried atfair value at each reporting date. Unrealized gains and losses, includingchanges in foreign exchange rates for non-monetary financial assets, arerecognized in OCI in the period in which the changes arise and are transferredto income when the assets are derecognized or impairment occurs. Objectiveevidence of impairment of an equity investment includes a significant orprolonged decline in the fair value of the security below its cost. If areliable estimate of the fair value of an unquoted equity instrument cannot bemade, this instrument is measured at cost, less any impairment losses.Dividends are recognized in income when the right of payment has beenestablished.

 

As a result, the following classifications weredetermined:

(i)     Cash and cash equivalents, restricted cash and allderivative instruments, except for derivatives designated as effective hedginginstruments, are classified as FVTPL;

(ii)    Accounts receivable, contracts in progress, non-currentreceivables and advances are classified as loans and receivables, except forthose that the Company intends to sell immediately or in the near term whichare classified as FVTPL;

(iii)   Portfolio investments are classified as available-for-sale;

(iv)   Accounts payable and accrued liabilities and long-termdebt, including interest payable, as well as finance lease obligations androyalty obligations are classified as other financial liabilities, all of whichare measured at amortized cost using the effective interest rate method.

 

##### *Transaction costs*

Transaction costs that aredirectly related to the acquisition or issuance of financial assets andfinancial liabilities (other than those classified as FVTPL) are included inthe fair value initially recognized for those financial instruments. Thesecosts are amortized to income using the effective interest rate method.

 

##### *Offsetting of financial assets and financial liabilities*

Financial assets andfinancial liabilities are offset and the net amount is presented in theconsolidated statement of financial position when the Company has a legallyenforceable right to set off the recognized amounts and intends to settle on anet basis or to realize the assets and settle the liabilities simultaneously.

 

##### *Impairment of financial assets carried at amortized cost*

At each reporting date, thecarrying amounts of the financial assets other than those to be measured atFVTPL are assessed to determine whether there is objective evidence ofimpairment. Impairment losses on financial assets carried at amortized cost arereversed in subsequent periods if the amount of loss decreases and the decreasecan be related objectively to an event occurring after the impairment wasrecognized. 

 

##### *Fair value hierarchy transfers*

For financial instruments that are recognized at fairvalue on a recurring basis, the Company determines whether transfers haveoccurred between levels in the fair value hierarchy. The assessment is based onthe lowest level input that is significant to the fair value measurement as awhole at the end of each period.

 

##### *Embedded derivatives*

Embedded derivatives arerecorded at fair value separately from the host contract when their economiccharacteristics and risks are not clearly and closely related to those of thehost contract. The Company may enter into freestanding derivative instrumentswhich are not eligible for hedge accounting, to offset the foreign exchangeexposure of embedded foreign currency derivatives. In such circumstances, bothderivatives are carried at fair value at each statement of financial positiondate with the change in fair value recorded in consolidated net income.

##### *** ***

##### ***Hedgeaccounting***

##### *Documentation*

At the inception of a hedge,if the Company elects to use hedge accounting, the Company formally documentsthe designation of the hedge, the risk management objectives and strategy, thehedging relationship between the hedged item and hedging item and the methodfor testing the effectiveness of the hedge, which must be reasonably assuredover the term of the hedging relationship and can be reliably measured. TheCompany formally assesses, both at inception of the hedge relationship and onan ongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in fair values or cash flows ofhedged items in relation to the hedged risk.

##### * *

##### *Method of accounting*

The method of recognizingfair value gains and losses depends on whether derivatives are at FVTPL or aredesignated as hedging instruments, and, if the latter, the nature of the risksbeing hedged. All gains and losses from changes in the fair value ofderivatives not designated as hedges are recognized in income. When derivativesare designated as hedges, the Company classifies them either as: (a) hedges ofthe change in fair value of recognized assets or liabilities or firmcommitments (fair value hedges); or (b) hedges of the variability in highlyprobable future cash flows attributable to a recognized asset or liability, afirm commitment or a forecasted transaction (cash flow hedges); or (c) hedgesof a net investment in a foreign operation.

 

##### ** **

10 | CAE Year-End Financial Results 2014

----

Notes to the ConsolidatedFinancial Statements 

##### *Fair value hedge*

For fair value hedgesoutstanding, gains or losses arising from the measurement of derivative hedginginstruments at fair value are recorded in income and the carrying amount of thehedged items are adjusted by gains and losses on the hedged item attributableto the hedged risks which are recorded in income.

 

##### *Cash flow hedge*

The effective portion ofchanges in the fair value of derivative instruments that are designated andqualify as cash flow hedges is recognized in OCI, while the ineffective portionis recognized immediately in income. Amounts accumulated in OCI arereclassified to income in the period in which the hedged item affects income.However, when the forecasted transactions that are hedged items result inrecognition of non-financial assets (for example, inventories or property,plant and equipment), gains and losses previously recognized in OCI areincluded in the initial carrying value of the related non-financial assetsacquired or liabilities incurred. The deferred amounts are ultimatelyrecognized in income as the related non-financial assets are derecognized oramortized.

 

Hedge accounting isdiscontinued prospectively when the hedging relationship no longer meets thecriteria for hedge accounting, when the designation is revoked, or when thehedging instrument expires or is sold. Any cumulative gain or loss directlyrecognized in OCI at that time remains in OCI until the hedged item iseventually recognized in income. When it is probable that a hedged transactionwill not occur, the cumulative gain or loss that was recognized in OCI isrecognized immediately in income.

 

##### *Hedge of net investments in foreign operations*

The Company has designatedcertain long-term debt as a hedge of CAE’s overall net investments in foreignoperations whose activities are denominated in a currency other than theCompany’s functional currency. The portion of gains or losses on the hedgingitem that is determined to be an effective hedge is recognized in OCI and islimited to the translation gain or loss on the net investment.

 

##### ***Derecognition***

##### *Financial assets*

A financial asset (or, whereapplicable a part of a financial asset or part of a group of similar financialassets) is derecognized when: 

-       The rights to receive cash flows from the asset have expired;

-       The Company has transferred its rights to receive cash flows fromthe asset and either has transferred substantially all the risks and rewards ofthe asset or has neither transferred nor retained substantially all the risksand rewards of the asset, but has transferred control of the asset.

 

##### *Financial liabilities*

A financial liability isderecognized when the obligation under the liability is discharged, cancelledor expires.

 

When an existing financialliability is replaced by another from the same lender on substantiallydifferent terms, or the terms of an existing liability are substantiallymodified, such an exchange or modification is treated as a derecognition of theoriginal liability and the recognition of a new liability, and the differencein the respective carrying amounts is recognized in income.

 

#### **Foreign currency translation**

##### ***Foreignoperations***

Assets and liabilities ofsubsidiaries that have a functional currency other than the Canadian dollar aretranslated from their functional currency to Canadian dollars at exchange ratesin effect at the reporting date. Revenue and expenses are translated at theaverage exchange rates for the period. The resulting translation adjustmentsare included in OCI. When designated as hedges on net investments in foreignoperations, translation gains or losses related to long term intercompanyaccount balances, which form part of the overall net investment in foreignoperations, and those arising from the translation of debt denominated inforeign currencies, are also included in OCI. 

 

##### ***Transactionsand balances***

Monetary assets andliabilities denominated in foreign currencies are translated at the prevailingexchange rate at the reporting date. Non-monetary assets and liabilities, andrevenue and expense items denominated in foreign currencies are translated intothe functional currency using the exchange rate prevailing at the dates of therespective transactions. Foreign exchange gains and losses resulting from thesettlement of such transactions are recognized in income, except when deferredin OCI as qualifying cash flow hedges and qualifying net investment hedges. 

#### ** **

#### **Cash and cash equivalents**

Cash and cash equivalentsconsist of cash and highly-liquid investments with original terms to maturityof 90 days or less at the date of purchase.

####  

#### **Accounts receivable**

Receivables are initiallyrecognized at fair value and are subsequently carried at amortized cost, net ofan allowance for doubtful accounts, based on expected recoverability. Theamount of the allowance is the difference between the asset’s carrying amountand the present value of the estimated future cash flows, discounted at theoriginal effective interest rate. The loss is recognized in income. Subsequentrecoveries of amounts previously provided for or written-off are recognized inincome.

 

CAE Year-End Financial Results 2014 | 11

----

Notes to the Consolidated Financial Statements 

TheCompany is involved in a program in which it sells undivided interests incertain of its accounts receivable and contracts in progress: assets (currentfinancial assets program) to third parties for cash consideration for an amountup to $150.0 million without recourse to the Company. The Company continues toact as a collection agent. These transactions are accounted for when theCompany is considered to have surrendered control over the transferred accountsreceivable and contracts in progress: assets.

 

#### **Inventories**

Raw materials are valued atthe lower of average cost and net realizable value. Spare parts to be used inthe normal course of business are valued at the lower of cost, determined on aspecific identification basis, and net realizable value.

 

Work in progress is statedat the lower of cost, determined on a specific identification basis, and netrealizable value. The cost of work in progress includes material, labour and anallocation of manufacturing overhead, which is based on normal operatingcapacity. 

 

Net realizable value is theestimated selling price in the ordinary course of business, less estimatedcosts of completion and the estimated costs necessary to generate revenue. Inthe case of raw materials and spare parts, the replacement cost is the bestmeasure of net realizable value.

 

#### **Property, plant and equipment**

Property, plant andequipment are recorded at cost less any accumulated depreciation and anyaccumulated net impairment losses. Costs include expenditures that are directlyattributable to the acquisition or manufacturing of the item. The cost of anitem of property, plant and equipment that is initially recognized includes,when applicable, the initial present value estimate of the costs required todismantle and remove the asset and restore the site on which it is located atthe end of its useful life. Purchased software that is integral to thefunctionality of the related equipment is capitalized as part of thatequipment. Subsequent costs, such as updates on training devices, are includedin the asset’s carrying amount or recognized as a separate asset only when itis probable that future economic benefits will flow to the Company and the costof the item can be reliably measured; otherwise, they are expensed. 

 

A loss on disposal isrecognized in income when the carrying value of a replaced item isderecognized, unless the item is transferred to inventories. If it is notpracticable to determine the carrying value, the cost of the replacement andthe accumulated depreciation calculated by reference to that cost will be usedto derecognize the replaced part. The costs of day-to-day servicing ofproperty, plant and equipment are recognized in income as incurred. Gains andlosses on disposal of property, plant and equipment are determined by comparingthe proceeds from disposal with its carrying amount, and are recognized netwithin other gains and losses. 

 

The different components ofproperty, plant and equipment are recognized separately when their useful livesare materially different and such components are depreciated separately inincome. Leased assets are depreciated over the shorter of the lease term andtheir useful lives. If it is reasonably certain that the Company will obtainownership by the end of the lease term, the leased asset is depreciated overits useful life. Land is not depreciated. The estimated useful lives, residualvalues and depreciation methods are as follows:

 

|                                                                                                                                               |                             | Method |                       | Rates/Years |
|----------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|--------|----------------------------|-------------|
| Buildings and improvements                                                                                                                         | Declining  balance/Straight-line |   | 2.5  to 10%/3 to 20 years  |
| Simulators                                                                                                                                         | Straight-line  (10% residual)    |   | Not  exceeding 25 years    |
| Machinery and equipment                                                                                                                            | Declining  balance/Straight-line |   | 20  to 35%/2 to 10 years   |
| Aircraft                                                                                                                                           | Straight-line  (15% residual)    |   | Not  exceeding 12 years    |
| Aircraft engines                                                                                                                                   | Based  on utilization            |   | Not  exceeding 3,000 hours |
|                                                                                                                                               |                             |   |                       |        |
| Depreciation methods,  useful lives and residual values are reviewed and adjusted, if appropriate,  on a prospective basis at each reporting date. |

 

**Leases**

The Company leases certainproperty, plant and equipment from and to others. Leases in which substantiallyall the risks and rewards of ownership are transferred are classified asfinance leases. All other leases are accounted for as operating leases.

 

***The Company as a lessor***

With regards to financeleases, the asset is derecognized at the commencement of the lease and a gain(loss) is recognized in income. The net present value of the minimum leasepayments and any discounted unguaranteed residual value are recognized as non‐currentreceivables. Finance income is recognized over the term of the lease based onthe effective interest rate method. Income from operating leases is recognizedon a straight-line basis over the term of the corresponding lease.  

 

***The Company as a lessee***

Finance leases are capitalizedat the lease’s commencement at the lower of the fair value of the leased itemand the present value of the minimum lease payments. Any initial direct costsof the lessee are added to the amount recognized as an asset. The correspondingobligations are included in long-term debt. Finance expense is recognized overthe term of the lease based on the effective interest rate method. Paymentsmade under operating leases are charged to income on a straight-line basis overthe term of the lease.

 

12 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

***Sale and leaseback transactions***

The Company engages in sales and leaseback transactions as part of the Company’s financing strategy to support investment in the civil and military training and services business. Where a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount is deferred and amortized over the lease term. Where a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss is recognized in income. If the sales price is below fair value, the shortfall is recognized in income immediately except if the loss is compensated for by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the period the asset is expected to be used. If the sale price is above fair value, the excess over fair value is deferred and amortized over the period the asset is expected to be used.

 

**Intangible assets**

***Goodwill***

Goodwill is measured at cost less accumulated impairment losses, if any.  

 

Goodwill arises on the acquisition of subsidiaries. Goodwill represents the excess of the aggregate of the cost of an acquisition, including the Company’s best estimate of the fair value of contingent consideration and the acquisition-date fair value of any previous held equity interest in the acquiree, over the fair value of the net identifiable assets of the acquiree at the acquisition date.

 

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

***Research and development (R&D)***

Research costs are expensed as incurred. Development costs are also charged to income in the period incurred unless they meet all the specific capitalization criteria established in IAS 38, *Intangible Assets*. Capitalized development costs are stated at cost and net of accumulated amortization and accumulated impairment losses, if any. Amortization of the capitalized development costs commences when the asset is available for use and is included in research and development expense.

 

***Other intangible assets***

Intangible assets acquired separately are measured at cost upon initial recognition. The cost of intangible assets acquired in a business combination is the fair value as at the acquisition date. Following initial recognition, intangible assets are carried at cost, net of accumulated amortization and accumulated impairment losses, if any.  

 

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. 

 

Gains and losses on disposal of intangible assets are determined by comparing the proceeds from disposal with its carrying amount and are recognized within other gains and losses. 

 

| ***Amortization***                                                                                                                |    |
|-----------------------------------------------------------------------------------------------------------------------------------|---------|
| Amortization is calculated using the straight-line method for all intangible assets over their estimated useful lives as follows: |
|                                                                                                                              |    |   |
|                                                                                                                              |    | Amortization period |
|                                                                                                                              |    | (in years) |
| Capitalized development costs                                                                                                     | 5 to 10 |
| Customer relationships                                                                                                            | 3 to 15 |
| ERP and other software                                                                                                            | 3 to 10 |
| Technology                                                                                                                        | 3 to 15 |
| Other intangible assets                                                                                                           | 2 to 40 |
|                                                                                                                              |    |   |
| Amortization methods and useful lives are reviewed and adjusted, if appropriate, on a prospective basis at each reporting date.   |

 

**Impairment of non-financial assets**

The carrying amounts of the Company’s non-financial assets subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill and assets that are not yet available for use are tested for impairment annually or at any time if an indicator of impairment exists.

 

The recoverable amount of an asset or a cash-generating unit (CGU) is the greater of its value in use and its fair value less costs of disposal. The recoverable amount is determined for an individual asset; unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In such case, the CGU that the asset belongs to is used to determine the recoverable amount.

 

For the purposes of impairment testing, the goodwill acquired in a business combination is allocated to CGUs or groups of CGUs, which generally corresponds to its operating segments or one level below, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

 

CAE Year-End Financial Results 2014 | 13

----

Notes to the Consolidated Financial Statements 

Animpairment loss is recognized if the carrying amount of an asset or CGU exceedsits estimated recoverable amount. Where the recoverable amount of a CGU towhich goodwill has been allocated is lower than the CGU’s carrying amount, therelated goodwill is impaired. Any remaining amount of impairment exceeding theimpaired goodwill is recognized on a pro rata basis of the carrying amount ofeach asset in the respective CGU. Impairment losses are recognized in income.  

 

The Company evaluatesimpairment losses, other than goodwill impairment, for potential reversals ateach reporting date. An impairment loss is reversed if there is any indicationthat the loss has decreased or no longer exists due to changes in the estimatesused to determine the recoverable amount. An impairment loss is reversed onlyto the extent that the asset’s carrying amount does not exceed the carryingamount that would have been determined, net of depreciation or amortization, ifno impairment loss had been recognized. Such reversal is recognized in income.

 

**Borrowing costs**

Borrowing costs that aredirectly attributable to the acquisition or construction of a qualifying assetare capitalized as part of the cost of the asset. A qualifying asset is onethat takes a substantial period of time to get ready for its intended use.Capitalization of borrowing costs ceases when the asset is completed and readyfor its intended use. All other borrowing costs are recognized as financeexpense in income, as incurred.  

                                                               

**Other assets**

***Restricted cash***

The Company is required tohold a defined amount of cash as collateral under the terms of certainsubsidiaries’ external bank financing, government-related sales contracts andbusiness combination arrangements.

 

***Deferred financing costs***

Deferred financing costsrelated to the revolving unsecured term credit facilities, when it is probablethat some or all of the facilities will be drawn down, and deferred financing costsrelated to sale and leaseback agreements are included in other assets at costand are amortized on a straight-line basis over the term of the relatedfinancing agreements.

**  **

**Accounts payable and accrued liabilities**

Accounts payable and accruedliabilities are recognized initially at fair value and subsequently measured atamortized cost using the effective interest method.

** **

**Provisions**

Provisions are recognized whenthe Company has a present legal or constructive obligation as a result of pastevents, it is probable that an outflow of resources will be required to settlethe obligation and the amount can be reliably estimated. Provisions are notrecognized for future operating losses. Provisions are measured at the presentvalue of the expenditures expected to be required to settle the obligationusing a pre-tax rate that reflects current market assessments of the time valueof money and the risks specific to the obligation. The increase in theprovision due to passage of time is recognized as a finance expense. When thereare a number of similar obligations, the likelihood that an outflow will berequired in settlement is determined by considering the class of obligations asa whole. 

 

**Long-term debt**

Long-term debt is recognizedinitially at fair value, net of transaction costs incurred. They aresubsequently stated at amortized cost. Any difference between the proceeds, netof transaction costs, and the redemption value is recognized in income over theperiod of borrowings using the effective interest method.

 

Fees paid on the establishmentof loan facilities are recognized as transaction costs of the loan to theextent that it is probable that some or all of the facility will be drawn down.In these cases, the fee is deferred until the drawdown occurs. To the extentthat there is no evidence that it is probable that some or all of the facilitywill be drawn down, the fee is capitalized as a pre-payment for liquidityservices and amortized over the period of the facility to which it relates.

 

**Share capital**

Common shares are classifiedas equity. Incremental costs directly attributable to the issue of new sharesor options are shown in equity as a deduction, net of tax, from the proceeds.

** **

**Revenue recognition**

Revenue is measured at thefair value of the consideration received or receivable. Revenue is recognizedwhen the amount can be reliably measured, when it is probable that futureeconomic benefits will flow to the Company and when specific criteria have beenmet for each of the categories, as described below.

 

***Multiple component arrangements***

The Company sometimes entersinto multiple component revenue arrangements, which may include a combinationof design, engineering and manufacturing of flight simulators and otherproducts, as well as the provision of training services, spare parts andmaintenance. When a single sales transaction requires the delivery of more thanone product or service (multiple components), the revenue recognition criteriaare applied to the separately identifiable components. A component isconsidered separately identifiable if thedelivered item has value to the customer on a stand-alone basis and the fairvalue associated with the product or service can be reliably measured.

14 | CAE Year-End Financial Results 2014

----

Notes to the ConsolidatedFinancial Statements 

 

The allocation of the revenuefrom a multiple component arrangement is based on the fair value of eachelement in relation to the fair value of the arrangement as a whole.

 

The Company's revenues can bedivided into two main accounting categories: construction contracts and salesof goods and services.  

 

***Construction contracts***

A construction contract is acontract specifically negotiated for the construction of an asset or of a groupof assets, which are interrelated in terms of their design, technology,function, purpose or use. According to its characteristics, a constructioncontract can be accounted for separately, be segmented into several componentswhich are each accounted for separately, or be combined with anotherconstruction contract in order to form a single construction contract foraccounting purposes in respect of which revenues and expense will berecognized.

 

Revenue from constructioncontracts for the design, engineering and manufacturing of trainingdevices is recognized using the percentage-of-completion method when it isprobable that the economic benefits associated with the contract will flow tothe Company, the revenue, contract costs to complete and the stage of contractcompletion at the end of the reporting period can be reliably measured and whenthe contract costs can be clearly identified and reliably measured so thatactual contract costs incurred can be compared with prior estimates. The stageof completion is measured by reference to the contract costs incurred up to theend of the reporting period as a percentage of total estimated costs for eachcontract. When the criteria to use the percentage‐of‐completionmethod are not met, construction contract revenue is recognized to the extentof the contract costs incurred that are likely to be recoverable.

 

Provisions for estimatedcontract losses are recognized in the period in which the loss is determined.Contract losses are measured at the amount by which the estimated total costsexceed the estimated total revenue from the contract. Warranty provisions arerecorded when revenue is recognized based on past experience. 

 

The cumulative amount of costsincurred and profit recognized, reduced by losses and progress billing, isdetermined on a contract‐by‐contract basis. If this amount ispositive it is classified in contracts in progress: assets. If this amountis negative it is classified in contracts in progress: liabilities.

 

Post-delivery customer supportis billed separately, and revenue is recognized over the support period.

 

***Sales of goods and services***

*Softwarearrangements *

Revenue fromoff-the-shelf software sales is recognized when delivery hasoccurred. Revenue from fixed-price software arrangements and softwarecustomization contracts that require significant production, modification, orcustomization of software is recognized using the percentage-of-completionmethod.

* *

*Spare parts*

Revenue from the sale of spareparts is primarily recognized upon shipment to the customer. Upon shipment, thesignificant risks and rewards of ownership of the goods are transferred and the Company retainsneither continuing managerial involvement to the degree usually associated withownership nor effective control over the goods sold.  

 

*Productmaintenance*

Revenue from maintenancecontracts is generally recognized on the basis of the percentage-of-completionof the transaction. 

  

*Trainingand consulting services*

Revenue from training andconsulting services is recognized as the services are rendered. 

 

For flight schools, cadettraining courses are offered mainly by way of ground school and live aircraftflight. During the ground school phase, revenue is recognized in income on astraight-line basis, while during the live aircraft flight phase, revenue isrecognized based on actual flight hours.

*** ***

***Other***

*Salesincentives to customers*

The Company may provide salesincentives in the form of discounts and volume rebates, these incentives arerecorded as a reduction of revenues. 

 

*Non-monetarytransactions*

The Company may also enterinto sales arrangements where little or no monetary consideration is involved.The non-monetary transactions are measured at the more reliable measure of thefair value of the asset given up and fair value of the asset received.

 

*Deferredrevenue*

Cash payments received oradvances currently due pursuant to contractual arrangements, with the exceptionof those related to construction contracts, are recorded as deferred revenueuntil all of the foregoing conditions of revenue recognition have been met.

CAE Year-End Financial Results 2014 | 15

----

Notes to the Consolidated Financial Statements 

** **

**Employee benefits**

***Defined benefit pension plans***

The Company maintains definedbenefit pension plans that provide benefits based on length of service andfinal average earnings. 

 

The defined benefit asset orliability comprises the present value of the defined benefit obligation at thereporting date less the fair value of plan assets out of which the obligationsare to be settled. The defined benefit obligations are actuarially determinedfor each plan using the projected unit credit method. The present value of thedefined benefit obligation is determined by discounting the estimated futurecash flows using the interest rate of high-quality corporate bonds that aredenominated in the currency in which the benefit will be paid and that haveterms to maturity approximating the terms of the related pension obligation. Incountries where there is no deep market in such bonds, the market rates ongovernment bonds are used.

 

The value of any employeebenefit asset recognized is restricted to the present value of any economicbenefits available in the form of refunds from the plan or reductions in thefuture contributions to the plan (asset ceiling test). Minimum fundingrequirements may give rise to an additional liability to the extent that theyrequire paying contributions to cover an existing shortfall. Plan assets arenot available to the creditors of the Company nor can they be paid directly tothe Company. Fair value of plan assets is based on market price information. 

 

The Company determines the netinterest expense (income) by applying the discount rate used to measure thedefined benefit obligation at the beginning of the period to the net definedbenefit asset or liability.  

 

Actuarial gains and lossesarising from experience adjustments, changes in actuarial assumptions and theeffect of any asset ceiling and minimum liability are recognized to OCI in theperiod in which they arise. Past service costs are recognized as an expense asincurred at the earlier of when the plan amendment or curtailment occurs andwhen the entity recognizes related termination benefits. 

 

***Defined contribution pensionplans***

The Company also maintainsdefined contribution plans for which the Company pays fixed contributions topublicly or privately administered pension insurance plans on a mandatory,contractual or voluntary basis. The Company has no legal or constructiveobligation to pay further amounts if the fund does not hold sufficient assetsto pay the benefits to all employees. Obligations for contributions to definedcontribution pension plans are recognized as an employee benefit expense in incomeas the services are provided. 

 

***Termination benefits***

Termination benefits arerecognized as an expense when the Company is demonstrably committed, withoutrealistic possibility of withdrawal, to a formal detailed plan to eitherterminate employment before the normal retirement date, or to providetermination benefits as a result of an offer made to encourage voluntaryredundancy. Termination benefits for voluntary redundancies are recognized asan expense, if the Company has made an offer of voluntary redundancy, based onthe number of employees expected to accept the offer. Benefits falling due morethan 12 months after the reporting date are discounted to their present value.

 

**Share-based payment transactions**

The Company’s five share-basedpayment plans are segregated into two categories of plans: Employee StockOption Plan (ESOP), which is considered an equity-settled share-based paymentplan; and Employee Stock Purchase Plan (ESPP), Deferred Share Unit (DSU) plan,Long-Term Incentive Deferred Share Unit (LTI-DSU) plan and Long-Term IncentiveRestricted Share Unit (LTI-RSU) plan, which are considered cash-settledshare-based payment plans.   

 

For both categories, the fairvalue of the employee services received in exchange is recognized as an expensein income. Service and non-market performance conditions attached to thetransactions are not taken into account in determining fair value. 

 

For theequity-settled plan, the cost of equity-settled transactions is measured atfair value using the Black-Scholes option pricing model. The compensationexpense is measured at the grant date and recognized over the service periodwith a corresponding increase to contributed surplus. The cumulative expensesrecognized for equity-settled transactions at each reporting date representsthe extent to which the vesting period has expired and management’s bestestimate of the number of equity instruments that will ultimately vest. Foroptions with graded vesting, each tranche is considered a separate grant with adifferent vesting date and fair value, and each tranche is accounted forseparately. When the options areexercised, the Company issues new shares and the proceeds received net of anydirectly attributable transaction costs are credited to share capital. 

 

For cash-settled plans, acorresponding liability is recognized. The fair value of employee servicesreceived is calculated by multiplying the number of units expected to vest withthe fair value of one unit as of grant date based on the market price of theCompany’s common shares. The fair value of the ESPP is a function of theCompany’s contributions. Until the liability is settled, the Companyre-measures the fair value of the liability at the end of each reporting periodand at the date of settlement, with any changes in fair value recognized inincome for the period. The Company has entered into equity swap agreements withtwo major Canadian financial institutions in order to reduce its earningsexposure related to the fluctuation in the Company’s share price relating tothe DSU and LTI-DSU programs.

 

16 | CAE Year-End Financial Results 2014

----

Notes to the ConsolidatedFinancial Statements 

**Current and deferred incometax**

Income tax expense comprisescurrent and deferred tax. An income tax expense is recognized in income exceptto the extent that it relates to items recognized in OCI or directly in equity,in which case it is recognized in OCI or directly in equity, respectively.

 

Current tax is the amountexpected to be paid or recovered from taxation authorities on the taxableincome or loss for the year, using tax rates enacted or substantively enactedat the reporting date in the countries where the Company and its subsidiariesoperate and generate taxable income, and any adjustment to tax payable orreceivable in respect of previous years. 

 

Management periodicallyevaluates positions taken in tax returns with respect to situations in whichapplicable tax regulation is subject to interpretation. It establishesprovisions, where appropriate, on the basis of amounts expected to be paid tothe tax authorities.

 

Deferred tax is recognizedusing the balance sheet liability method, providing for temporary differencesbetween the tax bases of assets or liabilities and their carrying amounts inthe consolidated financial statements. 

 

Deferred income tax isprovided on temporary differences arising on investments in subsidiaries, andjointly controlled entities, except where the timing of the reversal of thetemporary difference is controlled by the Company and it is probable that thetemporary difference will not reverse in the foreseeable future.

 

Deferred tax is measured on anundiscounted basis at the tax rates that are expected to be applied totemporary differences when they reverse, based on the laws that have beenenacted or substantively enacted by the reporting date.

 

Deferred tax assets arerecognized for all deductible temporary differences and carry forward of unusedtax losses. The recognition of deferred tax assets are limited to the amountwhich is probable to be realized.

 

Deferred tax assets arereviewed at each reporting date and are reduced to the extent that it is nolonger probable that a recognized deferred tax asset will be realized.Unrecognized deferred tax assets are reassessed at each reporting date and arerecognized to the extent that it has become probable that an unrecognized deferredtax asset will be realized.

 

Deferred tax assets andliabilities are offset if there is a legally enforceable right to offsetcurrent tax liabilities and assets, and they relate to income taxes levied bythe same tax authority on the same taxable entity, or on different taxableentities which intend to settle current tax liabilities and assets on a netbasis or if their tax assets and liabilities will be realized simultaneously.

 

Taxes on income in the interimperiods are accrued by jurisdiction using the effective tax rate that would beapplicable to expected total annual profit or loss of the jurisdiction.

 

**Investment tax credits**

Investment tax credits (ITCs)arising from R&D activities are deducted from the related costs and areaccordingly included in the determination of net income when there isreasonable assurance that the credits will be realized. ITCs arising from theacquisition or development of property, plant and equipment and capitalizeddevelopment costs are deducted from the cost of those assets with amortizationcalculated on the net amount. Investmenttax credits expected to be recovered beyond 12 months are classified in Otherassets.

 

**Earnings per share**

Earnings per share iscalculated by dividing the net income for the period attributable to the commonshareholders of the Company by the weighted average number of common sharesoutstanding during the period. The diluted weighted average number of commonshares outstanding is calculated by taking into account the dilution that wouldoccur if the securities or other agreements for the issuance of common shareswere exercised or converted into common shares at the later of the beginning ofthe period or the issuance date unless it is anti-dilutive. The treasury stockmethod is used to determine the dilutive effect of the stock options. Thetreasury stock method is a method of recognizing the use of proceeds that couldbe obtained upon the exercise of options in computing diluted earnings pershare. It assumes that any proceeds would be used to purchase common shares atthe average market price during the period. Only the Company’s stock optionshave a dilutive potential on common shares.

 

**Dividend distribution**

In the period in which thedividends are approved by the Company’s Board of Directors, the dividend isrecognized as a liability in the Company’s consolidated financial statements. 

** **

**Government assistance**

Government contributions arerecognized when there is reasonable assurance that the contributions will bereceived and all attached conditions will be complied with by the Company. Governmentassistance related to the acquisition of intangible assets is recorded as areduction of the cost of the related asset while government assistance relatedto current expenses is recorded as a reduction of the related expenses.

 

The Company benefits frominvestment tax credits that are deemed to be equivalent to governmentcontributions.

 

CAE Year-End Financial Results 2014 | 17

----

Notes to the Consolidated Financial Statements 

Contributions are received forProject New Core Markets from Investissement Québec (IQ) for costs incurred inR&D programs. Contributions were received in previous fiscal years forProject Phoenix from Industry Canada under the Technology Partnerships Canada(TPC) program and from IQ. 

 

ProjectNew Core Markets and Project Phoenix require the Company to pay royalties. Theobligation to pay royalties, recognized as royalty obligations, is recordedwhen the contribution is receivable and is estimated based on futureprojections. The obligation is discounted using the prevailing market rates ofinterest, at that time, for a similar instrument (similar as to currency, term,type of interest rate, guarantees or other factors) with a similar creditrating. The current portion is included as part of accrued liabilities. Thedifference between government contributions and the discounted value of royaltyobligations is accounted for as a government assistance which is recognized asa reduction of related expenses or as a reduction of the cost of the relatedasset.

 

The Company recognizes theGovernment of Canada’s participation in Project Falcon and Project Innovate asinterest-bearing long‐term debt. The initial measurement of theaccounting liability is discounted using the prevailing market rates ofinterest, at that time, for a similar instrument (similar as to currency, term,type of interest rate, guarantees or other factors) with a similar creditrating. The difference between the face value of the long-term obligation andthe discounted value of the long-term obligation is accounted for as agovernment contribution which is recognized as a reduction of costs or as areduction of capitalized expenditures.

 

**Use of judgements, estimates and assumptions**

The preparation of theconsolidated financial statements requires the Company’s management(management) to make judgements, estimates and assumptions that affect theapplication of accounting policies, the reported amounts of assets andliabilities and disclosures at the date of the consolidated financialstatements, as well as the reported amounts of revenues and expenses for theperiod reported. It also requires management to exercise its judgement inapplying the Company’s accounting policies. The areas involving a high degreeof judgement or complexity, or areas where assumptions and estimates aresignificant to the consolidated financial statements are disclosed below.Actual results could differ from those estimates. Changes will be reported inthe period in which they are identified.

 

***Business combinations***

Business combinations areaccounted for in accordance with the acquisition method; thus, on the date thatcontrol is obtained. The consideration transferred and the acquiree’sidentifiable assets, liabilities and contingent liabilities are measured attheir fair value. Depending on the complexity of determining these valuations,the Company either consults with independent experts or develops the fair valueinternally by using appropriate valuation techniques which are generally basedon a forecast of the total expected future net discounted cash flows. Theseevaluations are linked closely to the assumptions made by management regardingthe future performance of the related assets and the discount rate. Contingentconsideration is measured at fair value using a discounted cash flow modelbased on expected revenues.

*** ***

***Development costs***

Development costs arerecognized as intangible assets and are amortized over their useful lives whenthey meet the criteria for capitalization. Forecasted revenue and profitabilityfor the relevant projects are used to assess compliance with the capitalizationcriteria and to assess the recoverable amount of the assets.

*** ***

***Impairment of non-financialassets***

The Company’s impairment testfor goodwill is based on internal estimates (level 3) of fair value less costsof disposal calculations and uses valuation models such as the discounted cashflows model. The cash flows are derived from the projections approved bymanagement for the next five years. Cash flow projections take into accountpast experience and represent management’s best estimate about futuredevelopments and form part of the Company’s strategic plan approved annually bythe Board of Directors. Cash flows after the five year period are extrapolatedusing estimated growth rates. Key assumptions which management has based itsdetermination of fair value less costs of disposal include estimated growthrates, post-tax discount rates and tax rates. The post-tax discount rates werederived from the respective CGUs’ representative weighted average cost ofcapital which range from 7.5% to 14.0%. These estimates, including themethodology used, can have a material impact on the respective values andultimately the amount of any goodwill impairment. 

 

Likewise, whenever property,plant and equipment and intangible assets are tested for impairment, thedetermination of the assets’ recoverable amount involves the use of estimatesby management and can have a material impact on the respective values andultimately the amount of any impairment.

*** ***

***Revenue recognition***

The percentage-of-completionmethod requires the Company to estimate the work performed to date as aproportion of the total work to be performed. Management conducts monthlyreviews of its estimated costs to complete, percentage-of-completion estimatesand revenues and margins recognized, on a contract-by-contract basis. Theimpact of any revisions in cost and earnings estimates is reflected in theperiod in which the need for a revision becomes known.

 

18 | CAE Year-End Financial Results 2014

----

Notes to the ConsolidatedFinancial Statements 

***Defined benefit pension plans***

The cost of defined benefitpension plans and the present value of the employee benefits obligations aredetermined using actuarial valuations. Actuarial valuations involve makingassumptions about discount rates, future salary increases, mortality rates andfuture pension increases. All assumptions are reviewed at each reporting date.Any changes in these assumptions will impact the carrying amount of theemployee benefits obligations and the cost of the defined benefit pensionplans. In determining the appropriated discount rate, management considers theinterest rates of high quality corporate bonds that are denominated in thecurrency in which the benefits will be paid, and that have terms to maturityapproximating the terms of the related pension liability. The mortality rate isbased on publicly available mortality tables for the specific country. Futuresalary increases and pension increases are based on expected future inflationrates for the specific country.

 

Other key assumptions forpension obligations are based, in part, on current market conditions. See Note14 for further details regarding assumptions used.

*** ***

***Governmentassistance repayments***

In determining the amount ofrepayable government assistance, assumptions and estimates are made in relationto discount rates, expected revenues and the expected timing of revenues.Revenue projections take into account past experience and representmanagement’s best estimate about the future. Revenues after a five-year periodare extrapolated using estimated growth rates, ranging from 5% to 9%, over theperiod of repayments. The estimated repayments are discounted using averagerates ranging from 6% to 8.5% based on terms of similar financial instruments.These estimates, along with the methodology used to derive the estimates, canhave a material impact on the respective values and ultimately any repayableobligation in relation to government assistance. A 1% increase to the growthrates would increase the royalty obligation at March 31, 2014 by approximately$9.4 million (2013 − $10.2 million). 

*** ***

***Share-based payments***

The Company measures the costof cash and equity-settled transactions with employees by reference to the fairvalue of the related instruments at the date at which they are granted.Estimating fair value for share-based payments requires determining the mostappropriate valuation model for a grant, which is dependent on the terms andconditions of the grant. This also requires making assumptions and determiningthe most appropriate inputs to the valuation model including the expected lifeof the option, volatility and dividend yield.

*** ***

***Income taxes***

The Company is subject toincome tax laws in numerous jurisdictions. Judgement is required in determiningthe worldwide provision for income taxes. The determination of tax liabilitiesand assets involves certain uncertainties in the interpretation of complex taxregulations. The Company provides for potential tax liabilities based on theweighted average probability of the possible outcomes. Differences betweenactual results and those estimates could have an effect on the income taxliabilities and deferred tax liabilities in the period in which suchdeterminations are made. 

 

Deferred tax assets arerecognized to the extent that it is probable that taxable profit will be availableagainst the losses that can be utilised. Significant management judgement isrequired to determine the amount of deferred tax assets that can be recognized,based upon the likely timing and the level of future taxable profits togetherwith future tax planning strategies. The recorded amount of total deferred taxassets could be altered if estimates of projected future taxable income andbenefits from available tax strategies are lowered, or if changes in currenttax regulations are enacted that impose restrictions on the timing or extent ofthe Company’s ability to utilise future tax benefits.

 

**NOTE 2 –cHANGES IN ACCOUNTING POLICIES**

**New and amended standard****s****adopted by the Company**

***Joint arrangements***

In May 2011, the IASB releasedIFRS 11, *Joint Arrangements*, which supersedes IAS 31, *Interests inJoint Ventures*, and SIC-13, *Jointly Controlled Entities – Non-monetaryContributions by Venturers*. IFRS 11 focuses on the rights and obligationsof a joint arrangement, rather than its legal form as was previously the caseunder IAS 31. The standard addresses inconsistencies in the reporting for jointarrangements by requiring the equity method to account for interests in jointlycontrolled entities. The Company previously accounted for its interests in jointventures using the proportionate consolidation method and now accounts for itsinterests in joint ventures using the equity method. IFRS 11 was adoptedretrospectively effective April 1st, 2013 in accordance with thetransition rules of IFRS 11. 

 

Under the equity method, theCompany’s share of net assets, net income and OCI of joint ventures will bepresented as one-line items on the statement of financial position, thestatement of income and the statement of comprehensive income, respectively. Inaddition, the consolidated statement of cash flows includes the cash flowsbetween the Company and its joint ventures, and not the Company’s proportionateshare of the joint ventures’ cash flows. The Company assessed that theclassification of its joint arrangements remains the same upon adoption of IFRS11. When making this assessment, the Company considered the structure of thearrangements, the legal form of any separate vehicles, the contractual terms ofthe arrangements and other facts and circumstances.

CAE Year-End Financial Results 2014 | 19

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Notes to the Consolidated Financial Statements 

***Employee benefits***

In June 2011, theIASB amended IAS 19, *Employee Benefit**s*. IAS 19 wasamended to require the calculation of a net interest that is calculated by applying the discount rate to the net defined benefit liability or asset and to expand the disclosure requirements.  As a result, the Company determined  anet interest expense on the net defined benefit liability which is  presented as part of the finance expense. The net interest on the defined benefit obligationliability or asset replaces the interest cost on the defined benefit obligationand the expected return on plan assets.  Theamended IAS 19 was adopted retrospectively effective April 1st, 2013in accordance with the transition rules of the amended IAS 19 and additionaldisclosure is provided in Note 14.

 

***Consolidation***

In May 2011, the IASB releasedIFRS 10, *Consolidated Financial Statements*, which replaces SIC-12, *Consolidation– Special Purpose Entities*, and parts of IAS 27, *Consolidated andSeparate Financial Statements*. The new standard builds on existingprinciples by identifying the concept of control as the determining factor inwhether an entity should be included in a company’s consolidated financialstatements. IFRS 10 was adopted retrospectively effective April 1st,2013 in accordance with the transition rules of IFRS 10. The Company assessedthat the adoption of IFRS 10 does not result in any change in the consolidationstatus of its subsidiaries. 

 

***Disclosure of interests in other entities***

InMay 2011, the IASB released IFRS 12, *Disclosure of Interests in OtherEntities*. IFRS 12 requires disclosure for all forms of interests in otherentities, including joint arrangements, associates and unconsolidatedstructured entities. The standard requires an entity to disclose informationregarding the nature and risks associated with its interests in other entitiesand the effects of those interests in its financial position, financialperformance and cash flows. IFRS 12 was adopted effective April 1st,2013 in accordance with the transition rules of IFRS 12. The new disclosurepursuant to IFRS 12 is included in these annual consolidated financialstatements.

*** ***

***Fair value measurement***

In May 2011, the IASB releasedIFRS 13, *Fair Value Measurement*. IFRS 13 defines fair value, sets out ina single IFRS a framework for measuring fair value and requires disclosureabout fair value measurements. IFRS 13 applies when other IFRS standardsrequire or permit fair value measurements. It does not extend the use of fairvalue accounting but provides guidance on how it should be applied when its useis already required or permitted by other standards within IFRS. IFRS 13 wasadopted prospectively effective April 1st, 2013 in accordance withthe transitional rules of IFRS 13. Other than additional disclosure which isincluded in Note 29, the adoption of IFRS 13 has no significant impact onthe Company’s consolidated financial statements.

*** ***

***Financial statement presentation***

In June 2011, the IASB amendedIAS 1, *Financial Statement Presentation,*to change the disclosure ofitems presented in OCI, including a requirement to separate items presented inOCI into two groups based on whether or not they may be recycled to net incomein the future. The amendments were adopted effective April 1st, 2013in accordance with the transition rules of IAS 1. The new OCI requirements arepresented in the Company’s consolidated statement of comprehensive income.

 

***Financial instrument disclosures***

In December 2011, the IASBamended IFRS 7, *Financial Instrument: Disclosures,* on asset and liabilityoffsetting. The amendment requires additional disclosures illustrating theeffect or potential effect of netting arrangements associated with theCompany’s recognized financial assets and financial liabilities. The amendmentswere adopted retrospectively effective April 1st, 2013 in accordancewith the transition rules of IFRS 7 and the additional disclosure is includedin Note 29.

 

***Property, plant and equipment***

In the 2011 AnnualImprovements, the IASB amended IAS 16, *Property, Plant and Equipment,*toclarify when certain assets are property, plant and equipment or inventory.This amendment clarifies that major spare parts and servicing equipment thatmeet the definition of property, plant and equipment are not inventory. The2011 annual improvement amendment removes the requirement for spare parts andservicing equipment used only in connection with an item of property, plant andequipment to be classified as property, plant and equipment. This annualimprovement was adopted retrospectively effective April 1st, 2013 inaccordance with the transition rules of IAS 16. The amendment of IAS 16 has noimpact on the Company’s consolidated financial statements.

 

***Impairment of non-financial assets***

In May 2013, the IASB amendedIAS 36, *Impairment of assets*regarding disclosures for non-financialassets. This amendment removed certain disclosures related to the recoverableamount of CGUs which had been included in IAS 36 with the issue of IFRS 13. Theamendment is not mandatory until January 1st, 2014, however; theCompany has decided to adopt the amendment as of April 1st, 2013.

20 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

The following tables summarize the adjustments to the Company’s consolidated statement of financial position as at April 1, 2012 and March 31, 2013, and its consolidated statements of income, comprehensive income and cash flows for the year ended March 31, 2013 as a result of those changes in accounting policies: 

 

| **Summary reconciliation of financial position** |                     |
|--------------------------------------------------|--------------------------|
|                                             |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |                     |   |   |   |   | IFRS 11 |   |   | IAS 19 |   | **March 31, 2013** |   |   |   | IFRS 11 |   |   | IAS 19 |   | **April 1, 2012** |   |
| *(amounts in millions)*                          | March 31, 2013           |   | Adjustment |   | Adjustment |   | **Restated** |   | April 1, 2012 |   | Adjustment |   | Adjustment |   | **Restated** |   |
| **Assets**                                       |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |                     | $ | 293.2  | $ | (33.2) | $ | -  | **$** | **260.0 ** | $ | 287.3  | $ | (32.6) | $ | -  | **$** | **254.7 ** |
| Total current assets, excluding                  |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             | cash and cash equivalent |   |   | 1,040.6  |   | 7.0  |   | -  |   | **1,047.6 ** |   | 860.8  |   | 0.1  |   | -  |   | **860.9 ** |
| Property, plant and equipment                    |                     |   | 1,498.6  |   | (355.8) |   | -  |   | **1,142.8 ** |   | 1,293.7  |   | (300.5) |   | -  |   | **993.2 ** |
| Investment in equity                             |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             | accounted investees      |   |   | -  |   | 196.9  |   | -  |   | **196.9 ** |   | -  |   | 172.9  |   | -  |   | **172.9 ** |
| Other non-current assets                         |                     |   | 1,046.3  |   | (2.3) |   | -  |   | **1,044.0 ** |   | 741.9  |   | 5.3  |   | -  |   | **747.2 ** |
| **Total assets**                                 |                     | $ | 3,878.7  | $ | (187.4) | $ | -  | **$** | **3,691.3 ** | $ | 3,183.7  | $ | (154.8) | $ | -  | **$** | **3,028.9 ** |
| **Liabilities and equity**                       |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total current liabilities                        |                     | $ | 1,002.8  | $ | (96.4) | $ | -  | **$** | **906.4 ** | $ | 883.4  | $ | (57.6) | $ | -  | **$** | **825.8 ** |
| Provisions                                       |                     |   | 8.3  |   | (0.4) |   | -  |   | **7.9 ** |   | 6.0  |   | (0.5) |   | -  |   | **5.5 ** |
| Long-term debt                                   |                     |   | 1,097.0  |   | (94.2) |   | -  |   | **1,002.8 ** |   | 685.6  |   | (97.2) |   | -  |   | **588.4 ** |
| Royalty obligations                              |                     |   | 160.6  |   | -  |   | -  |   | **160.6 ** |   | 161.6  |   | -  |   | -  |   | **161.6 ** |
| Employee benefits obligations                    |                     |   | 136.1  |   | -  |   | -  |   | **136.1 ** |   | 114.2  |   | -  |   | 0.1  |   | **114.3 ** |
| Other non-current liabilities                    |                     |   | 339.4  |   | (8.3) |   | -  |   | **331.1 ** |   | 290.7  |   | (8.8) |   | -  |   | **281.9 ** |
| **Total liabilities**                            |                     | $ | 2,744.2  | $ | (199.3) | $ | -  | **$** | **2,544.9 ** | $ | 2,141.5  | $ | (164.1) | $ | 0.1  | **$** | **1,977.5 ** |
| **Equity**                                       |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share capital                                    |                     | $ | 471.7  | $ | -  | $ | -  | **$** | **471.7 ** | $ | 454.5  | $ | -  | $ | -  | **$** | **454.5 ** |
| Contributed surplus                              |                     |   | 21.9  |   | -  |   | -  |   | **21.9 ** |   | 19.2  |   | -  |   | -  |   | **19.2 ** |
| Accumulated other                                |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             | comprehensive loss       |   |   | (16.6) |   | 4.6  |   | -  |   | **(12.0)** |   | (9.8) |   | 3.8  |   | -  |   | **(6.0)** |
| Retained earnings                                |                     |   | 625.7  |   | 7.3  |   | -  |   | **633.0 ** |   | 558.0  |   | 5.5  |   | (0.1) |   | **563.4 ** |
| Equity attributable to equity                    |                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             | holders of the Company   |   | $ | 1,102.7  | $ | 11.9  | $ | -  | **$** | **1,114.6 ** | $ | 1,021.9  | $ | 9.3  | $ | (0.1) | **$** | **1,031.1 ** |
| Non-controlling interests                        |                     |   | 31.8  |   | -  |   | -  |   | **31.8 ** |   | 20.3  |   | -  |   | -  |   | **20.3 ** |
| **Total equity**                                 |                     | $ | 1,134.5  | $ | 11.9  | $ | -  | **$** | **1,146.4 ** | $ | 1,042.2  | $ | 9.3  | $ | (0.1) | **$** | **1,051.4 ** |
| **Total liabilities and equity**                 |                     | $ | 3,878.7  | $ | (187.4) | $ | -  | **$** | **3,691.3 ** | $ | 3,183.7  | $ | (154.8) | $ | -  | **$** | **3,028.9 ** |

CAE Year-End Financial Results 2014 | 21

----

Notes to the Consolidated Financial Statements 

 

| **Reconciliation of net income**                        |
|---------------------------------------------------------|
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Year ended March 31, 2013*                             |   | As previously |   |   |   | IFRS 11 |   |   |   | IAS 19 |   |   |   |   |   |
| *(amounts in millions, except per share amounts)*       |   |   | reported |   |   | Adjustment |   |   | Adjustment |   |   | **Restated** |   |
| Revenue                                                 |   |   | $ | 2,104.5  |   | $ | (69.3) |   | $ | -  |   | **$** | **2,035.2 ** |
| Cost of sales                                           |   |   |   | 1,482.8  |   |   | (31.8) |   |   | (0.6) |   |   | **1,450.4 ** |
| **Gross profit**                                        |   |   | $ | 621.7  |   | $ | (37.5) |   | $ | 0.6  |   | **$** | **584.8 ** |
| Research and development expenses                       |   |   |   | 60.6  |   |   | (0.5) |   |   | -  |   |   | **60.1 ** |
| Selling, general and administrative expenses            |   |   |   | 269.9  |   |   | (5.6) |   |   | 0.2  |   |   | **264.5 ** |
| Other gains – net                                 |   |   |   | (23.4) |   |   | 1.0  |   |   | -  |   |   | **(22.4)** |
| After tax share in profit of equity accounted investees |   |   |   | -  |   |   | (20.1) |   |   | -  |   |   | **(20.1)** |
| Restructuring, integration and acquisition costs        |   |   |   | 68.9  |   |   | (0.2) |   |   | -  |   |   | **68.7 ** |
| **Operating profit**                                    |   |   | $ | 245.7  |   | $ | (12.1) |   | $ | 0.4  |   | **$** | **234.0 ** |
| Finance income                                          |   |   |   | (7.3) |   |   | (2.1) |   |   | -  |   |   | **(9.4)** |
| Finance expense                                         |   |   |   | 75.5  |   |   | (6.1) |   |   | 5.1  |   |   | **74.5 ** |
| Finance expense – net                             |   |   | $ | 68.2  |   | $ | (8.2) |   | $ | 5.1  |   | **$** | **65.1 ** |
| **Earnings before income taxes**                        |   |   | $ | 177.5  |   | $ | (3.9) |   | $ | (4.7) |   | **$** | **168.9 ** |
| Income tax expense                                      |   |   |   | 35.1  |   |   | (5.7) |   |   | (1.2) |   |   | **28.2 ** |
| **Net income**                                          |   |   | $ | 142.4  |   | $ | 1.8  |   | $ | (3.5) |   | **$** | **140.7 ** |
| Attributable to:                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity holders of the Company                           |   |   | $ | 139.4  |   | $ | 1.8  |   | $ | (3.5) |   | **$** | **137.7 ** |
| Non-controlling interests                               |   |   |   | 3.0  |   |   | -  |   |   | -  |   |   | **3.0 ** |
| **Earnings per share from continuing operations**       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **attributable to equity holders of the Company**       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                       |   |   | $ | 0.54  |   | $ | -  |   | $ | (0.01) |   | **$** | **0.53 ** |
| Weighted average number of                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| shares outstanding (basic)                              |   |   |   | 259.0  |   |   | -  |   |   | -  |   |   | **259.0 ** |
| Weighted average number of                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| shares outstanding (diluted)                            |   |   |   | 259.4  |   |   | -  |   |   | -  |   |   | **259.4 ** |

 

| **Summary reconciliation of comprehensive income** |   |
|----------------------------------------------------|--------|
|                                               |   |   |   |   |   |   |   |   |   |
| *Year ended March 31, 2013*                        |   | As previously |   |   | IFRS 11 |   |   | IAS 19 |   |   |   |   |   |
| *(amounts in millions)*                            |   |   | reported |   | Adjustment |   | Adjustment |   |   | **Restated** |   |
| **Net income**                                     |   |   | $ | 142.4  | $ | 1.8  | $ | (3.5) |   | **$** | **140.7 ** |
| Foreign currency translation                       |   |   | $ | 2.5  | $ | -  | $ | -  |   | **$** | **2.5 ** |
| Net changes in cash flow hedge                     |   |   |   | (9.2) |   | 0.8  |   | -  |   |   | **(8.4)** |
| Defined benefit plan actuarial losses              |   |   |   | (22.5) |   | -  |   | 3.6  |   |   | **(18.9)** |
| Other comprehensive loss                           |   | $ | (29.2) | $ | 0.8  | $ | 3.6  |   | **$** | **(24.8)** |
| **Total comprehensive income**                     |   | $ | 113.2  | $ | 2.6  | $ | 0.1  |   | **$** | **115.9 ** |
| Attributable to:                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity holders of the Company                      |   |   | $ | 110.1  | $ | 2.6  | $ | 0.1  |   | **$** | **112.8 ** |
| Non-controlling interests                          |   |   |   | 3.1  |   | -  |   | -  |   |   | **3.1 ** |
|                                               |   | $ | 113.2  | $ | 2.6  | $ | 0.1  |   | **$** | **115.9 ** |

 

| **Summary reconciliation of statement of cash flows** |   |
|-------------------------------------------------------|--------|
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Year ended March 31, 2013*                           |   |   | As previously |   |   | IFRS 11 |   |   | IAS 19 |   |   |   |   |
| *(amounts in millions)*                               |   |   |   |   | reported |   | Adjustment |   | Adjustment |   | **Restated** |   |
| Cash provided by operating activities                 |   |   |   | $ | 204.1  | $ | (49.6) | $ | -  | **$** | **154.5 ** |
| Cash used in investing activities                     |   |   |   |   | (504.9) |   | 71.2  |   | -  |   | **(433.7)** |
| Cash provided by financing activities                 |   |   |   |   | 306.7  |   | (22.2) |   | -  |   | **284.5 ** |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

22 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

**New and amended standard****s not yet****adopted by the Company**

***Financial Instruments***

In October 2010, the IASB released  IFRS 9, *Financial Instruments*.  IFRS 9, which is the first part of a three-part project to replace IAS 39, *Financial Instruments: recognition and measurement.* This first part addresses the classification and measurement of financial assets and financial liabilities. The IASB is considering making limited modifications to this part, which would include the introduction of a fair value through OCI category for debt instruments that would be based on a company’s business model. In November 2013, the IASB released the hedge accounting part, introducing a new hedge accounting model, together with associated disclosures about risk management activity. Impairment of financial assets, the third part of the project, is still under development. 

 

Replacing the multiple rules in IAS 39, the first part of IFRS 9 uses a new approach to determine whether a financial asset is measured at amortized cost or fair value and is based on how a company manages its financial instruments and the contractual cash flow characteristics of the financial assets. The majority of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9; however, the portion of the changes in fair value related to the company’s own credit risk, in measuring a financial liability at FVTPL, will be presented in OCI rather than in the income statement. The new hedge accounting model represents a substantial overhaul of hedge accounting that will enable companies to better reflect their risk management activities in their financial statements.

 

The initial mandatory effective date of IFRS 9, set for annual periods beginning on or after January 1, 2015, has been removed by the IASB, and a new date will be determined closer to project completion, however, early application is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements.

 

In June 2013, the IASB amended IAS 39 to provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. This amendment will be effective for Company’s fiscal year beginning on April 1, 2014. Similar relief will be included in IFRS 9.

 

***Employee benefits***

In November 2013, the IASB amended IAS 19, *Employee benefits*. The amendment simplifies the accounting for contributions to defined benefit plans that are independent of the number of years of employee service, for example, employee contributions that are calculated according to a fixed percentage of salary. The amendment is effective for annual periods beginning on or after January 1, 2015, with earlier application permitted. The Company is currently evaluating the impact of the amendment on its consolidated financial statements. 

 

**NOTE 3 – BUSINESS COMBINATIONS**

During the year, the Company paid $3.8 million for business combination transactions of which $0.8 million was for the payment of contingent consideration of previous acquisitions, $2.9 million (€2.1 million) was for the balance of the purchase price for the May 2012 acquisition of Oxford Aviation Academy Luxembourg S.à r.l.(OAA) and $0.1 million was to acquire the assets of RW Consulting and Training Services LTD (RWCTS), a provider of mining training and consulting services. The total consideration transferred for the RWCTS acquisition is $0.4 million, including $0.3 million of contingent consideration. 

 

**NOTE 4 – ACCOUNTS RECEIVABLE**

Accounts receivable are carried on the consolidated statement of financial position net of allowance for doubtful accounts. This provision is established based on the Company’s best estimates regarding the ultimate recovery of balances for which collection is uncertain. Uncertainty of ultimate collection may become apparent from various indicators, such as a deterioration of the credit situation of a given client and delay in collection beyond the contractually agreed upon payment terms. Management regularly reviews accounts receivable, monitors past due balances and assesses the appropriateness of the allowance for doubtful accounts.

 

| Details of accounts receivable are as follows: |
|------------------------------------------------|
|                                           |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                        |   |   |   | **2014 ** | 2013  |
| Current trade receivables                      |   |   | **$** | **178.4 ** | $ | 144.5  |
| Past due trade receivables                     |   |   |   |   |   |   |   |   |
|                                           | 1-30 days |   |   |   | **43.3 ** |   | 37.7  |
|                                           | 31-60 days |   |   |   | **17.2 ** |   | 15.5  |
|                                           | 61-90 days |   |   |   | **14.0 ** |   | 14.5  |
|                                           | Greater than 90 days |   |   |   | **55.5 ** |   | 44.2  |
| Allowance for doubtful accounts                |   |   |   | **(13.8)** |   | (9.8) |
| Total trade receivables                        |   |   | **$** | **294.6 ** | $ | 246.6  |
| Accrued receivables                            |   |   |   | **84.4 ** |   | 67.7  |
| Receivables from related parties (Note 33)     |   |   |   | **30.1 ** |   | 49.9  |
| Other receivables                              |   |   |   | **44.8 ** |   | 37.2  |
| Total accounts receivable                      |   |   | **$** | **453.9 ** | $ | 401.4  |

CAE Year-End Financial Results 2014 | 23

----

Notes to the Consolidated Financial Statements 

 

| Changes in the allowance for doubtful accounts are as follows: |
|----------------------------------------------------------------|
|                                                           |   |   |   |   |   |   |
| *(amounts in millions)*                                        |   |   |   | **2014 ** |   |   | 2013  |
| Allowance for doubtful accounts, beginning of year             |   |   | **$** | **(9.8)** |   | $ | (7.0) |
| Additions                                                      |   |   |   | **(5.6)** |   |   | (6.8) |
| Amounts charged off                                            |   |   |   | **1.0 ** |   |   | 2.3  |
| Unused amounts reversed                                        |   |   |   | **1.6 ** |   |   | 1.4  |
| Exchange differences                                           |   |   |   | **(1.0)** |   |   | 0.3  |
| Allowance for doubtful accounts, end of year                   |   |   | **$** | **(13.8)** |   | $ | (9.8) |
|                                                           |   |   |   |   |   |   |   |   |   |

 

 

**NOTE 5 – inventories**

| *(amounts in millions)*                                              |   |   |   | **2014 **  |   | 2013   |
|----------------------------------------------------------------------|--------|--------|--------|-----------------|--------|-------------|
| Work in progress                                                     |   |   | **$**  | **129.7 ** | $      | 103.1  |
| Raw materials, supplies and manufactured products                    |   |   |   | **89.8 **  |   | 73.1   |
|                                                                 |   |   | **$**  | **219.5 ** | $      | 176.2  |
|                                                                 |   |   |   |            |   |        |   |   |
| The amount of inventories recognized as cost of sales is as follows: |   |   |   |            |   |        |   |   |
|                                                                 |   |   |   |            |   |        |   |   |
| *(amounts in millions)*                                              |   |   |   | **2014 **  |   | 2013   |
| Work in progress                                                     |   |   | **$**  | **79.3 **  | $      | 64.8   |
| Raw materials, supplies and manufactured products                    |   |   |   | **69.7 **  |   | 40.7   |
|                                                                 |   |   | **$**  | **149.0 ** | $      | 105.5  |

 

Write-downs of inventories, net of reversals, in the amount of $0.4 million were made during fiscal 2014 (2013 – net reversal of $0.2 million).

 

 

**NOTE 6 – Property, plant and equipment**

|                                 |          |           |    |            |      |            |    |           |    |           |     |            |       |            |    |              | Assets     |   |   |   |   |   |   |   |
|--------------------------------------|---------------|----------------|---------|-----------------|-----------|-----------------|---------|----------------|---------|----------------|----------|-----------------|------------|-----------------|---------|-------------------|------------|--------|--------|--------|--------|--------|--------|--------|
|                                 |          |           |    |            | Buildings |            |    |           |    | Machinery      |     | Aircraft and    |       | under           |    | Assets            |       |   |   |   |
|                                 |          |           |    | and             |      |            |    |           | and     |           | aircraft |            | finance    |            | under   |              |       |   |   |
| *(amounts in millions)*              |          | Land           |    | improvements    |      | Simulators      |    | equipment      |    | engines        |     | lease           |       | construction    |    |              | Total      |   |
| Net book value at March 31, 2012     | $             | 26.3      | $       | 161.2      | $         | 535.1      | $       | 54.7      | $       | 7.2       | $        | 115.0      | $          | 93.7       | $       | 993.2        |
| Additions                            |          | -         |    | 17.9       |      | 11.8       |    | 4.2       |    | 0.3       |     | -          |       | 62.5       |    | 96.7         |
| Acquisition of subsidiaries          |          | -         |    | 11.7       |      | 91.1       |    | 2.9       |    | 12.8      |     | 32.6       |       | -          |    | 151.1        |
| Acquisition of assets under          |          |           |    |            |      |            |    |           |    |           |     |            |       |            |    |              |       |   |   |   |   |   |   |   |
|                                 | finance lease |           | -  |            | -    |            | -  |           | -  |           | -   |            | 5.0   |            | -  |              | 5.0   |
| Disposals                            |          | -         |    | (1.0)           |      | (5.1)           |    | -         |    | (0.1)          |     | -          |       | (0.3)           |    | (6.5)             |
| Depreciation                         |          | -         |    | (12.0)          |      | (49.3)          |    | (12.3)         |    | (1.5)          |     | (18.8)          |       | -          |    | (93.9)            |
| Transfers and others                 |          | -         |    | (0.3)           |      | 54.0       |    | (1.6)          |    | (2.4)          |     | (7.6)           |       | (48.2)          |    | (6.1)             |
| Exchange differences                 |          | (0.3)          |    | (1.0)           |      | (0.5)           |    | (0.5)          |    | 0.2       |     | 3.6        |       | 1.8        |    | 3.3          |
| Net book value at March 31, 2013     | $             | 26.0      | $       | 176.5      | $         | 637.1      | $       | 47.4      | $       | 16.5      | $        | 129.8      | $          | 109.5      | $       | 1,142.8      |
| Additions                            |          | -         |    | 13.7       |      | 6.5        |    | 13.3      |    | 4.0       |     | -          |       | 119.9      |    | 157.4        |
| Acquisition of assets under          |          |           |    |            |      |            |    |           |    |           |     |            |       |            |    |              |       |   |   |   |   |   |   |   |
|                                 | finance lease |           | -  |            | -    |            | -  |           | -  |           | -   |            | 33.4  |            | -  |              | 33.4  |
| Disposals                            |          | (2.2)          |    | (2.5)           |      | (2.9)           |    | -         |    | (2.2)          |     | -          |       | -          |    | (9.8)             |
| Depreciation                         |          | -         |    | (14.6)          |      | (51.0)          |    | (15.3)         |    | (2.2)          |     | (16.4)          |       | -          |    | (99.5)            |
| Impairment (Note 20)                 |          | -         |    | (0.6)           |      | -          |    | -         |    | -         |     | -          |       | -          |    | (0.6)             |
| Transfers and others                 |          | -         |    | 4.6        |      | 72.0       |    | 3.6       |    | (0.1)          |     | (2.1)           |       | (78.5)          |    | (0.5)             |
| Exchange differences                 |          | 2.7       |    | 15.1       |      | 77.9       |    | 3.4       |    | 0.8       |     | 12.9       |       | 5.2        |    | 118.0        |
| **Net book value at March 31, 2014** | **$**         | **26.5 ** | **$**   | **192.2 ** | **$**     | **739.6 ** | **$**   | **52.4 ** | **$**   | **16.8 ** | **$**    | **157.6 ** | **$**      | **156.1 ** | **$**   | **1,341.2 ** |

24 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

|                                 |   |           |   |            |      |            |   |           |   |           |     |            |    |            |   |              | Assets |   |   |   |   |   |   |   |
|--------------------------------------|--------|----------------|--------|-----------------|-----------|-----------------|--------|----------------|--------|----------------|----------|-----------------|---------|-----------------|--------|-------------------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                 |   |           |   |            | Buildings |            |   |           |   | Machinery      |     | Aircraft and    |    | under           |   | Assets            |   |   |   |   |
|                                 |   |           |   | and             |      |            |   |           | and    |           | aircraft |            | finance |            | under  |              |   |   |   |
| *(amounts in millions)*              |   | Land           |   | improvements    |      | Simulators      |   | equipment      |   | engines        |     | lease           |    | construction    |   |              | Total  |   |
| Cost                                 | $      | 26.0      | $      | 302.1      | $         | 847.9      | $      | 197.6     | $      | 24.8      | $        | 269.0      | $       | 109.5      | $      | 1,776.9      |
| Accumulated depreciation             |   | -         |   | (125.6)         |      | (210.8)         |   | (150.2)        |   | (8.3)          |     | (139.2)         |    | -          |   | (634.1)           |
| Net book value at March 31, 2013     | $      | 26.0      | $      | 176.5      | $         | 637.1      | $      | 47.4      | $      | 16.5      | $        | 129.8      | $       | 109.5      | $      | 1,142.8      |
| Cost                                 | $      | 26.5      | $      | 336.4      | $         | 1,013.3    | $      | 224.8     | $      | 23.7      | $        | 261.3      | $       | 156.1      | $      | 2,042.1      |
| Accumulated depreciation             |   | -         |   | (144.2)         |      | (273.7)         |   | (172.4)        |   | (6.9)          |     | (103.7)         |    | -          |   | (700.9)           |
| **Net book value at March 31, 2014** | **$**  | **26.5 ** | **$**  | **192.2 ** | **$**     | **739.6 ** | **$**  | **52.4 ** | **$**  | **16.8 ** | **$**    | **157.6 ** | **$**   | **156.1 ** | **$**  | **1,341.2 ** |
|                                 |   |           |   |            |      |            |   |           |   |           |     |            |    |            |   |              |   |   |   |   |   |   |   |   |   |

 

As at March 31, 2014, the average remaining amortization period for full-flight simulators is 11.5 years (2013 –  12.0 years).

 

As at March 31, 2014, bank borrowings are collateralized by property, plant and equipment for a value of $13.0 million (2013 –  $10.0 million).

 

As at March 31, 2014, the net book value of simulators leased out to third parties is $23.4 million (2013 – $22.3 million).

 

| Assets under finance lease, with lease terms between 2 and 21 years, include simulators, buildings and machinery and equipment, as follows: |
|---------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                        |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                                                     |   |   |   | **2014 ** |   | 2013  |
| **Simulators**                                                                                                                              |   |   |   |   |   |   |
| Cost                                                                                                                                        |   |   | **$** | **223.5 ** | $ | 234.2  |
| Accumulated depreciation                                                                                                                    |   |   |   | **(89.1)** |   | (127.4) |
| Net book value                                                                                                                              |   |   | **$** | **134.4 ** | $ | 106.8  |
| **Buildings**                                                                                                                               |   |   |   |   |   |   |
| Cost                                                                                                                                        |   |   | **$** | **37.2 ** | $ | 34.2  |
| Accumulated depreciation                                                                                                                    |   |   |   | **(14.0)** |   | (11.2) |
| Net book value                                                                                                                              |   |   | **$** | **23.2 ** | $ | 23.0  |
| **Machinery and equipment**                                                                                                                 |   |   |   |   |   |   |
| Cost                                                                                                                                        |   |   | **$** | **0.6 ** | $ | 0.6  |
| Accumulated depreciation                                                                                                                    |   |   |   | **(0.6)** |   | (0.6) |
| Net book value                                                                                                                              |   |   | **$** | **- ** | $ | -  |
| **Total net book value**                                                                                                                    |   |   | **$** | **157.6 ** | $ | 129.8  |

 

 

**NOTE 7 – intangible assets**

|                                   |        |            |     |            | Capitalized   |            |     |           |       | ERP and        |       |           |   |            | Other  |   |   |   |   |
|----------------------------------------|-------------|-----------------|----------|-----------------|---------------|-----------------|----------|----------------|------------|----------------|------------|----------------|--------|-----------------|--------|--------|--------|--------|--------|
| Goodwill                               | development |            | Customer |            |          | other           |     |           |       |           | intangible |           |   |            |   |
| *(amounts in millions)*                | (Note 20)   |            | costs    |            | relationships |            | software |           | Technology |           | assets     |           |   | Total           |   |
| Net book value at March 31, 2012       | $           | 298.1      | $        | 71.0       | $             | 56.8       | $        | 57.1      | $          | 27.7      | $          | 17.2      | $      | 527.9      |
| Additions – internal development |        | -          |     | 49.6       |          | -          |     | 19.2      |       | -         |       | -         |   | 68.8       |
| Additions – acquired separately  |        | -          |     | -          |          | 6.2        |     | -         |       | -         |       | -         |   | 6.2        |
| Acquisition of subsidiaries            |        | 149.8      |     | 0.8        |          | 63.7       |     | 1.1       |       | 0.8       |       | 17.6      |   | 233.8      |
| Amortization                           |        | -          |     | (8.9)           |          | (12.5)          |     | (9.4)          |       | (3.9)          |       | (3.2)          |   | (37.9)          |
| Transfers and others                   |        | -          |     | (8.1)           |          | 0.8        |     | (2.6)          |       | -         |       | -         |   | (9.9)           |
| Exchange differences                   |        | 4.1        |     | 0.1        |          | 1.0        |     | -         |       | 0.1       |       | 0.2       |   | 5.5        |
| Net book value at March 31, 2013       | $           | 452.0      | $        | 104.5      | $             | 116.0      | $        | 65.4      | $          | 24.7      | $          | 31.8      | $      | 794.4      |
| Additions – internal development |        | -          |     | 48.1       |          | -          |     | 13.6      |       | -         |       | -         |   | 61.7       |
| Additions – acquired separately  |        | -          |     | -          |          | 2.9        |     | -         |       | -         |       | 0.1       |   | 3.0        |
| Acquisition of subsidiaries            |        | 0.3        |     | -          |          | -          |     | -         |       | -         |       | -         |   | 0.3        |
| Amortization                           |        | -          |     | (12.2)          |          | (14.5)          |     | (12.8)         |       | (4.0)          |       | (3.5)          |   | (47.0)          |
| Transfers and others                   |        | -          |     | (7.9)           |          | -          |     | (2.4)          |       | -         |       | 0.3       |   | (10.0)          |
| Exchange differences                   |        | 50.2       |     | 1.5        |          | 10.7       |     | 0.6       |       | 1.8       |       | 3.5       |   | 68.3       |
| **Net book value at March 31, 2014**   | **$**       | **502.5 ** | **$**    | **134.0 ** | **$**         | **115.1 ** | **$**    | **64.4 ** | **$**      | **22.5 ** | **$**      | **32.2 ** | **$**  | **870.7 ** |
|                                   |        |            |     |            |          |            |     |           |       |           |       |           |   |            |   |   |   |   |   |   |   |   |

 

CAE Year-End Financial Results 2014 | 25

----

Notes to the Consolidated Financial Statements 

|                                 |     |            |   |            | Capitalized   |            |     |           |       | ERP and        |       |           |   |            | Other  |   |   |   |   |
|--------------------------------------|----------|-----------------|--------|-----------------|---------------|-----------------|----------|----------------|------------|----------------|------------|----------------|--------|-----------------|--------|--------|--------|--------|--------|
|                                 |     | development     |   | Customer        |          | other           |     |           |       |           | intangible |           |   |            |   |
| *(amounts in millions)*              | Goodwill |            | costs  |            | relationships |            | software |           | Technology |           | assets     |           |   | Total           |   |
| Cost                                 | $        | 452.0      | $      | 145.7      | $             | 146.8      | $        | 117.5     | $          | 41.9      | $          | 50.3      | $      | 954.2      |
| Accumulated depreciation             |     | -          |   | (41.2)          |          | (30.8)          |     | (52.1)         |       | (17.2)         |       | (18.5)         |   | (159.8)         |
| Net book value at March 31, 2013     | $        | 452.0      | $      | 104.5      | $             | 116.0      | $        | 65.4      | $          | 24.7      | $          | 31.8      | $      | 794.4      |
| Cost                                 | $        | 502.5      | $      | 187.8      | $             | 163.9      | $        | 130.5     | $          | 44.8      | $          | 55.7      | $      | 1,085.2    |
| Accumulated depreciation             |     | -          |   | (53.8)          |          | (48.8)          |     | (66.1)         |       | (22.3)         |       | (23.5)         |   | (214.5)         |
| **Net book value at March 31, 2014** | **$**    | **502.5 ** | **$**  | **134.0 ** | **$**         | **115.1 ** | **$**    | **64.4 ** | **$**      | **22.5 ** | **$**      | **32.2 ** | **$**  | **870.7 ** |
|                                 |     |            |   |            |          |            |     |           |       |           |       |           |   |            |   |   |   |   |   |   |   |   |

 

For the year ended March 31, 2014, amortization of $34.8 million (2013 – $28.6 million) has been recorded in cost of sales, $10.6  million (2013 – $7.8 million) in research and development expenses, $1.6 million (2013 – $1.5 million) in selling, general and administrative expenses and nil (2013 – nil) was capitalized.

 

As at March 31, 2014, the average remaining amortization period for the capitalized development costs is 5.5 years (2013 – 5.0 years).

 

The categories of capitalized development costs and ERP and other software both primarily consist of internally generated intangible assets.

 

The Company has no indefinite life intangible assets other than goodwill.

 

 

**NOTE 8 – Other assets**

| *(amounts in millions)*                                                                                                                                                      |                                                  |   | **2014 **  |   | 2013       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|--------|-----------------|--------|-----------------|
| Restricted cash                                                                                                                                                              |                                                  | **$**  | **24.1 **  | $      | 4.1        |
| Prepaid rent to a portfolio investment                                                                                                                                       |                                                  |   | **78.6 **  |   | 77.5       |
| Investment in a portfolio investment                                                                                                                                         |                                                  |   | **1.5 **   |   | 1.3        |
| Advances to a portfolio investment                                                                                                                                           |                                                  |   | **50.2 **  |   | 33.9       |
| Deferred financing costs(1)                                                                                                                                                  |                                                  |   | **3.8 **   |   | 4.2        |
| Non-current receivables                                                                                                                                                      |                                                  |   | **87.7 **  |   | 80.8       |
| Investment tax credits                                                                                                                                                       |                                                  |   | **138.1 ** |   | -          |
| Other(1)                                                                                                                                                                     |                                                  |   | **16.1 **  |   | 10.1       |
|                                                                                                                                                                         |                                                  |   |            | **$**  | **400.1 ** | $ | 211.9  |
|                                                                                                                                                                         |                                                  |   |            |   |            |   |   |   |   |
| (1) The related amortization for deferred financing costs for the year amounted to $0.7 million (2013 – $0.8 million). The related amortization for other for the year |
|                                                                                                                                                                         | amounted to $0.4 million (2013 – $0.9 million). |   |            |   |            |   |   |   |

 

| **Finance lease receivables**                                                                                                     |
|-----------------------------------------------------------------------------------------------------------------------------------|
| The present value of future minimum lease payment receivables, included in the current and non-current receivables is as follows: |
|                                                                                                                              |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                                           |   |   | **2014 ** |   | 2013  |
| Gross investment in finance lease contracts                                                                                       |   | **$** | **97.6 ** | $ | 65.4  |
| Less: unearned finance income                                                                                                     |   |   | **40.8 ** |   | 25.0  |
| Less: discounted unguaranteed residual values of leased assets                                                                    |   |   | **0.9 ** |   | 0.5  |
| Present value of future minimum lease payment receivables                                                                         |   | **$** | **55.9 ** | $ | 39.9  |
|                                                                                                                              |   |   |   |   |   |   |   |

 

| Future minimum lease payments from investments in finance lease contracts to be received are as follows: |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                  |   |   |   |   | **2014 ** |   |   |   |   | 2013  |
|                                                                                                     |   |   | **Present value of** |   |   |   | Present value of |   |
|                                                                                                     |   | **Gross** |   | **future minimum** |   |   | Gross |   | future minimum |   |
|                                                                                                     | **Investment** |   | **lease payments** |   | Investment |   | lease payments |   |
| No later than 1 year                                                                                     | **$** | **3.0 ** | **$** | **2.1 ** | $ | 2.7  | $ | 1.8  |
| Later than 1 year and no later than 5 years                                                              |   | **17.6 ** |   | **7.8 ** |   | 11.5  |   | 5.3  |
| Later than 5 years                                                                                       |   | **77.0 ** |   | **46.0 ** |   | 51.2  |   | 32.8  |
|                                                                                                     | **$** | **97.6 ** | **$** | **55.9 ** | $ | 65.4  | $ | 39.9  |
|                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |

26 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**NOTE 9 – ACCOUNTs PAYABLE AND ACCRUED LIABILITIES**

| *(amounts in millions)*                  |   |   |   | **2014 **  |   | 2013   |
|------------------------------------------|--------|--------|--------|-----------------|--------|-------------|
| Accounts payable trade                   |   |   | **$**  | **288.1 ** | $      | 268.7  |
| Accrued liabilities                      |   |   |   | **255.1 ** |   | 234.7  |
| Amounts due to related parties (Note 33) |   |   |   | **16.3 **  |   | 25.3   |
| Deferred revenue                         |   |   |   | **117.3 ** |   | 101.9  |
| Current portion of royalty obligations   |   |   |   | **8.2 **   |   | 13.6   |
|                                     |   |   | **$**  | **685.0 ** | $      | 644.2  |
|                                     |   |   |   |            |   |        |   |   |
|                                     |   |   |   |            |   |        |   |   |

 

 

**NOTE 10 – contracts IN PROGRESS**

The amounts recognized in the consolidated statement of financial position correspond, for each construction contract, to the aggregate amount of costs incurred plus recognized profits (less recognized losses), less progress billings and amounts sold.

 

| *(amounts in millions)*                            |                                     | **2014 **    |              |   | 2013     |
|----------------------------------------------------|------------------------------------------|-------------------|-------------------|--------|---------------|
| Contracts in progress: assets                      | **$**                                    | **256.4 **   |              | $      | 265.6    |
| Contracts in progress: liabilities                 |                                     | **(167.4)**       |              |   | (122.3)       |
| Contracts in progress: net assets                  | **$**                                    | **89.0 **    |              | $      | 143.3    |
|                                               |                                     |              |              |   |          |
| These amounts correspond to:                       |                                     |              |              |   |          |   |   |
|                                               |                                     |              |              |   |          |   |   |   |
| *(amounts in millions)*                            |                                     | **2014 **    |              |   | 2013     |
| Aggregate amount of costs incurred plus recognized |                                     |              |              |   |          |
|                                               | profits (less recognized losses) to date | **$**             | **3,128.8 ** |   | $             | 3,094.4  |
| Less: progress billing                             |                                     | **3,035.6 ** |              |   | 2,948.0  |
| Less: amounts sold                                 |                                     | **4.2 **     |              |   | 3.1      |
| Contracts in progress: net assets                  | **$**                                    | **89.0 **    |              | $      | 143.3    |

 

Advances received from customers on construction contracts related to work not yet commenced amounts to $31.7 million at March 31, 2014 (2013 – $1.6 million). 

 

Construction contracts revenue recognized in fiscal 2014 amounts to $763.4 million (2013 – $822.3 million).

 

 

**NOTE 11 – provisionS**

**Restoration and simulator removal**

In certain situations, simulators are installed at locations that are not owned by the Company. In some of these cases, the Company has an obligation to dismantle and remove the simulators from these sites and to restore the location to its original condition. A provision is recognized for the present value of estimated costs to be incurred to dismantle and remove the simulators from these sites and restore the location. The provision also includes amounts relating to leased land and building where restoration costs are contractually required at the end of the lease. Where such costs arise as a result of capital expenditure on the leased asset, the restoration costs are also capitalized. 

 

**Restructuring**

Restructuring costs consist mainly of severances and other related costs.

 

**Legal claims**

The amount represents a provision for certain legal claims brought against the Company. The corresponding charge is recognized in the consolidated income statement within selling, general and administrative expenses. Management’s best estimate is that the outcome of these legal claims will not give rise to any significant loss beyond the amounts provided at March 31, 2014.

 

**Warranties**

A provision is recognized for expected warranty claims on products sold in the last two years, based on past experience of the level of repairs and returns. It is expected that most of these costs will be incurred in the next financial year. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the warranty period of products sold.

CAE Year-End Financial Results 2014 | 27

----

Notes to the Consolidated Financial Statements 

 

| Changes in provisions are as follows: |                   |          |          |           |    |          |       |          |         |                  |       |          |       |           |       |   |
|---------------------------------------|------------------------|---------------|---------------|----------------|---------|---------------|------------|---------------|--------------|-----------------------|------------|---------------|------------|----------------|------------|--------|
|                                  |                   |          |          |           |    |          |       |          |         |                  |       | Contingent    |       |           |       |   |   |   |   |
|                                  | Restoration            |          |          |           |    |          |       |          |         | consideration arising |       |          |       |           |       |   |   |
|                                  | and simulator          |          | Restructuring |           | Legal   |          |       | on business   |         |                  | Other      |          |       |           |       |
| *(amounts in millions)*               | removal                |          | (Note 22)     |           | claims  |          | Warranties |          | combinations |                  | provisions |          |       | Total          |       |
| Total provisions, beginning of year   | $                      | 4.0      | $             | 27.9      | $       | 5.2      | $          | 8.4      | $            | 3.5              | $          | 7.9      | $          | 56.9      |
| Additions including increases         |                   |          |          |           |    |          |       |          |         |                  |       |          |       |           |       |   |   |   |   |   |   |
|                                  | to existing provisions |          | 0.1      |           | -  |          | -     |          | 9.2     |                  | 0.3   |          | 10.3  |           | 19.9  |
| Amounts used                          |                   | -        |          | (16.7)         |    | (0.8)         |       | (11.7)        |         | (0.8)                 |       | (9.3)         |       | (39.3)         |
| Unused amounts reversed               |                   | (0.4)         |          | -         |    | (3.8)         |       | (0.1)         |         | (0.4)                 |       | (1.4)         |       | (6.1)          |
| Changes in the                        |                   |          |          |           |    |          |       |          |         |                  |       |          |       |           |
|                                  | discounted amount      |          | -        |           | -  |          | -     |          | -       |                  | 0.2   |          | -     |           | 0.2   |
| Exchange differences                  |                   | 0.6      |          | 1.9       |    | 0.2      |       | -        |         | 0.1              |       | 0.6      |       | 3.4       |
| **Total provisions, end of year**     | **$**                  | **4.3 ** | **$**         | **13.1 ** | **$**   | **0.8 ** | **$**      | **5.8 ** | **$**        | **2.9 **         | **$**      | **8.1 ** | **$**      | **35.0 ** |
| **Less: current portion**             |                   | **0.4 ** |          | **13.1 ** |    | **0.4 ** |       | **5.8 ** |         | **0.8 **         |       | **8.1 ** |       | **28.6 ** |
| **Long-term portion**                 | **$**                  | **3.9 ** | **$**         | **- **    | **$**   | **0.4 ** | **$**      | **- **   | **$**        | **2.1 **         | **$**      | **- **   | **$**      | **6.4 **  |

 

 

**NOTE 12 – DEBT FACILITIES**

Long-term debt, net of transaction costs is as follows:

 

| *(amounts in millions)*                                                                                                                                           |   |   | **2014 **    |   | 2013     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------------|--------|---------------|
| Total recourse debt                                                                                                                                               |   | **$**  | **1,130.3 ** | $      | 1,067.6  |
| Total non-recourse debt (1)                                                                                                                                       |   |   | **38.2 **    |   | 5.8      |
| Total long-term debt                                                                                                                                              |   | **$**  | **1,168.5 ** | $      | 1,073.4  |
| Less:                                                                                                                                                             |   |   |              |   |          |
| Current portion of long-term debt                                                                                                                                 |   |   | **23.8 **    |   | 43.7     |
| Current portion of finance leases                                                                                                                                 |   |   | **26.8 **    |   | 26.9     |
|                                                                                                                                                              |   | **$**  | **1,117.9 ** | $      | 1,002.8  |
|                                                                                                                                                              |   |   |              |   |          |   |   |   |
| (1) Non-recourse debt is a debt in a subsidiary for which recourse is limited to the assets, equity, interest and undertaking of such subsidiary and not CAE Inc. |
|                                                                                                                                                              |   |   |              |   |          |   |   |   |

 

| Details of the recourse debt are as follows: |                                                                                                                                                                                                                                                                 |   |              |            |          |        |   |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------------|---------------|-------------|--------|
|                                         |                                                                                                                                                                                                                                                                 |   |              |            |          |        |   |   |
| *(amounts in millions)*                      |                                                                                                                                                                                                                                                                 |   | **2014 **    |            | 2013     |
|                                         |                                                                                                                                                                                                                                                                 |   |              |            |          |        |   |
| (i)                                          | Senior notes ($125.0 and US$225.0 maturing between December 2019 and December 2027), floating interest rates based on bankers’ acceptances rate plus a spread on $50.0 million and interest rate ranging from 3.59% and 4.15% for remaining $75.0 and US$225.0 |   | **$**             | **373.7 ** | $             | 353.5  |
| (ii)                                         | Senior notes ($15.0 and US$45.0 maturing in June 2016 and US$60.0 maturing in June 2019), average blended rate of 7.15% payable semi-annually in June and December                                                                                                   |   |              | **128.6 ** |          | 119.0  |
| (iii)                                        | Senior notes (US$100.0 maturing in August 2021 and US$50.0 maturing in August 2026), average blended rate of 4.47% payable semi-annually in August and February                                                                                                      |   |              | **165.8 ** |          | 152.3  |
| (iv)                                         | Revolving unsecured term credit facilities maturing in October 2018 (US$550.0)                                                                                                                                                                                       |   |              | **54.3 **  |          | 67.5   |
| (v)                                          | Obligations under finance lease commitments, with various maturities from May 2014 to October 2036, interest rates from 2.75% to 10.69%                                                                                                                              |   |              | **159.2 ** |          | 142.5  |
| (vi)                                         | Term loan maturing in June 2014 (outstanding as at March 31, 2014 – US$1.5 and £0.7, as at March 31, 2013 – US$7.7 and £3.2)                                                                                                                   |   |              | **2.8 **   |          | 12.4   |
|                                         | Term loan maturing in June 2018 (outstanding as at March 31, 2014 – US$43.2 and £8.5, as at March 31, 2013 – US$43.2 and £8.5)                                                                                                                 |   |              | **61.7 **  |          | 55.2   |
|                                         | Combined coupon rate of post-swap debt of 7.98% (2013 – 6.92%)                                                                                                                                                                                                 |   |              |            |          |        |
| (vii)                                        | R&D obligation from a government agency maturing in July 2029                                                                                                                                                                                                    |   |              | **139.1 ** |          | 97.5   |
| (viii)                                       | R&D obligation from a government agency maturing in July 2035                                                                                                                                                                                                    |   |              | **1.3 **   |          | -      |
| (ix)                                         | Term loan maturing in January 2020 (outstanding as at March 31, 2014 – €3.6, as at March 31, 2013 – €4.4), floating interest rate of EURIBOR plus a spread                                                                                   |   |              | **5.3 **   |          | 5.5    |
| (x)                                          | Credit facility maturing in January 2015 (outstanding as at March 31, 2014 – $1.4 and INR 294.2, as at March 31, 2013 – $2.2 and INR 349.2), bearing interest based on floating interest rates in India prevailing at the time of each drawdown          |   |              | **6.8 **   |          | 8.7    |
| (xi)                                         | Term loan, maturing in October 2022 (outstanding as at March 31, 2014 – US$13.7, as at March 31, 2013 – $US15.4), bearing interest at a fixed rate of 4.14%                                                                                              |   |              | **15.1 **  |          | 15.6   |
| (xii)                                        | Other debts, with various maturities from June 2014 to March 2024, average interest rate of approximately 2.53%                                                                                                                                                      |   |              | **16.6 **  |          | 37.9   |
|                                         |                                                                                                                                                                                                                                                                 |   |              |            |          |        |   |
| Total recourse debt, net amount              |                                                                                                                                                                                                                                                                 | **$**  | **1,130.3 ** | $               | 1,067.6  |
|                                         |                                                                                                                                                                                                                                                                 |   |              |            |          |        |   |   |

28 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

 

(i)         Represents unsecured senior notes for $125.0 million and US$225.0 million by way of a private placement. 

 

(ii)        Represents unsecured senior notes for $15.0 million and US$105.0 million by way of a private placement.      

 

(iii)       Represents unsecured senior notes for US$150.0 million by way of a private placement. 

 

(iv)       Represents revolving unsecured term credit facilities with a maturity date of October 2018. The available facility amount is US$550.0 million with an option, subject to the lender’s consent, to increase to a total amount of up to US$850.0 million. The facility has covenants requiring a minimum fixed charge coverage and a maximum debt coverage. The applicable interest rate on this revolving term credit facility is at the option of the Company, based on the bank’s prime rate, bankers’ acceptance rates or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poor’s Rating Services.

 

(v)        These finance leases relate to the leasing of various buildings, simulators, machinery and equipment.

 

In September 2013 and October 2013, we entered into various finance leases, for the leasing of simulators located in the U.S. These transactions represent a total finance lease obligation of $34.2 million as at March 31, 2014.

 

(vi)       Represents senior financing for two civil aviation training centres. Tranche A is repaid in quarterly instalments of principal and interest while Tranche B begins quarterly amortization in July 2014. 

 

(vii)      Represents an interest-bearing long-term obligation with the Government of Canada relative to Project Falcon, an R&D program that ended at the end of fiscal 2014, for a maximum amount of $250.0 million. The aggregate amount recognized at the end of fiscal 2014 was $250.0 million (2013 – $200.8 million) (see Note 1). The discounted value of the debt recognized amounted to $139.1 million as at March 31, 2014 (2013 – $97.5 million).

 

(viii)     In fiscal 2014, the Company entered into an interest-bearing long-term obligation with the Government of Canada relative to Project Innovate, an R&D program extending over five and half years, for a maximum amount of $250.0 million. The aggregate amount recognized in fiscal 2014 was 2.7 million. The discounted value of the debt recognized amounted to $1.3 million as at March 31, 2014.

 

(ix)       Represents a loan agreement of $5.3 million (€3.6 million) (2013 – $5.7 million (€4.4 million)) for the financing of one of the Company’s subsidiaries. 

 

(x)        Represents the financing facility for certain of the Company’s operations in India. The financing facility is comprised of a term loan of up to $8.6 million (INR 470.0 million) and working capital facilities of up to an aggregate of $2.3 million (INR 125.0 million). Drawdowns can be made in INR or any other major currencies acceptable to the lender. 

 

(xi)       Represents a term loan maturing in October 2022 to finance simulators.

 

(xii)      Other debts include an unsecured facility for the financing of the cost of establishment of an ERP system. The facility is repayable with monthly repayments over a term of seven years beginning at the end of the first month following each quarterly disbursement. Other debts also include bonds for which US$11.0 million (2013 – US$30.8 million) of letters of credit have been issued to support the bonds for the outstanding amount of the loans. Combined interest rate for these bonds is 1.79% (2013 – 2.15%).

 

| Details of the non-recourse debt are as follows: |                                                                                                                                                                                             |   |           |           |       |      |   |
|--------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|----------------|------------|-----------|--------|
|                                             |                                                                                                                                                                                             |   |           |           |       |      |   |   |
| *(amounts in millions)*                          |                                                                                                                                                                                             |   | **2014 ** |           | 2013  |
| (i)                                              | Term loan of £12.7 collateralized, maturing in October 2016 (outstanding as at March 31, 2014 – £1.1, as at March 31, 2013 – £1.3), interest rate of LIBOR plus 1.05% |   | **$**          | **1.9 **  | $          | 2.1  |
| (ii)                                             | Term loan of US$48.0 collateralized, maturing in March 2028 (outstanding as at March 31, 2014 – US$33.1, as at March 31, 2013 – US$4.0), interest rate of LIBOR plus 2.50%           |   |           | **36.3 ** |       | 3.7  |
| Total non-recourse debt, net amount              |                                                                                                                                                                                             | **$**  | **38.2 ** | $              | 5.8   |
|                                             |                                                                                                                                                                                             |   |           |           |       |      |   |   |

 

                                                 

(i)         The credit facility to finance the Company’s MSH program for the MoD in the U.K., includes a term loan that is collateralized by the project assets of the subsidiary and a bi-annual repayment that is required until 2016. The Company has entered into an interest rate swap totalling £0.9 million as at March 31, 2014 (2013 – £1.1 million) fixing the interest rate at 6.31%. The book value of the assets pledged as collateral for the credit facility as at March 31, 2014 is £85.2 million (2013 – £73.2 million).

 

(ii)        Represents collateralized non-recourse financing for a term loan to finance CAE Brunei Multi Purpose Training Centre Sdn Bhd (MPTC). MPTC may also avail an additional amount of up to US$12.0 million in the form of letters of credit. 

 

CAE Year-End Financial Results 2014 | 29

----

Notes to the Consolidated Financial Statements 

 

| Payments required in each of the next five fiscal years to meet the retirement provisions of the long-term debt and face values of finance leases are as follows: |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                              |   | Long-term |   | Finance |   |   |   |   |
| *(amounts in millions)*                                                                                                                                           |   |   | debt |   |   | leases |   |   | **Total** |   |
| 2015                                                                                                                                                         |   | $ | 24.5  |   | $ | 26.8  |   | **$** | **51.3 ** |
| 2016                                                                                                                                                         |   |   | 31.9  |   |   | 20.1  |   |   | **52.0 ** |
| 2017                                                                                                                                                         |   |   | 98.2  |   |   | 13.7  |   |   | **111.9 ** |
| 2018                                                                                                                                                         |   |   | 34.4  |   |   | 13.7  |   |   | **48.1 ** |
| 2019                                                                                                                                                         |   |   | 75.9  |   |   | 11.5  |   |   | **87.4 ** |
| Thereafter                                                                                                                                                        |   |   | 749.1  |   |   | 73.4  |   |   | **822.5 ** |
| Total payments required                                                                                                                                           |   | $ | 1,014.0  |   | $ | 159.2  |   | **$** | **1,173.2 ** |
| Less: transaction costs                                                                                                                                           |   |   | (4.7) |   |   | -  |   |   | **(4.7)** |
|                                                                                                                                                              |   | $ | 1,009.3  |   | $ | 159.2  |   | **$** | **1,168.5 ** |

 

As at March 31, 2014, the Company is in compliance with all of its financial covenants. 

 

| **Finance lease commitments**                                                                     |
|---------------------------------------------------------------------------------------------------|
| The present value of future finance lease commitments, included in debt facilities is as follows: |
|                                                                                              |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                           |   |   |   | **2014 ** |   | 2013  |
| Future finance lease commitments                                                                  |   |   | **$** | **228.1 ** | $ | 209.0  |
| Less: Future finance charges on finance leases                                                    |   |   |   | **61.1 ** |   | 59.2  |
| Less: Discounted guaranteed residual values of leased assets                                      |   |   |   | **7.8 ** |   | 7.3  |
| Present value of future minimum lease payments                                                    |   |   | **$** | **159.2 ** | $ | 142.5  |
|                                                                                              |   |   |   |   |   |   |   |   |

 

| Future minimum lease payments for finance lease commitments are as follows: |
|-----------------------------------------------------------------------------|
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                     |   |   |   |   | **2014 ** |   |   |   |   | 2013  |
|                                                                        | **Future** |   | **Present value of** |   | Future |   | Present value of |   |
| **finance lease**                                                           |   | **future minimum** |   | finance lease |   | future minimum |   |
|                                                                        | **commitments** |   | **lease payments** |   | commitments |   | lease payments |   |
| No later than 1 year                                                        | **$** | **35.8 ** | **$** | **26.8 ** | $ | 35.5  | $ | 26.9  |
| Later than 1 year and no later than 5 years                                 |   | **85.4 ** |   | **59.0 ** |   | 77.8  |   | 54.2  |
| Later than 5 years                                                          |   | **106.9 ** |   | **73.4 ** |   | 95.7  |   | 61.4  |
|                                                                        | **$** | **228.1 ** | **$** | **159.2 ** | $ | 209.0  | $ | 142.5  |
|                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |

 

 

**NOTE 13 – GOVERNMENT ASSISTANCE**

The Company has signed agreements with various governments whereby the latter share in the cost, based on expenditures incurred by the Company, of certain R&D programs for modeling, simulation and training services expertise.

 

During fiscal 2009, the Company announced Project Falcon, an R&D program that extended over five years. The goal of Project Falcon was to expand the Company’s modeling and simulation technologies, develop new ones and increase its capabilities beyond training into other areas of the aerospace and defence market, such as analysis and operations. Concurrently, the Government of Canada agreed to participate in Project Falcon through a repayable investment of up to $250 million made through the Strategic Aerospace and Defence Initiative (SADI), which supports strategic industrial research and pre-competitive development projects in the aerospace, defence, space and security industries. As at March 31, 2014, Project Falcon was completed.

 

During fiscal 2010, the Company announced Project New Core Markets, an R&D program extending over seven years. The aim is to leverage the Company’s modeling, simulation and training services expertise into the healthcare and mining markets. The Québec government, through Investissement Québec, agreed to participate up to $100 million in contributions related to costs incurred before the end of fiscal 2016.

 

During fiscal 2014, the Company announced Project Innovate, an R&D program extending over five and a half years. The goal of Project Innovate is to expand the Company’s modeling and simulation technologies, develop new ones and continue to differentiate its service offering. Concurrently, the Government of Canada agreed to participate in Project Innovate through a repayable investment of up to $250 million made through the SADI.

 

See Notes 1 and 12 for explanations of the royalty obligations and debt.

30 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

The following table provides aggregate information regarding contributions recognized and amounts not yet received for the projects Falcon, New Core Markets and Innovate:

 

| *(amounts in millions)*                                |   |   | **2014 ** |   | 2013  |
|--------------------------------------------------------|--------|--------|----------------|--------|------------|
| Outstanding contribution receivable, beginning of year |   | **$**  | **5.8 **  | $      | 8.3   |
| Contributions                                          |   |   | **19.3 ** |   | 29.4  |
| Payments received                                      |   |   | **(20.1)**     |   | (31.9)     |
| Outstanding contribution receivable, end of year       |   | **$**  | **5.0 **  | $      | 5.8   |

 

| **Aggregate information about programs**                                                                     |
|--------------------------------------------------------------------------------------------------------------|
| The aggregate contributions recognized for all programs are as follows:                                      |
|                                                                                                         |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                      |   | **2014 ** |   | 2013  |
| Contributions credited to capitalized expenditures:                                                          |   |   |   |   |
|                                                                                                         | Project Falcon | **$** | **3.0 ** | $ | 6.4  |
|                                                                                                         | Project New Core Markets |   | **3.4 ** |   | 3.7  |
|                                                                                                         | Project Innovate |   | **0.9 ** |   | -  |
| Contributions credited to income:                                                                            |   |   |   |   |
|                                                                                                         | Project Falcon | **$** | **10.0 ** | $ | 17.6  |
|                                                                                                         | Project New Core Markets |   | **1.5 ** |   | 1.7  |
|                                                                                                         | Project Innovate |   | **0.5 ** |   | -  |
| Total contributions:                                                                                         |   |   |   |   |
|                                                                                                         | Project Falcon | **$** | **13.0 ** | $ | 24.0  |
|                                                                                                         | Project New Core Markets |   | **4.9 ** |   | 5.4  |
|                                                                                                         | Project Innovate |   | **1.4 ** |   | -  |
|                                                                                                         |   |   |   |   |   |   |   |
| There are no unfulfilled conditions or unfulfilled contingencies attached to these government contributions. |

 

**NOTE 14 – employee benefits OBLIGATIONS**

**Defined benefit plans**

The Company has two registered funded defined benefit pension plans in Canada (one for employees and one for designated executives) that provide benefits based on length of service and final average earnings. The Company also maintains funded pension plans for employees in the Netherlands, United Kingdom and Norway that provide benefits based on similar provisions.

 

The Company, as required by pension legislation, hires independent firms to conduct actuarial valuations. The Company’s annual contributions, to fund both benefits accruing in the year and deficits accumulated over prior years, and the plans’ financial position are determined based on the actuarial valuations. Applicable pension legislations prescribe minimum funding requirements.  

 

In addition, the Company maintains unfunded plans in Canada, Germany and Norway that provide defined benefits based on length of service and final average earnings. These unfunded plans are the sole obligation of the Company, and there is no requirement to fund them. However, the Company is obligated to pay the benefits when they become due. As at March 31, 2014, the unfunded defined benefits pension obligations are $66.0 million (2013 – $59.7 million) and the Company has issued letters of credit totalling $53.0 million (2013 – $54.3 million) to collateralize these obligations under the Canadian plan.

 

The funded plans are trustee administered funds. Plan assets held in trusts are governed by local regulations and practices in each country, as is the nature of the relationship between the Company and the trustees and their composition. Responsibility for governance of the plans, including investment decisions and contribution schedules, lies jointly with the Company and the board of trustees.

 

In fiscal 2014, the Company temporarily amended its early retirement provision, as a result, a past service cost of $1.0 million was recognized in the income statement. In fiscal 2013, in accordance with a restructuring plan, the Company reduced its workforce and consequently recognized a curtailment gain of $2.1 million and a settlement loss of $1.3 million.

 

In fiscal 2013, in the acquisition of OAA, the Company assumed two pension plans resulting in additional pension obligations of $2.3 million and additional plan assets of $1.7 million.

CAE Year-End Financial Results 2014 | 31

----

Notes to the Consolidated Financial Statements 

 

| The employee benefits obligations are as follows:       |   |
|---------------------------------------------------------|--------|
|                                                    |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                 |   |   |   | **2014 ** |   | 2013  |   |
| Funded defined benefits pension obligations             |   |   | **$** | **406.9 ** | $ | 377.7  |   |
| Fair value of plan assets                               |   |   |   | **357.4 ** |   | 301.3  |   |
| Funded defined benefits pension obligations – net |   |   |   | **49.5 ** |   | 76.4  |   |
| Unfunded defined benefits pension obligations           |   |   |   | **66.0 ** |   | 59.7  |   |
| Employee benefits obligations                           |   |   | **$** | **115.5 ** | $ | 136.1  |   |
|                                                    |   |   |   |   |   |   |   |   |   |

 

| The changes in the funded defined benefits pension obligations and the fair value of plan assets are as follows: |
|------------------------------------------------------------------------------------------------------------------|
|                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                          |   |   |   |   |   |   |   | **2014 ** |   |   |   |   |   |   |   | 2013  |
|                                                                                                             |   | **Canadian** |   |   | **Foreign** |   | **Total** |   | Canadian |   |   | Foreign |   | Total |   |
| Pension obligations, beginning of year                                                                           | **$** | **330.9 ** | **$** | **46.8 ** | **$** | **377.7 ** | $ | 279.4  | $ | 41.0  | $ | 320.4  |
|                                                                                                             | Current service cost |   | **17.8 ** |   | **1.7 ** |   | **19.5 ** |   | 13.6  |   | 1.6  |   | 15.2  |
|                                                                                                             | Interest cost |   | **14.0 ** |   | **1.8 ** |   | **15.8 ** |   | 13.3  |   | 1.7  |   | 15.0  |
|                                                                                                             | Past service cost and settlements |   | **1.0 ** |   | **- ** |   | **1.0 ** |   | (5.1) |   | -  |   | (5.1) |
|                                                                                                             | Actuarial loss (gain) arising from: |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                             | Experience adjustments |   | **5.8 ** |   | **(1.1)** |   | **4.7 ** |   | 9.2  |   | (0.7) |   | 8.5  |
|                                                                                                             | Economic assumptions |   | **(24.1)** |   | **0.5 ** |   | **(23.6)** |   | 28.0  |   | 2.4  |   | 30.4  |
|                                                                                                             | Demographic assumptions |   | **13.5 ** |   | **1.2 ** |   | **14.7 ** |   | -  |   | (0.4) |   | (0.4) |
|                                                                                                             | Employee contributions |   | **5.1 ** |   | **0.3 ** |   | **5.4 ** |   | 3.6  |   | 0.3  |   | 3.9  |
|                                                                                                             | Pension benefits paid |   | **(14.2)** |   | **(1.0)** |   | **(15.2)** |   | (11.1) |   | (0.6) |   | (11.7) |
|                                                                                                             | Business combination |   | **- ** |   | **- ** |   | **- ** |   | -  |   | 2.3  |   | 2.3  |
|                                                                                                             | Exchange differences |   | **- ** |   | **6.9 ** |   | **6.9 ** |   | -  |   | (0.8) |   | (0.8) |
| Pension obligations, end of year                                                                                 | **$** | **349.8 ** | **$** | **57.1 ** | **$** | **406.9 ** | $ | 330.9  | $ | 46.8  | $ | 377.7  |
| Fair value of plan assets, beginning of year                                                                     | **$** | **259.2 ** | **$** | **42.1 ** | **$** | **301.3 ** | $ | 228.6  | $ | 34.6  | $ | 263.2  |
|                                                                                                             | Interest income |   | **11.5 ** |   | **1.6 ** |   | **13.1 ** |   | 11.3  |   | 1.3  |   | 12.6  |
|                                                                                                             | Return on plan assets, excluding amounts |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                             | included in interest income |   | **14.4 ** |   | **(2.0)** |   | **12.4 ** |   | 9.2  |   | 3.4  |   | 12.6  |
|                                                                                                             | Employer contributions |   | **32.9 ** |   | **2.1 ** |   | **35.0 ** |   | 22.5  |   | 2.2  |   | 24.7  |
|                                                                                                             | Employee contributions |   | **5.1 ** |   | **0.3 ** |   | **5.4 ** |   | 3.6  |   | 0.3  |   | 3.9  |
|                                                                                                             | Pension benefits paid |   | **(14.2)** |   | **(1.0)** |   | **(15.2)** |   | (11.1) |   | (0.6) |   | (11.7) |
|                                                                                                             | Settlements |   | **- ** |   | **- ** |   | **- ** |   | (4.3) |   | -  |   | (4.3) |
|                                                                                                             | Business combination |   | **- ** |   | **- ** |   | **- ** |   | -  |   | 1.7  |   | 1.7  |
|                                                                                                             | Administrative costs |   | **(0.8)** |   | **(0.2)** |   | **(1.0)** |   | (0.6) |   | -  |   | (0.6) |
|                                                                                                             | Exchange differences |   | **- ** |   | **6.4 ** |   | **6.4 ** |   | -  |   | (0.8) |   | (0.8) |
| Fair value of plan assets, end of year                                                                           | **$** | **308.1 ** | **$** | **49.3 ** | **$** | **357.4 ** | $ | 259.2  | $ | 42.1  | $ | 301.3  |
|                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The actual return on plan assets was $25.5 million in fiscal 2014 (2013 – $25.2 million).                  |

 

| The changes in the unfunded defined benefits pension obligations are as follows: |
|----------------------------------------------------------------------------------|
|                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                          |   |   |   |   |   |   |   | **2014 ** |   |   |   |   |   |   |   | 2013  |
|                                                                             |   | **Canadian** |   | **Foreign** |   | **Total** |   | Canadian |   | Foreign |   | Total |   |
| Pension obligations, beginning of year                                           | **$** | **49.2 ** | **$** | **10.5 ** | **$** | **59.7 ** | $ | 47.9  | $ | 9.2  | $ | 57.1  |
|                                                                             | Current service cost |   | **2.1 ** |   | **0.2 ** |   | **2.3 ** |   | 2.3  |   | 0.1  |   | 2.4  |
|                                                                             | Interest cost |   | **2.1 ** |   | **0.4 ** |   | **2.5 ** |   | 2.3  |   | 0.4  |   | 2.7  |
|                                                                             | Past service cost |   | **0.1 ** |   | **- ** |   | **0.1 ** |   | 0.6  |   | -  |   | 0.6  |
|                                                                             | Actuarial loss (gain) arising from: |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                             | Experience adjustments |   | **1.1 ** |   | **(0.1)** |   | **1.0 ** |   | (4.5) |   | (0.5) |   | (5.0) |
|                                                                             | Economic assumptions |   | **(1.9)** |   | **0.5 ** |   | **(1.4)** |   | 3.1  |   | 2.0  |   | 5.1  |
|                                                                             | Demographic assumptions |   | **3.5 ** |   | **0.1 ** |   | **3.6 ** |   | -  |   | -  |   |   | -  |
|                                                                             | Pension benefits paid |   | **(2.6)** |   | **(0.6)** |   | **(3.2)** |   | (2.5) |   | (0.5) |   | (3.0) |
|                                                                             | Exchange differences |   | **- ** |   | **1.4 ** |   | **1.4 ** |   | -  |   | (0.2) |   | (0.2) |
| Pension obligations, end of year                                                 | **$** | **53.6 ** | **$** | **12.4 ** | **$** | **66.0 ** | $ | 49.2  | $ | 10.5  | $ | 59.7  |

32 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

| The net pension cost is as follows: |
|-------------------------------------|
|                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Years ended March 31*              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*             |   |   |   |   |   |   |   | **2014 ** |   |   |   |   |   |   |   | 2013  |
|                                |   | **Canadian** |   | **Foreign** |   | **Total** |   | Canadian |   | Foreign |   | Total |   |
| Funded plans                        |   |   |   |   |   |   |   |   |   |   |   |   |
|                                | Current service cost | **$** | **17.8 ** | **$** | **1.7 ** | **$** | **19.5 ** | $ | 13.6  | $ | 1.6  | $ | 15.2  |
|                                | Interest cost |   | **14.0 ** |   | **1.8 ** |   | **15.8 ** |   | 13.3  |   | 1.7  |   | 15.0  |
|                                | Interest income |   | **(11.5)** |   | **(1.6)** |   | **(13.1)** |   | (11.3) |   | (1.3) |   | (12.6) |
|                                | Past service cost and settlements |   | **1.0 ** |   | **- ** |   | **1.0 ** |   | (0.8) |   | -  |   | (0.8) |
|                                | Administrative cost |   | **0.8 ** |   | **0.2 ** |   | **1.0 ** |   | 0.6  |   | -  |   | 0.6  |
| Net pension cost                    | **$** | **22.1 ** | **$** | **2.1 ** | **$** | **24.2 ** | $ | 15.4  | $ | 2.0  | $ | 17.4  |
| Unfunded plans                      |   |   |   |   |   |   |   |   |   |   |   |   |
|                                | Current service cost | **$** | **2.1 ** | **$** | **0.2 ** | **$** | **2.3 ** | $ | 2.3  | $ | 0.1  | $ | 2.4  |
|                                | Interest cost |   | **2.1 ** |   | **0.4 ** |   | **2.5 ** |   | 2.3  |   | 0.4  |   | 2.7  |
|                                | Past service cost |   | **0.1 ** |   | **- ** |   | **0.1 ** |   | 0.6  |   | -  |   | 0.6  |
| Net pension cost                    | **$** | **4.3 ** | **$** | **0.6 ** | **$** | **4.9 ** | $ | 5.2  | $ | 0.5  | $ | 5.7  |
| Total net pension cost              | **$** | **26.4 ** | **$** | **2.7 ** | **$** | **29.1 ** | $ | 20.6  | $ | 2.5  | $ | 23.1  |

 

For the year ended March 31, 2014, pension costs of $10.8 million (2013 – $7.3 million) have been charged in cost of sales, $2.8 million (2013 – $2.0 million) in research and development expenses, $8.1 million (2013 – $8.0 million) in selling, general and administrative expenses, $5.2 million (2013 – $5.1 million) in finance expenses and $2.4 million (2013 – $1.5 million) were capitalized. In fiscal 2014, the curtailment and settlement gain of $0.2 million (2013 – $0.8 million) has been included in restructuring, integration and acquisition costs.

 

As at March 31, 2014, the total cumulative amount of net actuarial losses before income taxes recognized in OCI was $68.9 million (2013 – $82.3 million). 

 

| The major categories of assets which constitute the fair value of plan assets are as follows:                     |
|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                           |   | **2014 ** |   | 2013  |
|                                                                                                              |   | **Quoted** |   | **Unquoted** |   |   | **Total** |   | Quoted |   | Unquoted |   |   | Total |   |
| Canadian plans                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              | Equity funds |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              | Canadian | **$** | **- ** | **$** | **96.3 ** | **$** | **96.3 ** | $ | -  | $ | 76.6  | $ | 76.6  |
|                                                                                                              | Foreign |   | **- ** |   | **90.3 ** |   | **90.3 ** |   | -  |   | 86.7  |   | 86.7  |
|                                                                                                              | Bond funds |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              | Government |   | **- ** |   | **91.9 ** |   | **91.9 ** |   | -  |   | 71.0  |   | 71.0  |
|                                                                                                              | Corporate |   | **- ** |   | **26.2 ** |   | **26.2 ** |   | -  |   | 22.3  |   | 22.3  |
|                                                                                                              | Other |   | **- ** |   | **0.3 ** |   | **0.3 ** |   | -  |   | -  |   | -  |
|                                                                                                              | Cash and cash equivalents |   | **- ** |   | **3.1 ** |   | **3.1 ** |   | -  |   | 2.6  |   | 2.6  |
| Total Canadian plans                                                                                              | **$** | **- ** | **$** | **308.1 ** | **$** | **308.1 ** | $ | -  | $ | 259.2  | $ | 259.2  |
| Foreign plans                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              | Equity instruments | **$** | **13.9 ** | **$** | **- ** | **$** | **13.9 ** | $ | 11.5  | $ | -  | $ | 11.5  |
|                                                                                                              | Debt instruments |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              | Government |   | **0.7 ** |   | **- ** |   | **0.7 ** |   | 0.5  |   | -  |   | 0.5  |
|                                                                                                              | Corporate |   | **31.1 ** |   | **- ** |   | **31.1 ** |   | 26.9  |   | -  |   | 26.9  |
|                                                                                                              | Other |   | **0.4 ** |   | **- ** |   | **0.4 ** |   | 0.3  |   | -  |   | 0.3  |
|                                                                                                              | Property |   | **- ** |   | **1.6 ** |   | **1.6 ** |   | -  |   | 1.3  |   | 1.3  |
|                                                                                                              | Cash and cash equivalents |   | **- ** |   | **1.3 ** |   | **1.3 ** |   | -  |   | 1.2  |   | 1.2  |
|                                                                                                              | Other |   | **- ** |   | **0.3 ** |   | **0.3 ** |   | -  |   | 0.4  |   | 0.4  |
| Total Foreign plans                                                                                               | **$** | **46.1 ** | **$** | **3.2 ** | **$** | **49.3 ** | $ | 39.2  | $ | 2.9  | $ | 42.1  |
| Total plans                                                                                                       | **$** | **46.1 ** | **$** | **311.3 ** | **$** | **357.4 ** | $ | 39.2  | $ | 262.1  | $ | 301.3  |
|                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As at March 31, 2014 and March 31, 2013, there were no ordinary shares of the Company in the pension plan assets. |

CAE Year-End Financial Results 2014 | 33

----

Notes to the Consolidated Financial Statements 

 

| Significant assumptions (weighted average): |                        |           |      |       |   |           |   |       |      |   |   |   |
|---------------------------------------------|-----------------------------|----------------|-----------|------------|--------|----------------|--------|------------|-----------|--------|--------|--------|
|                                        |                        |           |      |       |   |           |   |       |      |   |   |   |   |
|                                        |                        |           | Canadian  |       |   | Foreign        |   |
|                                        |                        | **2014 ** |      | 2013  |   | **2014 ** |   | 2013  |
| Pension obligations as at March 31:         |                        |           |      |       |   |           |   |       |      |   |   |   |
|                                        | Discount rate               |           | **4.50%** |       |   | 4.25%          |   |       | **3.47%** |   |   | 3.53%  |   |
|                                        | Compensation rate increases |           | **3.50%** |       |   | 3.50%          |   |       | **3.03%** |   |   | 2.98%  |   |
| Net pension cost for years ended March 31:  |                        |           |      |       |   |           |   |       |      |   |   |   |
|                                        | Discount rate               |           | **4.25%** |       |   | 4.75%          |   |       | **3.53%** |   |   | 4.05%  |   |
|                                        | Compensation rate increases |           | **3.50%** |       |   | 3.50%          |   |       | **2.98%** |   |   | 3.01%  |   |

 

Assumptions regarding future mortality are based on actuarial advice in accordance with published statistics and mortality tables and experience in each territory. The mortality tables and the average life expectancy in years for a member age 45 and 65 are as follows:

 

|                 |                                       |                                 |   |           |   |             |   |             |   |   |   |   |   |
|----------------------|--------------------------------------------|--------------------------------------|--------|----------------|--------|------------------|--------|------------------|--------|--------|--------|--------|--------|
| As at March 31, 2014 |                                       |                                 |
| *(in years)*         |                                       | Life expectancy over 65 for a member |   |
| Country              | Mortality table                            | Male at age 45                       |   | Male at age 65 |   | Female at age 45 |   | Female at age 65 |   |
| Canada               | CPM private tables (employees)             | **25.1 **                       |   | **23.6 ** |   | **26.5 **   |   | **25.4 **   |
| Canada               | CPM private tables (designated executives) | **26.5 **                       |   | **25.1 ** |   | **27.1 **   |   | **26.1 **   |
| Netherlands          | AG2012-2062                                | **23.3 **                       |   | **21.6 ** |   | **24.4 **   |   | **23.4 **   |
| Germany              | Heubeck RT2005G                            | **21.4 **                       |   | **18.7 ** |   | **25.3 **   |   | **22.8 **   |
| Norway               | K2013                                      | **21.8 **                       |   | **20.4 ** |   | **25.2 **   |   | **23.2 **   |
| United Kingdom       | S1PA                                       | **24.2 **                       |   | **22.4 ** |   | **26.7 **   |   | **24.7 **   |

 

|                 |            |                                 |   |           |   |             |   |             |   |   |   |   |   |
|----------------------|-----------------|--------------------------------------|--------|----------------|--------|------------------|--------|------------------|--------|--------|--------|--------|--------|
| As at March 31, 2013 |            |                                 |   |           |   |             |   |             |   |   |   |   |
| *(in years)*         |            | Life expectancy over 65 for a member |   |
| Country              | Mortality table | Male at age 45                       |   | Male at age 65 |   | Female at age 45 |   | Female at age 65 |   |
| Canada               | UP94            | 21.3                            |   | 19.8      |   | 22.9        |   | 22.1        |
| Netherlands          | AG2012-2062     | 23.3                            |   | 21.5      |   | 24.4        |   | 23.3        |
| Germany              | Heubeck RT2005G | 21.3                            |   | 18.6      |   | 25.2        |   | 22.7        |
| Norway               | K2005           | 19.3                            |   | 19.3      |   | 21.8        |   | 21.8        |
| United Kingdom       | S1PA            | 24.3                            |   | 22.0      |   | 27.0        |   | 24.6        |

 

| The weighted average duration of the defined benefit obligation is 18.1 years.                                                                                 |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                           |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The following table summarizes the impact on the defined benefit obligation as a result of a 0.25% change in the significant assumptions as at March 31, 2014: |
|                                                                                                                                                           |
|                                                                                                                                                           |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                           |     |   | Funded plans |   | Unfunded plans |   |   |   |
| *(amounts in millions)*                                                                                                                                        |     | Canadian |   | Foreign |   | Canadian |   | Foreign |   | Total |   |
| Discount rate:                                                                                                                                                 |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                           | Increase |   | **$** | **(15.4)** | **$** | **(2.5)** | **$** | **(1.8)** | **$** | **(0.4)** | **$** | **(20.1)** |
|                                                                                                                                                           | Decrease |   |   | **16.5 ** |   | **2.9 ** |   | **1.9 ** |   | **0.4 ** |   | **21.7 ** |
| Compensation rate:                                                                                                                                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                           | Increase |   |   | **5.6 ** |   | **0.4 ** |   | **0.3 ** |   | **- ** |   | **6.3 ** |
|                                                                                                                                                           | Decrease |   |   | **(5.5)** |   | **(0.4)** |   | **(0.3)** |   | **- ** |   | **(6.2)** |

34 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

Through its defined benefit plans, the Company is exposed to a number of risks, the most significant being the exposure to asset volatility, to changes in bond yields and to changes in life expectancy. The plan liabilities are calculated using a discount rate set with reference to corporate bond yields, if plan assets underperform against this yield, this will create a deficit. A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings. The plans’ obligations are to provide benefits for the duration of the life of its members, therefore, increases in life expectancy will result in an increase in the plans’ liabilities. 

| Contributions reflect actuarial assumptions of future investment returns, salary projections and future service benefits. The expected contribution for the next fiscal year is as follows: |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                        |   |   |   | Funded plans |   | Unfunded plans |   |   |   |   |
| *(amounts in millions)*                                                                                                                                                                     | Canadian |   | Foreign |   | Canadian |   | Foreign |   |   | Total |   |
| Expected contribution – fiscal 2015                                                                                                                                                   | $ | 18.4  | $ | 2.1  | $ | 2.4  | $ | 0.6  | $ | 23.5  |
|                                                                                                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

**NOTE 15 – DEFERRED GAINS AND OTHER non-CURRENT LIABILITIES**

 

| *(amounts in millions)*                                                                         |   |   |   | **2014 **       |   | 2013   |
|-------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------|--------|-------------|
| Deferred gains on sale and leasebacks (1)                                                       |   |   | **$**  | **32.8 **       | $      | 36.5   |
| Deferred revenue                                                                                |   |   |   | **95.5 **       |   | 91.8   |
| LTI-RSU/DSU compensation obligations (Note 24)                                                  |   |   |   | **38.2  ** |   | 29.3   |
| Licence payable                                                                                 |   |   |   | **4.4 **        |   | 4.5    |
| Purchase options                                                                                |   |   |   | **16.9 **       |   | 14.7   |
| Other                                                                                           |   |   |   | **16.4 **       |   | 14.6   |
|                                                                                            |   |   | **$**  | **204.2 **      | $      | 191.4  |
|                                                                                            |   |   |   |                 |   |        |   |   |
| (1) The related amortization for the year amounted to $4.2 million (2013 – $4.5 million). |   |   |   |                 |   |        |   |   |

 

 

**NOTE 16 – iNCOME TAXEs**

| **Income tax expense**                                                                                     |
|------------------------------------------------------------------------------------------------------------|
| A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows: |   |
|                                                                                                       |   |   |   |   |   |   |
| *Years ended March 31*                                                                                     |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions, except for income tax rates)*                                                       |   |   |   |   | **2014 ** |   |   | 2013  |
| Earnings before income taxes                                                                               |   |   | **$** | **221.1 ** |   | $ | 168.9  |
| Canadian statutory income tax rates                                                                        |   |   |   | **26.94%** |   |   | 26.74% |
| Income taxes at Canadian statutory rates                                                                   |   |   | **$** | **59.5 ** |   | $ | 45.2  |
| Difference between Canadian and Foreign statutory rates                                                    |   |   |   | **(8.0)** |   |   | (8.7) |
| Losses not tax effected                                                                                    |   |   |   | **5.5 ** |   |   | 6.5  |
| Tax benefit of operating losses not previously recognized                                                  |   |   |   | **(3.5)** |   |   | (0.3) |
| Non-taxable capital gain                                                                                   |   |   |   | **(0.5)** |   |   | (0.1) |
| Tax impact on equity accounted investees                                                                   |   |   |   |   | **(7.1)** |   |   | (5.8) |
| Non-deductible items                                                                                       |   |   |   | **2.2 ** |   |   | 6.3  |
| Prior years' tax adjustments and assessments                                                               |   |   |   | **(8.8)** |   |   | (10.1) |
| Impact of change in income tax rates on deferred income taxes                                              |   |   |   | **(1.5)** |   |   | (0.5) |
| Non-taxable research and development tax credits                                                           |   |   |   | **(1.3)** |   |   | (1.6) |
| Other tax benefits not previously recognized                                                               |   |   |   | **(6.6)** |   |   | (3.9) |
| Other                                                                                                      |   |   |   | **0.1 ** |   |   | 1.2  |
| Income tax expense                                                                                         |   |   | **$** | **30.0 ** |   | $ | 28.2  |
|                                                                                                       |   |   |   |   |   |   |   |   |   |   |

 

The applicable statutory tax rates are 26.94% in 2014 and 26.74% in 2013. The Company's applicable tax rate is the Canadian combined rates applicable in the jurisdictions in which the Company operates. The increase is due to a change in the mix of income from provincial jurisdictions.

CAE Year-End Financial Results 2014 | 35

----

Notes to the Consolidated Financial Statements 

 

| Significant components of the provision for the income tax expense are as follows: |                                                                          |
|------------------------------------------------------------------------------------|-------------------------------------------------------------------------------|
|                                                                               |                                                                          |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                            |                                                                          |   |   | **2014 ** |   |   | 2013  |
| Current income tax expense (recovery):                                             |                                                                          |   |   |   |   |   |   |
|                                                                               | Current period                                                                |   |   | **$** | **17.6 ** |   | $ | 1.0  |
|                                                                               | Adjustment for prior years                                                    |   |   |   | **(15.2)** |   |   | (0.4) |
| Deferred income tax expense (recovery):                                            |                                                                          |   |   |   |   |   |   |
|                                                                               | Tax benefit not previously recognized used to reduce the deferred tax expense |   |   |   | **(10.1)** |   |   | (4.3) |
|                                                                               | Impact of change in income tax rates on deferred income taxes                 |   |   |   | **(1.5)** |   |   | (0.5) |
|                                                                               | Origination and reversal of temporary differences                             |   |   |   | **39.2 ** |   |   | 32.4  |
| Income tax expense                                                                 |                                                                          |   | **$** | **30.0 ** |   | $ | 28.2  |
|                                                                               |                                                                          |   |   |   |   |   |   |   |   |   |

 

During fiscal 2014, a tax recovery of $10.3 million was recorded in income and was due to a favourable decision by the Federal Court of Appeal of Canada rendered April 17, 2013, with respect to the tax treatment of the depreciation and sale of simulators in Canada. 

 

**Income tax recognized in OCI**

During fiscal 2014, a deferred tax expense of $2.4 million was recorded in OCI (2013 – tax recovery of $11.0 million). No current income tax expense (recovery) was recognized in OCI for fiscal 2014 or fiscal 2013.

 

| **Deferred tax assets and liabilities**                                |               |            |           |        |       |            |           |        |        |           |           |       |       |   |   |   |   |   |
|------------------------------------------------------------------------|--------------------|-----------------|----------------|-------------|------------|-----------------|----------------|-------------|-------------|----------------|----------------|------------|------------|--------|--------|--------|--------|--------|
| Deferred tax assets and liabilities are attributable to the following: |               |
|                                                                   |               |            |           |        |       |            |           |        |        |           |           |       |       |   |   |   |   |   |   |
| *As at March 31*                                                       |               |            |           |        |       |            |           |        |        |           |           |       |       |   |   |   |   |   |
| *(amounts in millions)*                                                |               |            |           |        | Assets     |            |           |        | Liabilities |           |           |       |       |   | Net    |   |
|                                                                   |               |            | **2014 ** |        | 2013  |            | **2014 ** |        | 2013   |           | **2014 ** |       | 2013  |
| Non-capital loss carryforwards                                         | **$**              | **54.0 **  | $              | 57.2   | **$**      | **- **     | $              | -      | **$**       | **54.0 ** | $              | 57.2  |
| Intangible assets                                                      |               | **3.6 **   |           | 4.3    |       | **(76.4)**      |           | (72.3)      |        | **(72.8)**     |           | (68.0)     |
| Amounts not currently deductible                                       |               | **26.7 **  |           | 23.7   |       | **- **     |           | -      |        | **26.7 ** |           | 23.7  |
| Deferred revenues                                                      |               | **8.7 **   |           | 8.8    |       | **- **     |           | -      |        | **8.7 **  |           | 8.8   |
| Tax benefit carryover                                                  |               | **0.4 **   |           | 0.7    |       | **- **     |           | -      |        | **0.4 **  |           | 0.7   |
| Unclaimed research & development                                   |               |            |           |        |       |            |           |        |        |           |           |       |
|                                                                   | expenditures       |            | **10.5 ** |        | 10.2  |            | **- **    |        | -      |           | **10.5 ** |       | 10.2  |
| Investment tax credits                                                 |               | **- **     |           | -      |       | **(40.3)**      |           | (31.8)      |        | **(40.3)**     |           | (31.8)     |
| Property, plant and equipment                                          |               | **10.3 **  |           | 9.0    |       | **(112.7)**     |           | (95.1)      |        | **(102.4)**    |           | (86.1)     |
| Unrealized losses (gains) on foreign exchange                          |               | **1.6 **   |           | 0.7    |       | **(7.7)**       |           | (1.8)       |        | **(6.1)**      |           | (1.1)      |
| Financial instruments                                                  |               | **8.2 **   |           | 3.1    |       | **(0.2)**       |           | (0.2)       |        | **8.0 **  |           | 2.9   |
| Government assistance                                                  |               | **- **     |           | -      |       | **(11.1)**      |           | (9.9)       |        | **(11.1)**     |           | (9.9)      |
| Employee benefit plans                                                 |               | **27.3 **  |           | 32.9   |       | **- **     |           | -      |        | **27.3 ** |           | 32.9  |
| Percentage-of-completion versus                                        |               |            |           |        |       |            |           |        |        |           |           |       |
|                                                                   | completed contract |            | **- **    |        | -     |            | **(31.9)**     |        | (32.7)      |           | **(31.9)**     |       | (32.7)     |
| Other                                                                  |               | **1.3 **   |           | 0.9    |       | **(6.6)**       |           | (6.3)       |        | **(5.3)**      |           | (5.4)      |
| Tax assets (liabilities)                                               | **$**              | **152.6 ** | $              | 151.5  | **$**      | **(286.9)**     | $              | (250.1)     | **$**       | **(134.3)**    | $              | (98.6)     |
|                                                                   |               | **(120.8)**     |           | (120.2)     |       | **120.8 ** |           | 120.2  |        | **- **    |           | -     |
| Net deferred income tax assets (liabilities)                           | **$**              | **31.8 **  | $              | 31.3   | **$**      | **(166.1)**     | $              | (129.9)     | **$**       | **(134.3)**    | $              | (98.6)     |

36 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

| Movements in temporary differences during fiscal year 2014 are as follows: |               |
|----------------------------------------------------------------------------|--------------------|
|                                                                       |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |               |   | Balance |   | Recognized |   | Recognized |   | Acquisition |   | Exchange |   | **Balance** |   |
| *(amounts in millions)*                                                    | beginning of year  |   | in income |   | in OCI |   | of subsidiary |   | differences |   | **end of year** |   |
| Non-capital loss carryforwards                                             |               | $ | 57.2  | $ | (8.1) | $ | -  | $ | -  | $ | 4.9  | **$** | **54.0 ** |
| Intangible assets                                                          |               |   | (68.0) |   | (1.9) |   | -  |   | -  |   | (2.9) |   | **(72.8)** |
| Amounts not currently deductible                                           |               |   | 23.7  |   | 2.1  |   | -  |   | -  |   | 0.9  |   | **26.7 ** |
| Deferred revenues                                                          |               |   | 8.8  |   | (0.4) |   | -  |   | -  |   | 0.3  |   | **8.7 ** |
| Tax benefit carryover                                                      |               |   | 0.7  |   | (0.3) |   | -  |   | -  |   | -  |   | **0.4 ** |
| Unclaimed research & development expenditures                          |               |   | 10.2  |   | 0.3  |   | -  |   | -  |   | -  |   | **10.5 ** |
| Investment tax credits                                                     |               |   | (31.8) |   | (8.5) |   | -  |   | -  |   | -  |   | **(40.3)** |
| Property, plant and equipment                                              |               |   | (86.1) |   | (7.7) |   | -  |   | -  |   | (8.6) |   | **(102.4)** |
| Unrealized (gains) losses on foreign exchange                              |               |   | (1.1) |   | (0.4) |   | (4.3) |   | -  |   | (0.3) |   | **(6.1)** |
| Financial Instruments                                                      |               |   | 2.9  |   | (0.5) |   | 5.6  |   | -  |   | -  |   | **8.0 ** |
| Government assistance                                                      |               |   | (9.9) |   | (1.2) |   | -  |   | -  |   | -  |   | **(11.1)** |
| Employee benefit plans                                                     |               |   | 32.9  |   | (2.1) |   | (3.7) |   | -  |   | 0.2  |   | **27.3 ** |
| Percentage-of-completion versus                                            |               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       | completed contract |   |   | (32.7) |   | 0.8  |   | -  |   | -  |   | -  |   | **(31.9)** |
| Other                                                                      |               |   | (5.4) |   | 0.3  |   | -  |   | -  |   | (0.2) |   | **(5.3)** |
| Net deferred income tax (liabilities)                                      |               | $ | (98.6) | $ | (27.6) | $ | (2.4) | $ | -  |   | (5.7) | **$** | **(134.3)** |
|                                                                       |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

| Movements in temporary differences during fiscal year 2013 are as follows: |               |
|----------------------------------------------------------------------------|--------------------|
|                                                                       |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |               |   | Balance |   | Recognized |   | Recognized |   | Acquisition |   | Exchange |   | Balance |   |
| *(amounts in millions)*                                                    | beginning of year  |   | in income |   | in OCI |   | of subsidiaries |   | differences |   | end of year |   |
| Non-capital loss carryforwards                                             |               | $ | 41.4  | $ | 8.8  | $ | -  | $ | 6.7  | $ | 0.3  | $ | 57.2  |
| Intangible assets                                                          |               |   | (39.5) |   | (17.2) |   | -  |   | (10.8) |   | (0.5) |   | (68.0) |
| Amounts not currently deductible                                           |               |   | 26.4  |   | (4.2) |   | -  |   | 1.3  |   | 0.2  |   | 23.7  |
| Deferred revenues                                                          |               |   | 11.0  |   | (1.8) |   | -  |   | (0.1) |   | (0.3) |   | 8.8  |
| Tax benefit carryover                                                      |               |   | 5.2  |   | (4.5) |   | -  |   | -  |   | -  |   | 0.7  |
| Unclaimed research & development expenditures                          |               |   | 7.7  |   | 2.5  |   | -  |   | -  |   | -  |   | 10.2  |
| Investment tax credits                                                     |               |   | (18.9) |   | (12.9) |   | -  |   | -  |   | -  |   | (31.8) |
| Property, plant and equipment                                              |               |   | (83.8) |   | 6.1  |   | -  |   | (6.4) |   | (2.0) |   | (86.1) |
| Unrealized (gains) losses on foreign exchange                              |               |   | (4.8) |   | 2.2  |   | 0.7  |   | -  |   | 0.8  |   | (1.1) |
| Financial Instruments                                                      |               |   | 0.9  |   | (1.3) |   | 3.2  |   | -  |   | 0.1  |   | 2.9  |
| Government assistance                                                      |               |   | (3.1) |   | (6.8) |   | -  |   | -  |   | -  |   | (9.9) |
| Employee benefit plans                                                     |               |   | 27.2  |   | (2.1) |   | 7.1  |   | 0.2  |   | 0.5  |   | 32.9  |
| Percentage-of-completion versus                                            |               |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       | completed contract |   |   | (36.3) |   | 2.9  |   | -  |   | 0.7  |   | -  |   | (32.7) |
| Other                                                                      |               |   | (6.5) |   | 0.7  |   | -  |   | 0.5  |   | (0.1) |   | (5.4) |
| Net deferred income tax (liabilities) assets                               |               | $ | (73.1) | $ | (27.6) | $ | 11.0  | $ | (7.9) | $ | (1.0) | $ | (98.6) |
|                                                                       |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

As at March 31, 2014, taxable temporary differences of $565.6 million (2013 – $367.3 million) related to investments in foreign operations, including subsidiaries and interests in joint ventures has not been recognized, because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.

CAE Year-End Financial Results 2014 | 37

----

Notes to the Consolidated Financial Statements 

 

| The non-capital losses expire as follows: |
|-------------------------------------------|
|                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                   |   |   |   |   |   |
| Expiry date                               |   |   |   |   | Unrecognized |   | Recognized |   |
| 2015                                 |   |   |   |   | $ | 0.3  | $ | -  |
| 2016                                 |   |   |   |   |   | 0.3  |   | -  |
| 2017                                 |   |   |   |   |   | 3.7  |   | -  |
| 2018                                 |   |   |   |   |   | 2.5  |   | -  |
| 2019                                 |   |   |   |   |   | 8.7  |   | -  |
| 2020                                 |   |   |   |   |   | 6.2  |   | -  |
| 2021 – 2034                         |   |   |   |   |   | 24.8  |   | 56.3  |
| No expiry date                            |   |   |   |   |   | 70.0  |   | 113.3  |
|                                      |   |   |   |   | $ | 116.5  | $ | 169.6  |
|                                      |   |   |   |   |   |   |   |   |   |   |   |   |

 

As at March 31, 2014, the Company has $299.2 million (2013 – $288.2 million) of deductible temporary differences for which deferred tax assets have not been recognized. These amounts will reverse during a period of up to 30 years. The Company also has $0.3 million (2013 – nil) of accumulated capital losses carried forward relating to its operations in Canada for which deferred tax assets have not been recognized. These capital losses can be carried forward indefinitely.

 

 

**NOTE 17 – SHARE CAPITAL, Earnings per share and dividends**

**Share capital**

***Authorized shares***

The Company is authorized to issue an unlimited number of common shares without par value and an unlimited number of preferred shares without par value, issuable in series. 

 

The preferred shares may be issued with rights and conditions to be determined by the Board of Directors, prior to their issue. To date, the Company has not issued any preferred shares.

 

***Issued shares***

A reconciliation of the issued and outstanding common shares of the Company is presented in the Consolidated Statement of Changes in Equity. As at March 31, 2014, the number of shares issued and that are fully paid amount to 263,771,443 (2013 – 259,979,059).   

 

| **Earnings per share computation**                                                                                                                                                                  |                  |                  |              |           |          |   |       |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|-----------------------|-------------------|----------------|---------------|--------|------------|--------|--------|
| The denominators for the basic and diluted earnings per share computations are as follows:                                                                                                          |
|                                                                                                                                                                                                |                  |                  |              |           |          |   |
| *Years ended March 31*                                                                                                                                                                              |                  |                  |              | **2014 ** |          |   | 2013  |
| Weighted average number of common shares outstanding                                                                                                                                                |                  | **261,312,832 ** | 258,982,945  |
| Effect of dilutive stock options                                                                                                                                                                    |                  |                  | **606,705 ** |           | 412,661  |
| Weighted average number of common shares outstanding for diluted earnings per share calculation                                                                                                     | **261,919,537 ** | 259,395,606      |
|                                                                                                                                                                                                |                  |                  |              |           |          |   |       |   |   |
| As at March 31, 2014, options to acquire 589,040 common shares (2013 – 2,490,041) have been excluded from the above calculation since their inclusion would have had an anti-dilutive effect. |

 

**Dividends**

The dividends declared for fiscal 2014 were $57.6 million or $0.22 per share (2013 –  $49.2 million or $0.19 per share). 

38 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**NOTE 18 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

|                        |        |             |             |           |                  |               |   |       |   |           |   |       |   | Net changes in  |   |       |   |   |   |   |   |
|-----------------------------|-------------|------------------|------------------|----------------|-----------------------|--------------------|--------|------------|--------|----------------|--------|------------|--------|-----------------|--------|------------|--------|--------|--------|--------|--------|
|                        |        | Foreign currency |             | Net changes in |                  | available-for-sale |   |       |   |           |   |       |   |
| *As at March 31*            | translation |             | cash flow hedges |           | financial instruments |               |   |       |   |           | Total  |       |
| *(amounts in millions)*     |        | **2014 **   |             | 2013      |                  | **2014 **     |   | 2013  |   | **2014 ** |   | 2013  |   | **2014 **  |   | 2013  |
| Balances, beginning of year | **$**       | **(7.8)**        | $                | (10.2)         | **$**                 | **(4.6)**          | $      | 3.8   | **$**  | **0.4 **  | $      | 0.4   | **$**  | **(12.0)**      | $      | (6.0)      |
| OCI                         |        | **158.3 **  |             | 2.4       |                  | **(17.0)**         |   | (8.4)      |   | **0.2 **  |   | -     |   | **141.5 ** |   | (6.0)      |
| Balances, end of year       | **$**       | **150.5 **  | $                | (7.8)          | **$**                 | **(21.6)**         | $      | (4.6)      | **$**  | **0.6 **  | $      | 0.4   | **$**  | **129.5 ** | $      | (12.0)     |
|                        |        |             |             |           |                  |               |   |       |   |           |   |       |   |            |   |       |   |   |   |   |   |   |   |   |   |
|                        |        |             |             |           |                  |               |   |       |   |           |   |       |   |            |   |       |   |   |   |   |   |   |   |   |   |

 

 

**NOTE 19 – EMPLOYEE COMPENSATION**

| The total employee compensation expense recognized in the determination of net income is as follows: |   |
|------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                              |   |   | **2014 ** |   | 2013  |
| Salaries and benefits                                                                                |   | **$** | **695.7 ** | $ | 639.5  |
| Share-based payments, net of equity swap                                                             |   |   | **19.4 ** |   | 14.0  |
| Pension costs – defined benefit plans(1)                                                       |   |   | **26.7 ** |   | 21.6  |
| Pension costs – defined contribution plans                                                     |   |   | **7.5 ** |   | 8.4  |
| Termination benefits                                                                                 |   |   | **9.9 ** |   | 49.9  |
| Total employee compensation expense                                                                  |   | **$** | **759.2 ** | $ | 733.4  |
| (1) Includes net interest on employee benefits obligations (Note 23).                                |   |   |   |   |   |   |   |

 

 

**NOTE 20 – impairment of non-financial assets**

Goodwill is monitored by management at the operating segment level.

 

| The carrying amount of goodwill allocated to the Company's CGUs per operating segment is as follows: |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                              |   | SP/C |   | TS/C |   | SP/M |   | TS/M |   | NCM |   | Total |   |
| Net book value at March 31, 2012                                                                     | $ | -  | $ | 32.3  | $ | 103.1  | $ | 37.2  | $ | 125.5  | $ | 298.1  |
| Acquisition of subsidiaries                                                                          |   | -  |   | 142.4  |   | -  |   | -  |   | 7.4  |   | 149.8  |
| Exchange differences                                                                                 |   | -  |   | 1.8  |   | 0.8  |   | 0.4  |   | 1.1  |   | 4.1  |
| Net book value at March 31, 2013                                                                     | $ | -  | $ | 176.5  | $ | 103.9  | $ | 37.6  | $ | 134.0  | $ | 452.0  |
| Acquisition of subsidiaries (Note 3)                                                                 |   | -  |   | -  |   | -  |   | -  |   | 0.3  |   | 0.3  |
| Exchange differences                                                                                 |   | -  |   | 27.6  |   | 6.3  |   | 2.8  |   | 13.5  |   | 50.2  |
| Transfers                                                                                            |   | 3.8  |   | (3.8) |   | -  |   | -  |   | -  |   | -  |
| **Net book value at March 31, 2014**                                                                 | **$** | **3.8 ** | **$** | **200.3 ** | **$** | **110.2 ** | **$** | **40.4 ** | **$** | **147.8 ** | **$** | **502.5  ** |
|                                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

Goodwill is allocated to CGUs or a group of CGUs, which generally corresponds to the Company’s operating segments or one level below.

The Company’s impairment test for goodwill is based on level 3 fair value less costs of disposal calculations and uses valuation models such as the discounted cash flows model. The cash flows are derived from the projections approved by management for the next five years. Cash flow projections take into account past experience and represent management’s best estimate about future developments and form part of the Company’s strategic plan approved annually by the Board of Directors. Cash flows after the five year period are extrapolated using a constant growth rate of 2.5%. For fiscal 2014, the post-tax discount rates were derived from the respective CGUs’ representative weighted average cost of capital, which range from 7.5% to 14%.

 

In fiscal 2014, an impairment loss of $0.6 million was recognized in TS/C cost of sales following the decision to sell a building. The recoverable amount of $4.8 million was estimated using its fair value, based on a level 2 market price, less costs of disposal. There were no impairment losses in fiscal 2013. 

CAE Year-End Financial Results 2014 | 39

----

Notes to the Consolidated Financial Statements 

**NOTE 21 – other gains***– ***net**

| *(amounts in millions)*                                                         |   |   | **2014 ** |   | 2013  |
|---------------------------------------------------------------------------------|--------|--------|----------------|--------|------------|
| Disposal of property, plant and equipment                                       |   | **$**  | **(5.6)**      | $      | (2.7)      |
| Net foreign exchange differences                                                |   |   | **(0.4)**      |   | (11.4)     |
| Dividend income                                                                 |   |   | **(1.1)**      |   | (0.9)      |
| Reversal of contingent consideration arising on business combinations (Note 11) |   |   | **(0.4)**      |   | (6.1)      |
| Reversal of unused portion of an acquisition-related provision                  |   |   | **(4.2)**      |   | -     |
| Other                                                                           |   |   | **(8.7)**      |   | (1.3)      |
| Other gains – net                                                         |   | **$**  | **(20.4)**     | $      | (22.4)     |

 

 

**NOTE 22 – Restructuring, integration and acquisition costs**

 

| *(amounts in millions)*                          |   |   |   | **2014 ** |   | 2013  |
|--------------------------------------------------|--------|--------|--------|----------------|--------|------------|
| Restructuring costs (Note 11)                    |   |   | **$**  | **- **    | $      | 54.9  |
| Integration costs                                |   |   |   | **- **    |   | 7.8   |
| Acquisition costs                                |   |   |   | **- **    |   | 6.0   |
| Restructuring, integration and acquisition costs |   |   | **$**  | **- **    | $      | 68.7  |

 

**Restructuring costs**

Restructuring costs consist mainly of severances and other related costs.

 

**Integration costs**

Integration costs represent incremental costs directly related to the integration of OAA in the Company’s ongoing activities. This primarily includes expenditures related to redeployment of simulators, regulatory and process standardization, systems integration and other activities.

  

**Acquisition costs**

Acquisition costs include expenses, fees, commissions and other costs associated with the collection of information, negotiation of contracts, risk assessments, and the services of lawyers, advisors and specialists.

 

 

**NOTE 23 – FINANCE EXPENSE – NET**

 

| *(amounts in millions)*****                                                                                                                                 |                                        |   |   | **2014 ** |           |   | 2013  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|--------|--------|----------------|----------------|--------|------------|
| Finance expense:                                                                                                                                            |                                        |   |   |           |           |   |       |
|                                                                                                                                                        | Long-term debt (other than finance leases)  |   |   | **$**          | **52.8 ** |   | $          | 45.3  |
|                                                                                                                                                        | Finance leases                              |   |   |           | **9.8 **  |   |       | 10.0  |
|                                                                                                                                                        | Royalty obligations                         |   |   |           | **8.1 **  |   |       | 10.2  |
|                                                                                                                                                        | Net employee benefits obligations (Note 14) |   |   |           | **5.2 **  |   |       | 5.1  |
|                                                                                                                                                        | Financing cost amortization                 |   |   |           | **1.5 **  |   |       | 1.6  |
|                                                                                                                                                        | Accretion of other non-current liabilities  |   |   |           | **1.5 **  |   |       | 1.7  |
|                                                                                                                                                        | Other                                       |   |   |           | **5.2 **  |   |       | 3.8  |
|                                                                                                                                                        | Post interest rate swaps                    |   |   |           | **0.1 **  |   |       | (0.4) |
| Borrowing costs capitalized (1)                                                                                                                             |                                        |   |   | **(3.7)**      |           |   | (2.8)      |
| **Finance expense**                                                                                                                                         |                                        |   | **$**  | **80.5 ** |           | $      | 74.5  |
| Finance income:                                                                                                                                             |                                        |   |   |           |           |   |       |
|                                                                                                                                                        | Interest income on loans and receivables    |   |   | **$**          | **(1.6)**      |   | $          | (2.0) |
|                                                                                                                                                        | Other                                       |   |   |           | **(8.2)**      |   |       | (7.4) |
| **Finance income**                                                                                                                                          |                                        |   | **$**  | **(9.8)**      |           | $      | (9.4)      |
| **Finance expense - net**                                                                                                                                   |                                        |   | **$**  | **70.7 ** |           | $      | 65.1  |
|                                                                                                                                                        |                                        |   |   |           |           |   |       |   |   |   |
| (1)The average capitalization rate used during fiscal 2014 to determine the amount of borrowing costs eligible for capitalization was 3.75% (2013 - 3.86%). |
|                                                                                                                                                        |                                        |   |   |           |           |   |       |   |   |   |

40 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**NOTE 24 – SHARE-BASED PAYMENTS**

The Company’s five share-based payment plans consist of two categories of plans: the Employee Stock Option Plan (ESOP), which qualifies as an equity-settled share-based payment plan; and the Employee Stock Purchase Plan (ESPP), Deferred Share Unit (DSU) Plans, Long-Term Incentive Deferred Share Unit (LTI-DSU) Plan and the Long-Term Incentive Restricted Share Unit (LTI-RSU) Plans, which qualify as cash-settled share-based payments plans.

 

The effect before income taxes of share-based payment arrangements in the consolidated income statement and in the consolidated statement of financial position are as follows as at, and for the years ended March 31:

 

|                                          |   |            |   | Compensation                    |   | Recognized in the consolidated |   |
|-----------------------------------------------|--------|-----------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                          |   | cost/(recovery) |   | statement of financial position |   |
| *(amounts in millions)*                       |   | **2014 **  |   | 2013                       |   | **2014 **                 |   | 2013  |
| Cash-settled share-based compensation:        |   |            |   |                            |   |                           |   |   |
| ESPP                                          | **$**  | **5.7 **   | $      | 5.6                        | **$**  | **- **                    | $      | -  |
| DSU                                           |   | **4.3 **   |   | 0.9                        |   | **(8.0)**                      |   | (8.1) |
| LTI-DSU, net of equity swap                   |   | **(0.8)**       |   | 3.3                        |   | **(21.8)**                     |   | (19.3) |
| LTI-RSU                                       |   | **7.4 **   |   | 1.1                        |   | **(10.1)**                     |   | (6.5) |
| Total cash-settled share-based compensation   | **$**  | **16.6 **  | $      | 10.9                       | **$**  | **(39.9)**                     | $      | (33.9) |
| Equity-settled share-based compensation:      |   |            |   |                            |   |                           |   |   |
| ESOP                                          |   | **3.7 **   |   | 3.9                        |   | **(19.5)**                     |   | (21.9) |
| Total equity-settled share-based compensation | **$**  | **3.7 **   | $      | 3.9                        | **$**  | **(19.5)**                     | $      | (21.9) |
| **Total share-based compensation**            | **$**  | **20.3 **  | $      | 14.8                       | **$**  | **(59.4)**                     | $      | (55.8) |
|                                          |   |            |   |                            |   |                           |   |   |   |   |   |

 

The compensation costs listed above include capitalized costs of $0.9 million (2013 –  $0.8 million). 

The share-based payment plans are described below. There have been no plan cancellations during fiscal 2014 or fiscal 2013.

**Employee Stock Option Plan**

Under the Company’s long-term incentive program, options may be granted to its officers and other key employees of its subsidiaries to purchase common shares of the Company at a subscription price of 100% of the market value at the date of the grant. Market value is determined as the weighted average closing price of the common shares on the Toronto Stock Exchange (TSX) of the five days of trading prior to the effective date of the grant.

As at March 31, 2014, a total of 9,917,220 common shares (2013 –  12,304,776) remained authorized for issuance under the Employee Stock Option Plan (ESOP). The options are exercisable during a period not to exceed seven years (six years for options issued before March 31, 2011), and are not exercisable during the first 12 months after the date of the grant. The right to exercise all of the options vests over a period of four years of continuous employment from the grant date. Upon termination of employment at retirement, unvested options continue to vest following the retiree’s retirement date, subject to the four year vesting period. However, if there is a change of control of the Company, the options outstanding become immediately exercisable by option holders. Options are adjusted proportionately for any stock dividends or stock splits attributed to the common shares of the Company.

 

| Outstanding options are as follows:    |
|----------------------------------------|
|                                   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Years ended March 31*                 |   |   |   |   | **2014 ** |   |   |   |   | 2013  |
|                                   |   |   |   | **Weighted** |   |   |   |   | Weighted |   |
|                                   | **Number** |   | **average** |   | Number |   | average |   |
|                                   | **of options** |   | **exercise price** |   | of options |   | exercise price |   |
| Options outstanding, beginning of year |   | **7,311,967 ** | **$** | **10.24 ** |   | 6,473,768  | $ | 10.20  |
| Granted                                |   | **2,082,900 ** |   | **11.02 ** |   | 1,755,400  |   | 10.16  |
| Exercised                              |   | **(2,387,556)** |   | **9.28 ** |   | (482,250) |   | 8.13  |
| Forfeited                              |   | **(606,623)** |   | **11.56 ** |   | (412,076) |   | 11.61  |
| Expired                                |   | **(976,106)** |   | **14.08 ** |   | (22,875) |   | 11.97  |
| Options outstanding, end of year       |   | **5,424,582 ** | **$** | **10.13 ** |   | 7,311,967  | $ | 10.24  |
| Options exercisable, end of year       |   | **1,768,716 ** | **$** | **8.60 ** |   | 3,829,769  | $ | 10.44  |

CAE Year-End Financial Results 2014 | 41

----

Notes to the Consolidated Financial Statements 

 

| Summarized information about the Company's ESOP as at March 31, 2014 is as follows: |        |
|-------------------------------------------------------------------------------------|-------------|
|                                                                                |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Range of exercise prices*                                                          |        |   |   | Options Outstanding |   | Options Exercisable |   |
|                                                                                |        |   | Weighted |   |   | Weighted |   |   |   |   | Weighted |   |
|                                                                                | Number      |   | average remaining |   |   | average |   | Number |   |   | average |   |
|                                                                                | Outstanding |   | contractual life (years) |   |   | exercise price |   | exercisable |   |   | exercise price |   |
| $7.29 to $9.69                                                                      |        | 1,566,419  |   | 1.76  |   |   | $ | 7.95  |   | 1,343,283  |   |   | $ | 7.67  |
| $10.04 to $11.02                                                                    |        | 3,230,813  |   | 5.76  |   |   |   | 10.71  |   | 201,151  |   |   |   | 10.25  |
| $11.13 to $13.18                                                                    |        | 627,350  |   | 4.11  |   |   |   | 12.59  |   | 224,282  |   |   |   | 12.70  |
| Total                                                                               |        | 5,424,582  |   | 4.42  |   |   | $ | 10.13  |   | 1,768,716  |   |   | $ | 8.60  |
|                                                                                |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The weighted average market share price for share options exercised in 2014 was $13.13 (2013 –  $10.45).

For the year ended March 31, 2014, compensation cost for CAE’s stock options of $3.7 million (2013 –  $3.9 million) was recognized in the consolidated income statement with a corresponding credit to contributed surplus using the fair value method of accounting for awards that were granted since fiscal 2010.

 

| The assumptions used for the purpose of the option calculations outlined in this note are presented below:                 |
|----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                       |   |   |   |   |   |   |   |
|                                                                                                                       |   |   |   |   | **2014 ** |   |   | 2013  |
| Weighted average assumptions used in the Black-Scholes options pricing model:                                              |   |   |   |   |   |   |
|                                                                                                                       | Weighted average share price |   |   | **$** | **10.95 ** |   | $ | 10.08  |
|                                                                                                                       | Exercise price |   |   | **$** | **11.02 ** |   | $ | 10.16  |
|                                                                                                                       | Dividend yield |   |   |   | **1.83%** |   |   | 1.60% |
|                                                                                                                       | Expected volatility |   |   |   | **29.83%** |   |   | 33.56% |
|                                                                                                                       | Risk-free interest rate |   |   |   | **1.35%** |   |   | 1.29% |
|                                                                                                                       | Expected option term |   |   | **5 years** |   |   | 5 years |
|                                                                                                                       | Weighted average fair value option granted |   |   | **$** | **2.45 ** |   | $ | 2.59  |
|                                                                                                                       |   |   |   |   |   |   |   |   |   |   |
| Expected volatility is estimated by considering historical average share price volatility over the option's expected term. |

 

**Employee Stock Purchase Plan**

The Company maintains an Employee Stock Purchase Plan (ESPP) to enable employees of the Company and its participating subsidiaries to acquire CAE common shares through regular payroll deductions or a lump-sum payment plus employer contributions. The Company and its participating subsidiaries match the first $500 employee contribution and contribute $1 for every $2 of additional employee contributions, up to a maximum of 3% of the employee’s base salary. The Company recorded compensation cost in the amount of $5.7 million (2013 –  $5.6 million) in respect of employer contributions under the Plan.

**Deferred Share Unit Plans**

The Company maintains a Deferred Share Unit (DSU) plan for executives, whereby an executive may elect to receive any cash incentive compensation in the form of deferred share units. The plan is intended to promote a greater alignment of interests between executives and the shareholders of the Company. A DSU is equal in value to one common share of the Company. The units are issued on the basis of the average closing board lot sale price per share of CAE common shares on the TSX during the last 10 days on which such shares traded prior to the date of issue. The units also accrue dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares. DSUs mature upon termination of employment, whereupon an executive is entitled to receive a cash payment equal to the fair market value of the equivalent number of common shares, net of withholdings.

42 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

The Company also maintains a DSU plan for non-employee directors. A non-employee director holding less than the minimum holdings of common shares of the Company receives the Board retainer and attendance fees in the form of deferred share units. Minimum holdings means no less than the number of common shares or deferred share units equivalent in fair market value to three times the annual retainer fee payable to a director for service on the Board. A non-employee director holding no less than the minimum holdings of common shares may elect to participate in the plan in respect of half or all of his or her retainer and part or all of his or her attendance fees. The terms of the plan are essentially identical to the executive DSU Plan except that units are issued on the basis of the closing board lot sale price per share of CAE common shares on the TSX during the last day on which the common shares traded prior to the date of issue.

The Company records the cost of the DSU plans as a compensation expense and accrues its non-current liability in deferred gains and other non-current liabilities on the consolidated statement of financial position. The cost recorded in fiscal 2014 was $4.3 million (2013 – $0.9 million). 

 

| DSUs outstanding are as follows:                                                                       |
|--------------------------------------------------------------------------------------------------------|
|                                                                                                   |   |   |   |   |   |   |   |
| *Years ended March 31*                                                                                 |   |   |   | **2014 ** |   |   | 2013  |
| DSUs outstanding, beginning of year                                                                    |   |   | **813,191 ** |   |   | 805,527  |
| Units granted                                                                                          |   |   |   | **102,735 ** |   |   | 97,457  |
| Units redeemed                                                                                         |   |   |   | **(374,969)** |   |   | (104,807) |
| Dividends paid in units                                                                                |   |   |   | **10,976 ** |   |   | 15,014  |
| DSUs outstanding, end of year                                                                          |   |   |   | **551,933 ** |   |   | 813,191  |
| DSUs vested, end of the year                                                                           |   |   |   | **551,933 ** |   |   | 813,191  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| The intrinsic values of the DSUs amount to $8.0 million at March 31, 2014 (2013 – $8.1 million). |

 

**Long-Term Incentive (LTI) – Deferred Share Unit Plan**

The Company maintains a Long-Term Incentive Deferred Share Unit (LTI-DSU) plan for executives and senior management to promote a greater alignment of interests between executives and shareholders of the Company. A LTI-DSU is equal in value to one common share at a specific date. The LTI-DSUs are also entitled to dividend equivalents payable in additional units in an amount equal to dividends paid on CAE common shares. Eligible participants are entitled to receive a cash payment equivalent to the fair market value of the number of vested LTI-DSUs held upon any termination of employment. Upon termination of employment at retirement, unvested units continue to vest until November 30 of the year following the retirement date. For participants subject to section 409A of the United States Internal Revenue Code, vesting of unvested units takes place at the time of retirement.

The Plan stipulates that granted units vest equally over five years and that following a change of control, all unvested units vest immediately. The cost recorded in fiscal 2014 was $11.0 million (2013 – $3.0 million). 

The Company entered into equity swap agreements to reduce its earnings exposure to the fluctuations in its share price (See Note 30). 

 

| LTI-DSUs outstanding are as follows:                                                                         |
|--------------------------------------------------------------------------------------------------------------|
|                                                                                                         |   |   |   |   |   |   |   |
| *Years ended March 31*                                                                                       |   |   |   | **2014 ** |   |   | 2013  |
| LTI-DSUs outstanding, beginning of year                                                                      |   |   | **2,265,712 ** |   |   | 2,431,314  |
| Units granted                                                                                                |   |   |   | **252,970 ** |   |   | 293,990  |
| Units cancelled                                                                                              |   |   |   | **(97,164)** |   |   | (85,394) |
| Units redeemed                                                                                               |   |   |   | **(505,712)** |   |   | (421,170) |
| Dividends paid in units                                                                                      |   |   |   | **39,479 ** |   |   | 46,972  |
| LTI-DSUs outstanding, end of year                                                                            |   |   |   | **1,955,285 ** |   |   | 2,265,712  |
| LTI-DSUs vested at end of year                                                                               |   |   |   | **1,678,942 ** |   |   | 1,917,003  |
|                                                                                                         |   |   |   |   |   |   |   |   |   |   |
| The intrinsic values of the LTI-DSUs amount to $24.4 million at March 31, 2014 (2013 – $19.0 million). |

CAE Year-End Financial Results 2014 | 43

----

Notes to the Consolidated Financial Statements 

 

**Long-Term Incentive – Restricted Share Unit Plans**

The Company maintains Long-Term Incentive Performance Based Restricted Shares Unit (LTI-RSU) plans to enhance the Company’s ability to attract and retain talented individuals and also to promote a greater alignment of interest between eligible participants and the Company’s shareholders. The LTI-RSUs are share-based performance plans.

***Fiscal year 2008 Plan***

LTI-RSUs granted pursuant to the plan vest after three years from their grant date as follows:

(i)     100% of the units, if CAE shares have appreciated by a minimum annual compounded growth defined as the Bank of Canada 10-year risk-free rate of return on the grant date plus 350 basis points (3.50%) over the valuation period, or, in the case of pro‐rated vesting, as of the end of the pro-ration period;

(ii)    50% of the units if, based on the grant price, the closing average price on the common CAE shares has met or exceeded the performance of the companies listed on the Standard & Poor’s Aerospace and Defence Index (S&P A&D index), adjusted for dividends, or, in the case of pro-rated vesting, as of the end of the pro-ration period.

 

Participants subject to loss of employment, other than voluntarily or for cause, are entitled to conditional pro-rata vesting. The cost recorded in fiscal 2014 was nil (2013 –  $0.3 million).

***Fiscal year 2011 Plan***

In May 2010, the Company amended the fiscal year 2008 Plan for fiscal 2011 and subsequent years. LTI-RSUs granted pursuant to the revised plan vest over three years from their grant date as follows:

 

(i)     One-sixth of the total number of granted units multiplied by a factor vests every year. The factor is calculated from the one-year Total Shareholder Return (TSR) relative performance of CAE’s share price versus that of the S&P A&D index for the period April 1st to March 31st, immediately preceding each of the 1st, 2nd, and 3rd anniversary of the grant date, according to the following rule:

 

| Annual TSR relative performance              |   |   |   |              |    | Factor          |   |
|----------------------------------------------|--------|--------|--------|-------------------|---------|-----------------|--------|
| 1st Quartile (0 – 25th percentile)     |   |   |   |              | -  |
| 2nd Quartile (26th – 50th percentile)  |   |   |   |              |    | 50% – 98% |
| 3rd Quartile (51st – 75th percentile)  |   |   |   | 100% – 148% |
| 4th Quartile (76th – 100th percentile) |   |   |   |              |    | 150%            |

 

(ii)    One-half of the total number of granted units multiplied by a factor vests in the final year. The factor is calculated from the three‐year TSR relative performance of CAE’s share price versus that of the companies listed on the S&P A&D index for the period April 1st, immediately preceding the grant date, to March 31st, immediately preceding the 3rd anniversary of the grant date, according to the same rule described in the table above.

 

Participants subject to loss of employment, other than voluntarily or for cause, are entitled to the units vested. The cost recorded in fiscal 2014 was $7.4 million (2013 –  $0.8 million).

 

| LTI-RSU units outstanding under all plans are as follows:                                                   |
|-------------------------------------------------------------------------------------------------------------|
|                                                                                                        |   |   |   |   |   |   |   |   |
|                                                                                                        |   | Fiscal Year 2011 Plan |   |   | Fiscal Year 2008 Plan |   |
| *Years ended March 31*                                                                                      |   | **2014 ** |   | 2013  |   | **2014 ** |   | 2013  |
| LTI-RSUs outstanding, beginning of year                                                                     |   | **1,463,639 ** |   | 1,014,155  |   | **- ** |   | 660,733  |
| Units granted                                                                                               |   | **495,198 ** |   | 593,410  |   | **- ** |   | -  |
| Units cancelled                                                                                             |   | **(464,284)** |   | (138,924) |   | **- ** |   | (5,954) |
| Units redeemed                                                                                              |   | **(350,856)** |   | (5,002) |   | **- ** |   | (654,779) |
| LTI-RSUs outstanding, end of year                                                                           |   | **1,143,697 ** |   | 1,463,639  |   | **- ** |   | -  |
| LTI-RSUs vested, end of year                                                                                |   | **765,788 ** |   | 1,060,397  |   | **- ** |   | -  |
|                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
| The intrinsic values of the LTI-RSUs amount to $10.1 million at March 31, 2014 (2013 – $6.5 million). |
|                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |

44 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**NOTE 25 – SUPPLEMENTARY CASH FLOWS INFORMATION**

 

| *(amounts in millions)*                              |                                     |   |   | **2014 ** |           |   | 2013  |
|------------------------------------------------------|------------------------------------------|--------|--------|----------------|----------------|--------|------------|
| Cash (used in) provided by non-cash working capital: |                                     |   |   |           |           |   |       |
|                                                 | Accounts receivable                      |   |   | **$**          | **(14.3)**     |   | $          | (76.6) |
|                                                 | Contracts in progress: assets            |   |   |           | **29.0 ** |   |       | (1.8) |
|                                                 | Inventories                              |   |   |           | **(42.3)**     |   |       | (24.8) |
|                                                 | Prepayments                              |   |   |           | **(4.4)**      |   |       | (4.6) |
|                                                 | Income taxes recoverable                 |   |   |           | **6.0 **  |   |       | (11.5) |
|                                                 | Derivative financial assets              |   |   |           | **19.6 ** |   |       | 17.9  |
|                                                 | Accounts payable and accrued liabilities |   |   |           | **(9.4)**      |   |       | 8.2  |
|                                                 | Provisions                               |   |   |           | **(22.6)**     |   |       | 19.2  |
|                                                 | Income taxes payable                     |   |   |           | **(1.4)**      |   |       | (0.1) |
|                                                 | Contracts in progress: liabilities       |   |   |           | **40.6 ** |   |       | 12.4  |
|                                                 | Derivative financial liabilities         |   |   |           | **(29.6)**     |   |       | (22.9) |
| Changes in non-cash working capital                  |                                     |   | **$**  | **(28.8)**     |           | $      | (84.6)     |
|                                                 |                                     |   |   |           |           |   |       |   |   |   |
|                                                 |                                     |   |   |           |           |   |       |   |   |   |

 

**NOTE 26 – Contingencies**

In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position.

 

 

**NOTE 27 – COMMITMENTS**** **

 

| The future aggregate minimum lease payments under non-cancellable operating leases are as follows:                  |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                             |   | **2014 ** |   | 2013  |
| No later than 1 year                                                                                                | **$** | **53.4 ** | $ | 53.3  |
| Later than 1 year and no later than 5 years                                                                         |   | **130.9 ** |   | 140.2  |
| Later than 5 years                                                                                                  |   | **77.5 ** |   | 88.2  |
|                                                                                                                |   | **$** | **261.8 ** | $ | 281.7  |
|                                                                                                                |   |   |   |   |   |   |   |
| Rental expenses recorded in the consolidated income statement amount to $54.4 million (2013 – $59.1 million). |   |

 

| **Contractual purchase commitments**                       |
|------------------------------------------------------------|
| The total contractual purchase commitments are as follows: |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                    |   |   |   |   | TS/C |   |   | SP/C |   | Corporate |   |   | **Total** |   |
| 2015                                                  |   |   | $ | 1.9  | $ | 5.8  | $ | 4.5  |   | **$** | **12.2 ** |
| 2016                                                  |   |   |   | -  |   | 5.3  |   | -  |   |   | **5.3 ** |
| 2017                                                  |   |   |   | -  |   | 5.3  |   | -  |   |   | **5.3 ** |
|                                                       |   |   |   | $ | 1.9  | $ | 16.4  | $ | 4.5  | **$** | **22.8 ** |

CAE Year-End Financial Results 2014 | 45

----

Notes to the Consolidated Financial Statements 

 

| **Operating Lease Entitlements as a Lessor**                                                    |
|-------------------------------------------------------------------------------------------------|
| Future minimum lease payments receivable under non-cancellable operating leases are as follows: |   |   |   |   |   |   |
|                                                                                            |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                         |   | **2014 ** |   | 2013  |
| No later than 1 year                                                                            | **$** | **23.7 ** | $ | 11.9  |
| Later than 1 year and no later than 5 years                                                     |   | **49.1 ** |   | 20.5  |
| Later than 5 years                                                                              |   | **24.9 ** |   | 14.4  |
|                                                                                            |   | **$** | **97.7 ** | $ | 46.8  |

 

**Joint ventures’ commitments**

 

The Company’s total commitments to joint ventures that it has made but not recognized relating to its interests in joint ventures amount to $3.2 million as at March 31, 2014.

 

 

**NOTE 28 – capital risk management**

The Company’s objectives when managing capital are threefold:

(i)     Optimize the Company’s cost of capital;

(ii)    Maintain the Company’s financial strength and credit quality;

(iii)   Provide the Company’s shareholders with an appropriate rate of return on their investment.

 

The Company manages its capital structure and makes corresponding adjustments based on changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or use cash to reduce debt.

 

To accomplish its objectives stated above, the Company monitors its capital on the basis of the net debt to capital ratio. This ratio is calculated as net debt divided by the sum of the net debt and total equity. Net debt is calculated as total debt, including the short-term portion (as presented in the consolidated statement of financial position and including non-recourse debt) less cash and cash equivalents. Total equity comprises share capital, contributed surplus, accumulated other comprehensive (loss) income, retained earnings and non-controlling interests. 

| The level of debt versus equity in the capital structure is monitored, and the ratios are as follows: |
|-------------------------------------------------------------------------------------------------------|
|                                                                                                  |   |   |   |   |   |
| *(amounts in millions)*                                                                               |   |   | **2014 ** |   | 2013  |
| Total debt (Note 12)                                                                                  |   | **$** | **1,168.5 ** | $ | 1,073.4  |
| Less: cash and cash equivalents                                                                       |   |   | **312.3 ** |   | 260.0  |
| Net debt                                                                                              |   | **$** | **856.2 ** | $ | 813.4  |
| Equity                                                                                                |   | **$** | **1,482.2 ** | $ | 1,146.4  |
| Net debt: equity                                                                                      |   |   | **37:63** |   |   | 42:58 |   |
|                                                                                                  |   |   |   |   |   |   |   |   |

 

The Company has certain debt agreements which require the maintenance of a certain level of capital. As at March 31, 2014, the Company is compliant with its financial covenants.

46 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**NOTE 29 – FAIR VALUE OF Financial Instruments**

The fair value of a financial instrument is determined by reference to the available market information at the reporting date. When no active market exists for a financial instrument, the Company determines the fair value of that instrument based on valuation methodologies as discussed below. In determining assumptions required under a valuation model, the Company primarily uses external, readily observable market data inputs. Assumptions or inputs that are not based on observable market data incorporate the Company’s best estimates of market participant assumptions, and are used when external data is not available. Counterparty credit risk and the fair values of the Company’s own credit risk are taken into account in estimating the fair value of all financial assets and financial liabilities, including derivatives.

 

The following assumptions and valuation methodologies have been used to measure fair value of financial instruments:

(i)     The fair value of accounts receivable, contracts in progress, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturities;

(ii)    The fair value of derivative instruments, including forward contracts, swap agreements and embedded derivatives with economic characteristics and risks that are not clearly and closely related to those of the host contract, are determined using valuation techniques and are calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. Derivative instruments reflect the estimated amounts that the Company would receive or pay to settle the contracts at the reporting date;

(iii)   The fair value of the available-for-sale investment which does not have a readily available market value, is estimated using a discounted cash flow model, which includes some assumptions that are not supportable by observable market prices or rates;

(iv)   The fair value of non-current receivables are estimated based on discounted cash flows using current interest rates for instruments with similar terms and remaining maturities;

(v)    The fair value of provisions, long-term debt and non-current liabilities, including finance lease obligations and royalty obligations, are estimated based on discounted cash flows using current interest rates for instruments with similar terms and remaining maturities.

 

| The carrying values and fair values of financial instruments, by class, are as follows at March 31, 2014: |      |            |    |           |          |            |            |
|-----------------------------------------------------------------------------------------------------------|-----------|-----------------|---------|----------------|---------------|-----------------|-----------------|
|                                                                                                      |      |            |    |           |          |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                   |      |            |    |           |          |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |      |            |    |           |          |            |            |   |   |   |   |   |   | **Carrying Value** |   | **Fair Value** |   |
|                                                                                                      | **At**    |            |    | **Available-** |          |            | **Loans &** |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      | **FVTPL** |            | **(1)** | **for-Sale**   |          | **Receivables** |            |   | **DDHR** |   | **(2)** |   | **Total** |   |   |   |   |
| **Financial assets**                                                                                      |      |            |    |           |          |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                 | $         | 312.3      |    | $              | -        |            | $               | -  |   | $ | -  |   | $ | 312.3  | $ | 312.3  |
| Accounts receivable                                                                                       |      | -          |    |           | -        |            |            | 431.4  | (3) |   | -  |   |   | 431.4  |   | 431.7  |
| Contracts in progress: assets                                                                             |      | -          |    |           | -        |            |            | 256.4  |   |   | -  |   |   | 256.4  |   | 256.4  |
| Derivative financial assets                                                                               |      | 6.0        |    |           | -        |            |            | -  |   |   | 8.8  |   |   | 14.8  |   | 14.8  |
| Other assets                                                                                              |      | 24.1       | (4)     |           | 1.5      | (5)             |            | 133.5  | (6) |   | -  |   |   | 159.1  |   | 152.8  |
|                                                                                                      | **$**     | **342.4 ** |    | **$**          | **1.5 ** |            | **$**           | **821.3 ** |   | **$** | **8.8 ** |   | **$** | **1,174.0 ** | **$** | **1,168.0 ** |

 

|                                                                                                                                             |   |   |      |   |           |            |          |              |     |      |           |   |      | **Carrying Value** |   | **Fair Value**    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|----------------|-----------------|---------------|-------------------|----------|-----------|----------------|--------|-----------|--------------------|--------|-------------------|--------|
|                                                                                                                                             |   |   |      |   |           |            |          |              |     | **Other** |           |   |      |               |   |              |   |   |   |   |   |   |
|                                                                                                                                             |   |   |      | **At** |           |            | **Financial** |              |     |      |           |   |      |               |   |              |   |   |
|                                                                                                                                             |   |   | **FVTPL** |   | **(1)**        | **Liabilities** |          |              | **DDHR** |      | **(2)**        |   | **Total** |               |   |              |   |
| **Financial liabilities**                                                                                                                        |   |   |      |   |           |            |          |              |     |      |           |   |      |               |   |              |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                                                                                                         |   |   |      | $      | 1.3       |            | $             | 529.1        | (7)      | $         | -         |   | $         | 530.4         | $      | 532.3        |
| Total provisions                                                                                                                                 |   |   |      |   | 2.9       |            |          | 25.3         |     |      | -         |   |      | 28.2          |   | 28.2         |
| Total long-term debt                                                                                                                             |   |   |      |   | -         |            |          | 1,173.2      | (8)      |      | -         |   |      | 1,173.2       |   | 1,251.9      |
| Other non-current liabilities                                                                                                                    |   |   |      |   | -         |            |          | 197.5        | (9)      |      | -         |   |      | 197.5         |   | 223.4        |
| Derivative financial liabilities                                                                                                                 |   |   |      |   | 9.7       |            |          | -            |     |      | 33.3      |   |      | 43.0          |   | 43.0         |
|                                                                                                                                             |   |   |      | **$**  | **13.9 ** |            | **$**         | **1,925.1 ** |     | **$**     | **33.3 ** |   | **$**     | **1,972.3 **  | **$**  | **2,078.8 ** |
|                                                                                                                                             |   |   |      |   |           |            |          |              |     |      |           |   |      |               |   |              |   |   |   |   |   |   |
| (1) FVTPL: Fair value through profit and loss.                                                                                                   |   |
| (2) DDHR: Derivatives designated in a hedge relationship.                                                                                        |   |
| (3) Includes trade receivables, accrued receivables and certain other receivables.                                                               |   |
| (4) Represents restricted cash.                                                                                                                  |   |
| (5) Represents the Company's portfolio investment.                                                                                               |   |
| (6) Includes non-current receivables and advances.                                                                                               |   |
| (7) Includes trade accounts payable, accrued liabilities, interest payable, certain payroll-related liabilities and current royalty obligations. |   |
| (8) Excludes transaction costs.                                                                                                                  |   |
| (9) Includes non-current royalty obligations and other non-current liabilities.                                                                  |   |

CAE Year-End Financial Results 2014 | 47

----

Notes to the Consolidated Financial Statements 

 

| The carrying values and fair values of financial instruments, by class, were as follows at March 31, 2013: |   |        |   |       |
|------------------------------------------------------------------------------------------------------------|--------|-------------|--------|------------|
|                                                                                                       |   |        |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                    |   |        |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       |   |        |   |       |   |   |   |   |   |   |   |   |   | Carrying Value |   | Fair Value |   |
|                                                                                                       | At     |        |   | Available- |   |   | Loans & |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       | FVTPL  |        | (1)    | for-Sale   |   |   | Receivables |   |   | DDHR |   | (2) |   | Total |   |   |   |   |
| **Financial assets**                                                                                       |   |        |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                  | $      | 260.0  |   | $          | -  |   | $ | -  |   | $ | -  |   | $ | 260.0  | $ | 260.0  |
| Accounts receivable                                                                                        |   | -      |   |       | -  |   |   | 384.1  | (3) |   | -  |   |   | 384.1  |   | 384.1  |
| Contracts in progress: assets                                                                              |   | -      |   |       | -  |   |   | 265.6  |   |   | -  |   |   | 265.6  |   | 265.6  |
| Derivative financial assets                                                                                |   | 5.4    |   |       | -  |   |   | -  |   |   | 10.0  |   |   | 15.4  |   | 15.4  |
| Other assets                                                                                               |   | 4.1    | (4)    |       | 1.3  | (5) |   | 105.9  | (6) |   | -  |   |   | 111.3  |   | 119.6  |
|                                                                                                       | $      | 269.5  |   | $          | 1.3  |   | $ | 755.6  |   | $ | 10.0  |   | $ | 1,036.4  | $ | 1,044.7  |

 

|                                                                                                                                             |   |   |   |   |      |   |        |          |   |   |       |   |   | Carrying Value |   | Fair Value    |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-----------|--------|-------------|---------------|--------|--------|------------|--------|--------|----------------|--------|---------------|--------|
|                                                                                                                                             |   |   |   |   |      |   |        |          |   | Other  |       |   |   |           |   |          |   |   |   |   |   |   |
|                                                                                                                                             |   |   |   | At     |      |   | Financial   |          |   |   |       |   |   |           |   |          |   |   |
|                                                                                                                                             |   |   |   | FVTPL  |      | (1)    | Liabilities |          |   | DDHR   |       | (2)    |   | Total          |   |          |   |   |
| **Financial liabilities**                                                                                                                        |   |   |   |   |      |   |        |          |   |   |       |   |   |           |   |          |   |   |   |   |   |   |
| Accounts payable and accrued liabilities                                                                                                         |   |   |   | $      | -    |   | $           | 501.0    | (7)    | $      | -     |   | $      | 501.0     | $      | 501.0    |
| Total provisions                                                                                                                                 |   |   |   |   | -    |   |        | 29.7     |   |   | -     |   |   | 29.7      |   | 29.7     |
| Total long-term debt                                                                                                                             |   |   |   |   | -    |   |        | 1,078.6  | (8)    |   | -     |   |   | 1,078.6   |   | 1,117.3  |
| Other non-current liabilities                                                                                                                    |   |   |   |   | -    |   |        | 192.5    | (9)    |   | -     |   |   | 192.5     |   | 192.5    |
| Derivative financial liabilities                                                                                                                 |   |   |   |   | 5.5  |   |        | -        |   |   | 14.6  |   |   | 20.1      |   | 20.1     |
|                                                                                                                                             |   |   |   | $      | 5.5  |   | $           | 1,801.8  |   | $      | 14.6  |   | $      | 1,821.9   | $      | 1,860.6  |
|                                                                                                                                             |   |   |   |   |      |   |        |          |   |   |       |   |   |           |   |          |   |   |   |   |   |   |
| (1) FVTPL: Fair value through profit and loss.                                                                                                   |
| (2) DDHR: Derivatives designated in a hedge relationship.                                                                                        |
| (3) Includes trade receivables, accrued receivables and certain other receivables.                                                               |
| (4) Represents restricted cash.                                                                                                                  |
| (5) Represents the Company's portfolio investments.                                                                                              |
| (6) Includes non-current receivables and advances.                                                                                               |
| (7) Includes trade accounts payable, accrued liabilities, interest payable, certain payroll-related liabilities and current royalty obligations. |
| (8) Excludes transaction costs.                                                                                                                  |
| (9) Includes non-current royalty obligations and other non-current liabilities.                                                                  |

 

The Company did not elect to voluntarily designate any financial instruments at FVTPL; moreover, there have not been any changes to the classification of the financial instruments since inception.

 

As part of its financing transactions, the Company, through its subsidiaries, has pledged certain financial assets including cash and cash equivalents, accounts receivable and other assets. As at March 31, 2014, the aggregate carrying value of these pledged financial assets amounted to $149.2 million (2013 ** **– $55.8 million).

 

**Fair value hierarchy**

The fair value hierarchy reflects the significance of the inputs used in making the measurements and has the following levels:

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

Level 2:   Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as 

prices) or indirectly (i.e., derived from prices);

 

Level 3:   Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.

48 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

The following table presents the financial instruments, by class, which are recognized at fair value in the statement of financial position:   

 

| *(amounts in millions)*                        |                                       |        |            |          |          |          |            | **2014 ** |        |      |      |      |        |   |    | 2013  |
|------------------------------------------------|--------------------------------------------|-------------|-----------------|---------------|---------------|---------------|-----------------|----------------|-------------|-----------|-----------|-----------|-------------|--------|---------|------------|
|                                           |                                       |        | **Level 2**     |          |          | **Level 3**   |            |           | **Total**   |      |      | Level 2   |        |   | Level 3 |       |   | Total |   |
| **Financial assets**                           |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |
| At FVTPL                                       |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |
|                                           | Cash and cash equivalents                  | **$**       | **312.3 ** | **$**         | **- **   | **$**         | **312.3 ** | $              | 260.0  | $         | -    | $         | 260.0  |
|                                           | Restricted cash                            |        | **24.1 **  |          | **- **   |          | **24.1 **  |           | 4.1    |      | -    |      | 4.1    |
|                                           | Forward foreign currency contracts         |        | **2.0 **   |          | **- **   |          | **2.0 **   |           | 4.7    |      | -    |      | 4.7    |
|                                           | Embedded foreign currency derivatives      |        | **1.4 **   |          | **- **   |          | **1.4 **   |           | 0.7    |      | -    |      | 0.7    |
|                                           | Equity swap agreements                     |        | **2.6 **   |          | **- **   |          | **2.6 **   |           | -      |      | -    |      | -      |
| Available-for-sale                             |                                       | **- ** |            | **1.5 ** |          | **1.5 ** |            | -         |        | 1.3  |      | 1.3  |
| Derivatives designated in a hedge relationship |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |
|                                           | Forward foreign currency contracts         |        | **2.1 **   |          | **- **   |          | **2.1 **   |           | 4.6    |      | -    |      | 4.6    |
|                                           | Foreign currency swap agreements           |        | **6.7 **   |          | **- **   |          | **6.7 **   |           | 5.4    |      | -    |      | 5.4    |
|                                           |                                       | **$**       | **351.2 ** | **$**         | **1.5 ** | **$**         | **352.7 ** | $              | 279.5  | $         | 1.3  | $         | 280.8  |
|                                           |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |   |
| **Financial liabilities**                      |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |
| At FVTPL                                       |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |
|                                           | Accounts payable and accrued liabilities   | **$**       | **- **     | **$**         | **1.3 ** | **$**         | **1.3 **   | $              | -      | $         | -    | $         | -      |
|                                           | Contingent liabilities arising on business |        | **- **     |          | **2.9 ** |          | **2.9 **   |           | -      |      | -    |      | -      |
|                                           | Forward foreign currency contracts         |        | **9.4 **   |          | **- **   |          | **9.4 **   |           | 3.4    |      | -    |      | 3.4    |
|                                           | Embedded foreign currency derivatives      |        | **0.3 **   |          | **- **   |          | **0.3 **   |           | 1.8    |      | -    |      | 1.8    |
|                                           | Equity swap agreements                     |        | **- **     |          | **- **   |          | **- **     |           | 0.3    |      | -    |      | 0.3    |
| Derivatives designated in a hedge relationship |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |
|                                           | Forward foreign currency contracts         |        | **29.6 **  |          | **- **   |          | **29.6 **  |           | 6.8    |      | -    |      | 6.8    |
|                                           | Foreign currency swap agreements           |        | **- **     |          | **- **   |          | **- **     |           | 2.7    |      | -    |      | 2.7    |
|                                           | Interest rate swap agreements              |        | **3.7 **   |          | **- **   |          | **3.7 **   |           | 5.1    |      | -    |      | 5.1    |
|                                           |                                       | **$**       | **43.0 **  | **$**         | **4.2 ** | **$**         | **47.2 **  | $              | 20.1   | $         | -    | $         | 20.1   |
|                                           |                                       |        |            |          |          |          |            |           |        |      |      |      |        |   |    |       |   |   |   |

 

| Changes in Level 3 financial instruments are as follows: |               |           |          |       |    |   |
|----------------------------------------------------------|--------------------|----------------|---------------|------------|---------|--------|
|                                                     |               |           |          |       |    |   |   |
| *(amounts in millions)*                                  |               | **2014 ** |          | 2013  |
| Balance, beginning of year                               | **$**              | **1.3 **  | $             | 1.3   |
| Total realized and unrealized (losses) gains:            |               |           |          |       |    |   |
|                                                     | Included in income |           | **- **   |       | -  |
|                                                     | Included in OCI    |           | **0.2 ** |       | -  |
| Issued and settled                                       |               | **(4.2)**      |          | -     |
| Balance, end of year                                     | **$**              | **(2.7)**      | $             | 1.3   |

 

***Level 3 input sensitivity analysis***

For the Company’s contingent liabilities arising on business combination, the determination of the discount rate and the expected future cash flows has the most significant impact on the valuation. A reasonably possible 1% increase/decrease in the discount rate or a 10% decrease/increase in the expected future cash flows would not have a significant impact on the Company’s net income.

CAE Year-End Financial Results 2014 | 49

----

Notes to the Consolidated Financial Statements 

 

| ***Fair value hierarchy of items at amortized cost***                                                                                            |                                     |   |              |   |            |        |              |           |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|--------|-------------------|--------|-----------------|-------------|-------------------|----------------|-----------|
| The following table presents the fair value hierarchy of assets and liabilities carried at amortized cost but for which fair value is disclosed: |
|                                                                                                                                             |
|                                                                                                                                             |                                     |   |              |   |            |        |              |           |      |   |
| *(amounts in millions)*                                                                                                                          |                                     |   |              |   |            |        |              | **2014 ** |
|                                                                                                                                             |                                     |   | **Level 2**       |   |            | **Level 3** |              |           | **Total** |   |
| **Financial assets**                                                                                                                             |                                     |   |              |   |            |        |              |           |      |
|                                                                                                                                             | Accounts receivable                      | **$**  | **- **       | **$**  | **431.7 ** | **$**       | **431.7 **   |
|                                                                                                                                             | Contracts in progress                    |   | **- **       |   | **256.4 ** |        | **256.4 **   |
|                                                                                                                                             | Other assets                             |   |              |   |            |        |              |
|                                                                                                                                             | Investment in finance leases             |   | **38.4 **    |   | **- **     |        | **38.4 **    |
|                                                                                                                                             | Other                                    |   | **- **       |   | **88.8 **  |        | **88.8 **    |
|                                                                                                                                             |                                     | **$**  | **38.4 **    | **$**  | **776.9 ** | **$**       | **815.3 **   |
|                                                                                                                                             |                                     |   |              |   |            |        |              |           |      |   |
| **Financial liabilities**                                                                                                                        |                                     |   |              |   |            |        |              |           |      |
|                                                                                                                                             | Accounts payable and accrued liabilities | **$**  | **- **       | **$**  | **532.3 ** | **$**       | **532.3 **   |
|                                                                                                                                             | Provisions                               |   | **- **       |   | **28.2 **  |        | **28.2 **    |
|                                                                                                                                             | Long-term debt                           |   | **1,251.9 ** |   | **- **     |        | **1,251.9 ** |
|                                                                                                                                             | Other liabilities                        |   | **- **       |   | **223.4 ** |        | **223.4 **   |
|                                                                                                                                             |                                     | **$**  | **1,251.9 ** | **$**  | **783.9 ** | **$**       | **2,035.8 ** |
|                                                                                                                                             |                                     |   |              |   |            |        |              |           |      |   |
|                                                                                                                                             |

 

**NOTE 30 – FINANCIAL RISK MANAGEMENT**

Due to the nature of the activities that the Company carries out and as a result of holding financial instruments, the Company is exposed to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk. The Company’s exposure to credit risk, liquidity risk and market risk is managed within risk management parameters approved by the board of directors. These risk management parameters remain unchanged since the previous period, unless otherwise indicated.

 

**Credit risk**

Credit risk is defined as the Company’s exposure to a financial loss if a debtor fails to meet its obligations in accordance with the terms and conditions of its arrangements with the Company. The Company is exposed to credit risk on its accounts receivable and certain other assets through its normal commercial activities. The Company is also exposed to credit risk through its normal treasury activities on its cash and cash equivalents and derivative financial assets.

 

Credit risks arising from the Company’s normal commercial activities are managed in regards to customer credit risk. An allowance for doubtful accounts is established when there is a reasonable expectation that the Company will not be able to collect all amounts due according to the original terms of the receivables (See Note 4). When a trade receivable is uncollectible, it is written-off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written-off are recognized in income.

 

The Company’s customers are mainly established companies with publicly available credit ratings and government agencies, which facilitates risk monitoring. In addition, the Company typically receives substantial non-refundable advance payments for construction contracts. The Company closely monitors its exposure to major airlines in order to mitigate its risk to the extent possible. Furthermore, the Company’s trade receivables are not concentrated with specific customers but are held with a wide range of commercial and government organizations. As well, the Company’s credit exposure is further reduced by the sale of certain of its accounts receivable and contracts in progress assets to third-party financial institutions for cash consideration on a non-recourse basis (current financial assets program). The Company does not hold any collateral as security. The credit risk on cash and cash equivalents is mitigated by the fact that they are in place with a diverse group of major North American and European financial institutions.

 

The Company is exposed to credit risk in the event of non-performance by counterparties to its derivative financial instruments. The Company uses several measures to minimize this exposure. First, the Company enters into contracts with counterparties that are of high credit quality. The Company signed *International Swaps & Derivatives Association, Inc. (ISDA)* Master Agreements with the majority of counterparties with whom it trades derivative financial instruments. These agreements make it possible to offset when a contracting party defaults on the agreement, for each of the transactions covered by the agreement and in force at the time of default. Also, collateral or other security to support derivative financial instruments subject to credit risk can be requested by the Company or its counterparties (or both parties, if need be) when the net balance of gains and losses on each transaction exceeds a threshold defined in the ISDA Master Agreement. Finally, the Company monitors the credit standing of counterparties on a regular basis to help minimize credit risk exposure. 

 

The carrying amounts presented in Note 4 and Note 29 represent the maximum exposure to credit risk for each respective financial asset as at the relevant dates. 

 

50 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**Liquidity risk**

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

 

The Company manages this risk by establishing cash forecasts, as well as long-term operating and strategic plans. The management of consolidated liquidity requires a regular monitoring of expected cash inflows and outflows which is achieved through a forecast of the Company’s consolidated liquidity position, for efficient use of cash resources. Liquidity adequacy is assessed in view of seasonal needs, growth requirements and capital expenditures, and the maturity profile of indebtedness, including off-balance sheet obligations. The Company manages its liquidity risk to maintain sufficient liquid financial resources to fund its operations and meet its commitments and obligations. In managing its liquidity risk, the Company has access to a revolving unsecured credit facility of US$550.0 million, with an option, subject to the lender’s consent, to increase to a total amount of up to US$850.0 million. As well, the Company has agreements to sell certain of its accounts receivable and contracts in progress assets for an amount of up to $150.0 million (current financial assets program). As at March 31, 2014, $79.5 million (2013 – $88.6 million) of specific accounts receivable and $4.2 million (2013 – $3.1 million) of contracts in progress assets were sold to financial institutions pursuant to these agreements. Proceeds were net of $1.1 million in fees (2013 – $1.6 million). The Company also regularly monitors any financing opportunities to optimize its capital structure and maintain appropriate financial flexibility.

 

The following tables present a maturity analysis based on contractual maturity date, of the Company’s financial liabilities based on expected cash flows. Cash flows from derivatives presented either as derivative assets or liabilities have been included, as the Company manages its derivative contracts on a gross basis. The amounts are the contractual undiscounted cash flows. All amounts contractually denominated in foreign currency are presented in Canadian dollar equivalent amounts using the period-end spot rate except as otherwise stated:

 

|                                                                                                                                                     |                                                                                                      |                                  |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |              |    |              |   |   |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|---------------------------------------|-----------------------------|-------------------|-------------|-------------------|-------------|-------------------|-------------|-----------------|------------|-----------------|------------|-----------------|----------------|-----------------|---------|-------------------|---------|-------------------|--------|--------|--------|--------|--------|--------|--------|--------|
| *As at March 31, 2014*                                                                                                                                   | **Carrying**                                                                                              |                                  | **Contractual**             |              |        | **0-12**          |        |              | **13-24**   |            |       | **25-36**       |       |            | **37-48**      |            |    | **49-60**         |    |              |   |
| *(amounts in millions)*                                                                                                                                  | **Amount**                                                                                                |                                  | **Cash Flows**              |              | **Months**  |              | **Months**  |              | **Months**  |            | **Months** |            | **Months** |            | **Thereafter** |            |
| **Non-derivative financial**                                                                                                                             |                                                                                                      |                                  |                        |              |        |              |        |              |        |            |       |            |       |            |           |
|                                                                                                                                                     | **liabilities**                                                                                           |                                  |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |
|                                                                                                                                                     |                                                                                                      | Accounts payable                      |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |              |
|                                                                                                                                                     |                                                                                                      |                                  | and accrued liabilities (1) | $                 | 530.4  | $                 | 530.4  | $                 | 530.4  | $               | -     | $               | -     | $               | -         | $               | -  | $                 | -  |
|                                                                                                                                                     |                                                                                                      | Total provisions                      |                        | 28.2         |        | 28.2         |        | 22.2         |        | 3.0        |       | 0.4        |       | 0.4        |           | -          |    | 2.2          |
|                                                                                                                                                     |                                                                                                      | Total long-term debt (2)              |                        | 1,173.2      |        | 1,764.1      |        | 102.0        |        | 100.7      |       | 156.2      |       | 89.7       |           | 127.0      |    | 1,188.5      |
|                                                                                                                                                     |                                                                                                      | Other non-current liabilities (3) (4) |                        | 197.5        |        | 390.8        |        | -            |        | 35.1       |       | 13.6       |       | 16.1       |           | 17.3       |    | 308.7        |
|                                                                                                                                                     |                                                                                                      |                                  |                        |              | **$**       | **1,929.3 ** | **$**       | **2,713.5 ** | **$**       | **654.6 ** | **$**      | **138.8 ** | **$**      | **170.2 ** | **$**          | **106.2 ** | **$**   | **144.3 **   | **$**   | **1,499.4 ** |
| **Derivative financial**                                                                                                                                 |                                                                                                      |                                  |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |
|                                                                                                                                                     | **instruments**                                                                                           |                                  |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |
|                                                                                                                                                     |                                                                                                      | Forward foreign                       |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |              |
|                                                                                                                                                     |                                                                                                      |                                  | currency contracts (4)      | $                 | 34.9   |              |        |              |        |            |       |            |       |            |           |            |    |              |    |
|                                                                                                                                                     |                                                                                                      |                                  |                        | Outflow           |        |              | $           | 1,215.2      | $           | 870.1      | $          | 233.7      | $          | 41.9       | $              | 43.2       | $       | 19.6         | $       | 6.7          |
|                                                                                                                                                     |                                                                                                      |                                  |                        | Inflow            |        |              | (1,179.5)   |              | (850.0)     |            | (222.8)    |            | (40.4)     |            | (40.9)         |            | (19.0)  |              | (6.4)   |
|                                                                                                                                                     |                                                                                                      | Swap derivatives on total             |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |              |
|                                                                                                                                                     |                                                                                                      |                                  | long-term debt (5)          |              | (3.0)       |              |        |              |        |            |       |            |       |            |           |            |    |              |    |
|                                                                                                                                                     |                                                                                                      |                                  |                        | Outflow           |        |              |        | 121.4        |        | 15.4       |       | 15.5       |       | 14.8       |           | 13.8       |    | 9.8          |    | 52.1         |
|                                                                                                                                                     |                                                                                                      |                                  |                        | Inflow            |        |              |        | (124.1)           |        | (14.8)          |       | (15.4)          |       | (15.4)          |           | (14.7)          |    | (10.2)            |    | (53.6)            |
|                                                                                                                                                     |                                                                                                      | Equity swap agreement                 |                        | (2.6)             |        | (2.6)             |        | (2.6)             |        | -          |       | -          |       | -          |           | -          |    | -            |
|                                                                                                                                                     |                                                                                                      |                                  |                        |              | **$**       | **29.3 **    | **$**       | **30.4 **    | **$**       | **18.1 **  | **$**      | **11.0 **  | **$**      | **0.9 **   | **$**          | **1.4 **   | **$**   | **0.2 **     | **$**   | **(1.2)**         |
|                                                                                                                                                     |                                                                                                      |                                  | **$**                       | **1,958.6 ** | **$**       | **2,743.9 ** | **$**       | **672.7 **   | **$**       | **149.8 ** | **$**      | **171.1 ** | **$**      | **107.6 ** | **$**          | **144.5 ** | **$**   | **1,498.2 ** |
|                                                                                                                                                     |                                                                                                      |                                  |                        |              |        |              |        |              |        |            |       |            |       |            |           |            |    |              |    |              |   |   |   |   |   |   |   |   |
| (1) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.                                      |
| (2) Contractual cash flows include contractual interest and principal payments related to debt obligations and excludes transaction costs.               |
| (3) Includes non-current royalty obligations and other non-current liabilities.                                                                          |
| (4) Includes forward foreign currency contracts, but excludes all embedded derivatives, either presented as derivative liabilities or derivative assets. |
|                                                                                                                                                     | Outflows and inflows are presented in CAD equivalent using the contractual forward foreign currency rate. |
| (5) Includes interest rate swap and cross currency swaps designated as cash flow hedges either presented as derivative liabilities or derivative assets. |
|                                                                                                                                                     |

CAE Year-End Financial Results 2014 | 51

----

Notes to the Consolidated Financial Statements 

 

|                                                                                                                                                               |                                                                                                      |                              |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |          |    |          |   |   |   |   |   |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|-----------------------------------|-------------------------|---------------|-------------|---------------|-------------|---------------|-------------|-------------|---------|-------------|---------|-------------|------------|-------------|---------|---------------|---------|---------------|--------|--------|--------|--------|--------|--------|--------|--------|
| *As at March 31, 2013*                                                                                                                                             | Carrying                                                                                                  |                              | Contractual             |          |        | 0-12          |        |          | 13-24       |        |    | 25-36       |    |        | 37-48      |        |    | 49-60         |    |          |   |
| *(amounts in millions)*                                                                                                                                            | Amount                                                                                                    |                              | Cash Flows              |          | Months      |          | Months      |          | Months      |        | Months  |        | Months  |        | Thereafter |        |
| **Non-derivative financial**                                                                                                                                       |                                                                                                      |                              |                    |          |        |          |        |          |        |        |    |        |    |        |       |
|                                                                                                                                                               | **liabilities**                                                                                           |                              |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |
|                                                                                                                                                               |                                                                                                      | Accounts payable and              |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |          |
|                                                                                                                                                               |                                                                                                      |                              | accrued liabilities (1) | $             | 501.0  | $             | 501.0  | $             | 501.0  | $           | -  | $           | -  | $           | -     | $           | -  | $             | -  |
|                                                                                                                                                               |                                                                                                      | Total provisions                  |                    | 29.7     |        | 30.1     |        | 26.5     |        | 1.2    |    | 1.7    |    | 0.4    |       | 0.3    |    | -        |
|                                                                                                                                                               |                                                                                                      | Total long-term debt (2)          |                    | 1,078.6  |        | 1,555.5  |        | 108.7    |        | 90.1   |    | 83.0   |    | 133.9  |       | 69.8   |    | 1,070.0  |
|                                                                                                                                                               |                                                                                                      | Other non-current liabilities (3) |                    | 192.5    |        | 396.7    |        | -        |        | 15.3   |    | 31.5   |    | 13.4   |       | 15.9   |    | 320.6    |
|                                                                                                                                                               |                                                                                                      |                              |                    |          | $           | 1,801.8  | $           | 2,483.3  | $           | 636.2  | $       | 106.6  | $       | 116.2  | $          | 147.7  | $       | 86.0     | $       | 1,390.6  |
| **Derivative financial**                                                                                                                                           |                                                                                                      |                              |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |
|                                                                                                                                                               | **instruments**                                                                                           |                              |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |
|                                                                                                                                                               |                                                                                                      | Forward foreign                   |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |          |
|                                                                                                                                                               |                                                                                                      |                              | currency contracts (4)  | $             | 0.9    |          |        |          |        |        |    |        |    |        |       |        |    |          |    |
|                                                                                                                                                               |                                                                                                      |                              |                    | Outflow       |        |          | $           | 682.3    | $           | 519.4  | $       | 64.2   | $       | 56.3   | $          | 18.9   | $       | 22.2     | $       | 1.3      |
|                                                                                                                                                               |                                                                                                      |                              |                    | Inflow        |        |          | (681.6)     |          | (520.2)     |        | (63.5)  |        | (55.9)  |        | (18.8)     |        | (22.0)  |          | (1.2)   |
|                                                                                                                                                               |                                                                                                      | Swap derivatives on total         |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |          |
|                                                                                                                                                               |                                                                                                      |                              | long-term debt (5)      |          | 2.4    |          |        |          |        |        |    |        |    |        |       |        |    |          |    |
|                                                                                                                                                               |                                                                                                      |                              |                    | Outflow       |        |          |        | 131.3    |        | 13.9   |    | 14.5   |    | 14.4   |       | 13.8   |    | 13.0     |    | 61.7     |
|                                                                                                                                                               |                                                                                                      |                              |                    | Inflow        |        |          |        | (127.0)       |        | (12.6)      |    | (13.8)      |    | (14.3)      |       | (14.2)      |    | (13.5)        |    | (58.6)        |
|                                                                                                                                                               |                                                                                                      | Equity swap agreement             |                    | 0.3      |        | 0.3      |        | 0.3      |        | -      |    | -      |    | -      |       | -      |    | -        |
|                                                                                                                                                               |                                                                                                      |                              |                    |          | $           | 3.6      | $           | 5.3      | $           | 0.8    | $       | 1.4    | $       | 0.5    | $          | (0.3)       | $       | (0.3)         | $       | 3.2      |
|                                                                                                                                                               |                                                                                                      |                              | $                       | 1,805.4  | $           | 2,488.6  | $           | 637.0    | $           | 108.0  | $       | 116.7  | $       | 147.4  | $          | 85.7   | $       | 1,393.8  |
|                                                                                                                                                               |                                                                                                      |                              |                    |          |        |          |        |          |        |        |    |        |    |        |       |        |    |          |    |          |   |   |   |   |   |   |   |   |
| (1) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.                                                |
| (2) Contractual cash flows include contractual interest and principal payments related to debt obligations and excludes transaction costs.                         |
| (3) Includes non-current royalty obligations and other non-current liabilities.                                                                                    |
| (4) Includes forward foreign currency contracts, but excludes all embedded derivatives, either presented as derivative liabilities or derivative assets.           |
|                                                                                                                                                               | Outflows and inflows are presented in CAD equivalent using the contractual forward foreign currency rate. |
| (5) Includes interest rate swap and cross currency swap contracts either designated as cash flow hedges or as fair value hedges of long-term debt either presented |
|                                                                                                                                                               | as derivative liabilities or derivative assets.                                                           |
|                                                                                                                                                               |

 

**Market risk**

Market risk is defined as the Company’s exposure to a gain or a loss in the value of its financial instruments as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments traded in the market. The Company is mainly exposed to foreign currency risk and interest rate risk.

 

Derivative instruments are utilized by the Company to manage market risk against the volatility in foreign exchange rates, interest rates and share-based payments in order to minimize their impact on the Company’s results and financial position. The Company’s policy is not to utilize any derivative financial instruments for trading or speculative purposes.

 

***Foreign currency risk***

Foreign currency risk is defined as the Company’s exposure to a gain or a loss in the value of its financial instruments as a result of fluctuations in foreign exchange rates. The Company is exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected purchase transactions and debt denominated in a foreign currency, as well as on the net investment from its foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar (USD), euro (€) and British pound (GBP or £)). In addition, these operations have exposure to foreign exchange rates primarily through cash and cash equivalents and other working capital accounts denominated in currencies other than their functional currencies.

 

The Company also mitigates foreign currency risks by having its foreign operations transact in their functional currency for material procurement, sale contracts and financing activities.

 

The Company uses forward foreign currency contracts and foreign currency swap agreements to manage the Company’s exposure from transactions in foreign currencies and to synthetically modify the currency of exposure of certain financial position items. These transactions include forecasted transactions and firm commitments denominated in foreign currencies.

 

52 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

| The consolidated forward foreign currency contracts outstanding are as follows:                                       |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *(amounts in millions, except average rate)*                                                                          |   |   |   |   |   | **2014 ** |   |   |   |   |   | 2013  |
|                                                                                                                  |   | **Notional** |   |   | **Average** |   | Notional |   |   | Average |   |
| Currencies (sold/bought)                                                                                              | **Amount** |   | **(1)** | **Rate** |   | Amount |   | (1) | Rate |   |
| *USD/CDN*                                                                                                             |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year | **$** | **462.6 ** |   |   | **0.93 ** | $ | 560.3  |   |   | 0.98  |
|                                                                                                                  | Between 1 and 3 years |   | **126.1 ** |   |   | **0.94 ** |   | 80.8  |   |   | 0.98  |
|                                                                                                                  | Between 3 and 5 years |   | **20.8 ** |   |   | **0.95 ** |   | 18.7  |   |   | 0.98  |
|                                                                                                                  | Over 5 years |   | **6.6 ** |   |   | **0.94 ** |   | 1.8  |   |   | 0.97  |
| *CDN/EUR*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **29.8 ** |   |   | **1.52 ** |   | 17.1  |   |   | 1.32  |
|                                                                                                                  | Between 1 and 3 years |   | **10.2 ** |   |   | **1.40 ** |   | -  |   |   | -  |
|                                                                                                                  | Between 3 and 5 years |   | **- ** |   |   | **- ** |   | 7.7  |   |   | 1.40  |
| *EUR/CDN*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **56.9 ** |   |   | **0.68 ** |   | 53.3  |   |   | 0.75  |
|                                                                                                                  | Between 1 and 3 years |   | **39.4 ** |   |   | **0.72 ** |   | 22.3  |   |   | 0.77  |
|                                                                                                                  | Between 3 and 5 years |   | **3.0 ** |   |   | **0.73 ** |   | 10.3  |   |   | 0.72  |
| *EUR/USD*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **62.6 ** |   |   | **0.72 ** |   | 55.9  |   |   | 0.75  |
| *GBP/CDN*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **37.2 ** |   |   | **0.59 ** |   | 47.7  |   |   | 0.63  |
|                                                                                                                  | Between 1 and 3 years |   | **23.2 ** |   |   | **0.61 ** |   | 26.6  |   |   | 0.62  |
|                                                                                                                  | Between 3 and 5 years |   | **0.2 ** |   |   | **0.61 ** |   | 1.4  |   |   | 0.62  |
| *CDN/GBP*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **16.6 ** |   |   | **1.82 ** |   | 15.3  |   |   | 1.56  |
|                                                                                                                  | Between 1 and 3 years |   | **4.8 ** |   |   | **1.74 ** |   | 0.6  |   |   | 1.60  |
| *CDN/USD*                                                                                                             |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **80.5 ** |   |   | **1.11 ** |   | 101.7  |   |   | 1.03  |
|                                                                                                                  | Between 1 and 3 years |   | **14.7 ** |   |   | **1.10 ** |   | 14.9  |   |   | 1.11  |
|                                                                                                                  | Between 3 and 5 years |   | **- ** |   |   | **- ** |   | 0.3  |   |   | 1.08  |
| *GBP/USD*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **41.8 ** |   |   | **0.62 ** |   | 15.9  |   |   | 0.67  |
|                                                                                                                  | Between 1 and 3 years |   | **1.4 ** |   |   | **0.65 ** |   | 11.5  |   |   | 0.65  |
|                                                                                                                  | Between 3 and 5 years |   | **14.5 ** |   |   | **0.65 ** |   | 12.7  |   |   | 0.65  |
| *USD/EUR*                                                                                                             |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **8.3 ** |   |   | **1.37 ** |   | 18.6  |   |   | 1.31  |
| *SEK/USD*                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **4.4 ** |   |   | **6.61 ** |   | 3.7  |   |   | 6.56  |
|                                                                                                                  | Between 1 and 3 years |   | **36.4 ** |   |   | **6.65 ** |   | 22.1  |   |   | 6.68  |
| *Other currencies*                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  | Less than 1 year |   | **64.6 ** |   |   | **- ** |   | 33.5  |   |   | -  |
|                                                                                                                  | Between 1 and 3 years |   | **21.2 ** |   |   | **- ** |   | 2.3  |   |   | -  |
|                                                                                                                  | Between 3 and 5 years |   | **25.4 ** |   |   | **- ** |   | 8.8  |   |   | -  |
| Total                                                                                                                 | **$** | **1,213.2 ** |   |   |   | $ | 1,165.8  |   |   |   |
|                                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (1) Exchange rates as at the end of the respective fiscal years were used to translate amounts in foreign currencies. |   |   |   |   |   |   |   |   |

CAE Year-End Financial Results 2014 | 53

----

Notes to the Consolidated Financial Statements 

 

The Company has entered into foreign currency swap agreements related to its June 2007 senior collateralized financing, to convert a portion of the USD-denominated debt into GBP to finance its civil aviation training centre in the United Kingdom. The Company designated two USD to GBP foreign currency swap agreements as cash flow hedges with outstanding notional amounts of US$0.4 million (£0.2 million) (2013 –  US$1.8 million (£0.9 million)) and US$17.0 million (£8.5 million) (2013 –  US$17.0 million (£8.5 million)), amortized in accordance with the repayment schedule of the debt until June 2014 and June 2018 respectively.

 

In fiscal 2013, the Company entered into interest-only cross currency swap agreements related to its multi-tranche private placement debt issued in December 2012, to effectively fix the USD-denominated interest cash flows in CAD equivalent. The Company designated two USD to CAD interest-only currency swap agreements as cash flow hedges with outstanding notional amounts of US$127.0 million ($130.5 million) (2013 – US$127.0 million [$130.5 million]) and US$98.0 million ($100.7 million) (2013 – US$98.0 million [$100.7 million]) corresponding to the two tranches of the private placement until December 2024 and December 2027 respectively.

 

The Company’s foreign currency hedging programs are typically unaffected by changes in market conditions, as related derivative financial instruments are generally held until their maturity, consistent with the objective to fix currency rates on the hedged item.

 

*Foreign currency risk sensitivity analysis*

The following table presents the Company’s exposure to foreign currency risk of financial instruments and the pre-tax effects on net income and OCI as a result of a reasonably possible strengthening of 5% in the relevant foreign currency against the Canadian dollar as at March 31. This analysis assumes all other variables remain constant.

 

| *(amounts in millions)* | **USD**    |      |    | **€** |   |   | **GBP**       |   |
|-------------------------|------------|-----------|---------|-------------|--------|--------|---------------|--------|
|                    |       |      | **Net** |        |   |   |          |   |   | **Net** |   |   |   |   |   |   | **Net** |   |   |   |   |
|                    | **Income** |      |    | **OCI**     |   |   | **Income**    |   |   | **OCI** |   |   | **Income** |   |   | **OCI** |   |
| **2014 **          | **$**      | **(6.4)** | **$**   | **(19.3)**  |   | **$**  | **3.4 ** | **$**  | **(2.0)** |   | **$** | **(0.1)** | **$** | **(0.2)** |
| 2013               | $          | (1.2)     | $       | (20.6)      |   | $      | 1.4      | $      | (1.6) |   | $ | (0.2) | $ | (2.8) |
|                    |       |      |    |        |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

A reasonably possible weakening of 5% in the relevant foreign currency against the Canadian dollar would have an opposite impact on pre-tax income and OCI.

 

***Interest rate risk***

Interest rate risk is defined as the Company’s exposure to a gain or a loss to the value of its financial instruments as a result of fluctuations in interest rates. The Company bears some interest rate fluctuation risk on its floating rate long-term debt and some fair value risk on its fixed interest long-term debt. The Company mainly manages interest rate risk by fixing project-specific floating rate debt in order to reduce cash flow variability. The Company has a floating rate debt through its revolving unsecured credit facility and other asset-specific floating rate debts. A mix of fixed and floating interest rate debt is sought to reduce the net impact of fluctuating interest rates. Derivative financial instruments used to synthetically convert interest rate exposures are mainly interest rate swap agreements. 

 

As at March 31, 2014, the Company has entered into eight interest rate swap agreements with seven different financial institutions to mitigate these risks for a total notional value of $36.0 million (2013 –  $36.4 million). After considering these swap agreements, as at March 31, 2014, 84% (2013 –  83%) of the long-term debt bears fixed interest rates.

 

The Company’s interest rate hedging programs are typically unaffected by changes in market conditions, as related derivative financial instruments are generally held until their maturity to establish asset and liability management matching, consistent with the objective to reduce risks arising from interest rate movements. As a result, the changes in variable interest rates do not have a significant impact on net income and OCI.

 

*Interest rate risk sensitivity analysis*

In fiscal 2014 and fiscal 2013, a 1% increase/decrease in interest rates would not have a significant impact on the Company’s net income and OCI assuming all other variables remained constant.

 

**Hedge of share-based payments cost**

The Company has entered into equity swap agreements with two major Canadian financial institutions to reduce its income exposure to fluctuations in its share price relating to the DSU and LTI-DSU programs. Pursuant to the agreement, the Company receives the economic benefit of dividends and share price appreciation while providing payments to the financial institutions for the institution’s cost of funds and any share price depreciation. The net effect of the equity swaps partly offset movements in the Company’s share price impacting the cost of the DSU and LTI-DSU programs and is reset quarterly. As at March 31, 2014, the equity swap agreements covered 2,400,000 common shares (2013 –  2,706,816) of the Company.

**Hedge of net investments in foreign operations**

As at March 31, 2014, the Company has designated a portion of its senior notes totalling US$417.8 million (2013 – US$417.8 million) and a portion of the sale lease back obligation totalling US$16.1 million (2013 –  US$17.9 million) as a hedge of its net investments in foreign operations. Gains or losses on the translation of the designated portion of its senior notes are recognized in OCI to offset any foreign exchange gains or losses on translation of the financial statements of foreign operations.

54 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

**Letters of credit and guarantees**

As at March 31, 2014, the Company had outstanding letters of credit and performance guarantees in the amount of $191.4 million (2013 – $198.7 million) issued in the normal course of business. These guarantees are issued mainly under the Revolving Term Credit Facility as well as the Performance Securities Guarantee (PSG) account provided by Export Development Corporation (EDC) and under other standby facilities available to the Company through various financial institutions.

The advance payment guarantees are related to progress/milestone payments made by the Company’s customers and are reduced or eliminated upon delivery of the product. The contract performance guarantees are linked to the completion of the intended product or service rendered by the Company and to the customer’s requirements. It represents 10% to 20% of the overall contract amount. The customer releases the Company from these guarantees at the signing of a certificate of completion. The letter of credit for the lease obligation provides credit support for the benefit of the owner participant on a sale and leaseback transaction and varies according to the payment schedule of the lease agreement.

 

| *(amounts in millions)***** |   |   |   | **2014 **  |   |   | 2013   |
|-----------------------------|--------|--------|--------|-----------------|--------|--------|-------------|
| Advance payment             |   |   | **$**  | **40.6 **  |   | $      | 59.0   |
| Contract performance        |   |   |   | **31.2 **  |   |   | 14.7   |
| Lease obligation            |   |   |   | **26.7 **  |   |   | 24.2   |
| Financial obligations       |   |   |   | **81.9 **  |   |   | 93.1   |
| Other                       |   |   |   | **11.0 **  |   |   | 7.7    |
|                        |   |   | **$**  | **191.4 ** |   | $      | 198.7  |
|                        |   |   |   |            |   |   |        |   |   |   |
|                        |   |   |   |            |   |   |        |   |   |   |

 

**Sale and leaseback transactions**

For certain sale and leaseback transactions, the Company has agreed to guarantee the residual value of the underlying equipment in the event that the equipment is returned to the lessor and the net proceeds of any eventual sale do not cover the guaranteed amount. The maximum amount of exposure is $14.5 million (2013 – $14.5 million), of which $9.6 million matures in fiscal year 2020 and $4.9 million in fiscal year 2023. Of this amount, as at March 31, 2014, $12.1 million is recorded as a deferred gain (2013 ‐ $12.4 million). 

 

**Indemnifications**

In certain instances when the Company sells businesses, it may retain certain liabilities for known exposures and provide indemnification to the buyer with respect to future claims for certain unknown liabilities that exist, or arise from events occurring, prior to the sale date, including liabilities for taxes, legal matters, environmental exposures, product liability, and other obligations. The terms of the indemnifications vary in duration, from one to two years for certain types of indemnities, terms for tax indemnifications that are generally aligned to the applicable statute of limitations for the jurisdiction in which the divestiture occurred, and terms for environmental liabilities that typically do not expire. The maximum potential future payments that the Company could be required to make under these indemnifications are either contractually limited to a specified amount or unlimited. The Company believes that other than the liabilities already accrued, the maximum potential future payments that it could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all available defences, which cannot be estimated. However, historically, costs incurred to settle claims related to these indemnifications have not been material to the Company’s consolidated financial position, net income or cash flows.

CAE Year-End Financial Results 2014 | 55

----

Notes to the Consolidated Financial Statements 

 

**NOTE 31 – OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION**

The Company elected to organize its businesses based principally on products and services. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The Company manages operations through its five segments (see Note 1). 

 

**Results by segment**

The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing segment performance is operating profit (hereinafter referred to as segment operating income). The accounting principles used to prepare the information by operating segments are the same as those used to prepare the Company’s consolidated financial statements. Transactions between operating segments are mainly simulator transfers from the SP/C segment to the TS/C segment, which are recorded at cost. The method used for the allocation of assets jointly used by operating segments and costs and liabilities jointly incurred (mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the allocation is based on a proportion of each segment’s cost of sales.

 

| *Year ended March 31, 2014*           |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |           |   |    |   |   |      |   |   |
|---------------------------------------|-------------------------------------|-----------------|----------------|-----------------|---------------|-------------------|----------------|-----------------|---------------|-----------------|----------------|-----------------|----------------|-----------------|----------------|-------------------|----------------|--------|---------|--------|--------|-----------|--------|--------|
| *(amounts in millions)*               |                                | **TS/C**        |           |            | **SP/C**      |              |           | **Civil**       |          |            | **SP/M**       |            |           | **TS/M**        |           | **Military**      |           |   | **NCM** |   |   | **Total** |   |
| External revenue                      | **$**                               | **715.3 ** | **$**          | **461.4 ** | **$**         | **1,176.7 ** | **$**          | **529.3 ** | **$**         | **292.7 ** | **$**          | **822.0 ** | **$**          | **116.2 ** | **$**          | **2,114.9 ** |
| Depreciation and amortization         |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | Property, plant and equipment       |            | **80.9 ** |            | **4.7 ** |              | **85.6 ** |            | **7.3 ** |            | **3.6 **  |            | **10.9 ** |            | **3.0 **  |              | **99.5 ** |
|                                  | Intangible and other assets         |            | **17.4 ** |            | **7.5 ** |              | **24.9 ** |            | **9.9 ** |            | **21.6 ** |            | **31.5 ** |            | **11.2 ** |              | **67.6 ** |
| Impairment and reversal of impairment |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | of non-financial assets (Note 20)   |            | **0.6 **  |            | **- **   |              | **0.6 **  |            | **- **   |            | **- **    |            | **- **    |            | **- **    |              | **0.6 **  |
| Write-downs and reversals of          |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | write-downs of inventories (Note 5) | **- **     |           | **0.2 **   |          | **0.2 **     |           | **0.1 **   |          | **0.1 **   |           | **0.2 **   |           | **- **     |           | **0.4 **     |
| Write-downs and reversals of          |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | write-downs of accounts receivable  |            | **0.9 **  |            | **0.3 ** |              | **1.2 **  |            | **2.6 ** |            | **0.3 **  |            | **2.9 **  |            | **(0.1)**      |              | **4.0 **  |
| After tax share in profit of equity   |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | accounted investees                 |            | **18.7 ** |            | **- **   |              | **18.7 ** |            | **(0.2)**     |            | **11.5 ** |            | **11.3 ** |            | **- **    |              | **30.0 ** |
| Segment operating income              |                                | **96.3 **  |           | **83.5 **  |          | **179.8 **   |           | **77.4 **  |          | **30.4 **  |           | **107.8 ** |           | **4.2 **   |           | **291.8 **   |
|                                  |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |           |   |    |   |   |      |   |   |   |
| *Year ended March 31, 2013*           |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |           |   |    |   |   |      |   |   |
| *(amounts in millions)*               |                                | TS/C            |           |            | SP/C          |              |           | Civil           |          |            | SP/M           |            |           | TS/M            |           | Military          |           |   | NCM     |   |   | Total     |   |
| External revenue                      | $                                   | 659.8      | $              | 456.8      | $             | 1,116.6      | $              | 562.5      | $             | 244.0      | $              | 806.5      | $              | 112.1      | $              | 2,035.2      |
| Depreciation and amortization         |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | Property, plant and equipment       |            | 74.5      |            | 4.6      |              | 79.1      |            | 8.4      |            | 3.7       |            | 12.1      |            | 2.7       |              | 93.9      |
|                                  | Intangible and other assets         |            | 18.0      |            | 4.0      |              | 22.0      |            | 6.9      |            | 10.9      |            | 17.8      |            | 9.0       |              | 48.8      |
| Write-downs and reversals of          |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | write-downs of inventories (Note 5) | -          |           | (0.3)           |          | (0.3)             |           | (0.2)           |          | (0.1)           |           | (0.3)           |           | 0.4        |           | (0.2)             |
| Write-downs and reversals of          |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | write-downs of accounts receivable  |            | 3.0       |            | 0.3      |              | 3.3       |            | 0.2      |            | -         |            | 0.2       |            | 0.5       |              | 4.0       |
| After tax share in profit of equity   |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |
|                                  | accounted investees                 |            | 14.2      |            | -        |              | 14.2      |            | 1.5      |            | 4.4       |            | 5.9       |            | -         |              | 20.1      |
| Segment operating income              |                                | 100.7      |           | 88.2       |          | 188.9        |           | 80.0       |          | 27.4       |           | 107.4      |           | 6.4        |           | 302.7        |
|                                  |                                |            |           |            |          |              |           |            |          |            |           |            |           |            |           |              |           |   |    |   |   |      |   |   |   |

56 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

| **Operating profit**                                                                                       |   |            |   |        |   |   |
|------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|-------------|--------|--------|
| The following table provides a reconciliation between total segment operating income and operating profit: |   |            |   |        |   |   |
|                                                                                                       |   |            |   |        |   |   |   |
| *(amounts in millions)*                                                                                    |   | **2014 **  |   | 2013   |
| Total segment operating income                                                                             | **$**  | **291.8 ** | $      | 302.7  |
| Restructuring, integration and acquisition costs (Note 22)                                                 |   | **- **     |   | (68.7)      |
| Operating profit                                                                                           | **$**  | **291.8 ** | $      | 234.0  |
|                                                                                                       |   |            |   |        |   |   |   |

 

| Capital expenditures which consist of additions to non-current assets (other than financial instruments and deferred tax assets), by segment are as follows: |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                         |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                                                                                      |   |   |   | **2014 ** |   |   | 2013  |
| TS/C                                                                                                                                                         |   |   | **$** | **137.5 ** |   | $ | 91.2  |
| SP/C                                                                                                                                                         |   |   |   | **31.2 ** |   |   | 25.3  |
| SP/M                                                                                                                                                         |   |   |   | **22.3 ** |   |   | 31.3  |
| TS/M                                                                                                                                                         |   |   |   | **20.0 ** |   |   | 14.5  |
| NCM                                                                                                                                                          |   |   |   | **16.5 ** |   |   | 12.6  |
| Total capital expenditures                                                                                                                                   |   |   | **$** | **227.5 ** |   | $ | 174.9  |

 

**Assets and liabilities employed by segment**

The Company uses assets employed and liabilities employed to assess resources allocated to each segment. Assets employed include accounts receivable, contracts in progress, inventories, prepayments, property, plant and equipment, intangible assets, investment in equity accounted investees, derivative financial assets and other assets. Liabilities employed include accounts payable and accrued liabilities, provisions, contracts in progress, deferred gains and other non-current liabilities and derivative financial liabilities. 

 

| Assets and liabilities employed by segment are reconciled to total assets and liabilities as follows: |
|-------------------------------------------------------------------------------------------------------|
|                                                                                                  |   |   |   |   |   |   |   |   |   |
| *(amounts in millions)*                                                                               |   |   |   | **2014 ** |   |   | 2013  |
| **Assets employed**                                                                                   |   |   |   |   |   |   |   |   |   |
| TS/C                                                                                                  |   |   | **$** | **1,946.6 ** |   | $ | 1,697.6  |
| SP/C                                                                                                  |   |   |   | **417.7 ** |   |   | 326.8  |
| SP/M                                                                                                  |   |   |   | **584.5 ** |   |   | 579.1  |
| TS/M                                                                                                  |   |   |   | **403.7 ** |   |   | 303.6  |
| NCM                                                                                                   |   |   |   | **272.4 ** |   |   | 249.4  |
| Assets not included in assets employed                                                                |   |   |   | **611.8 ** |   |   | 534.8  |
| Total assets                                                                                          |   |   | **$** | **4,236.7 ** |   | $ | 3,691.3  |
| **Liabilities employed**                                                                              |   |   |   |   |   |   |   |   |   |
| TS/C                                                                                                  |   |   | **$** | **243.5 ** |   | $ | 232.9  |
| SP/C                                                                                                  |   |   |   | **344.5 ** |   |   | 270.4  |
| SP/M                                                                                                  |   |   |   | **229.6 ** |   |   | 253.0  |
| TS/M                                                                                                  |   |   |   | **191.3 ** |   |   | 151.6  |
| NCM                                                                                                   |   |   |   | **50.0 ** |   |   | 50.2  |
| Liabilities not included in liabilities employed                                                      |   |   |   | **1,695.6 ** |   |   | 1,586.8  |
| Total liabilities                                                                                     |   |   | **$** | **2,754.5 ** |   | $ | 2,544.9  |

CAE Year-End Financial Results 2014 | 57

----

Notes to the Consolidated Financial Statements 

 

| **Geographic information**                                                                                                                                                                                                                                                 |                     |   |   |           |              |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|--------|--------|----------------|-------------------|--------|
| The Company markets its products and services globally. Sales are attributed to countries based on the location of customers. Non-current assets other than financial instruments and deferred tax assets are attributed to countries based on the location of the assets. |
|                                                                                                                                                                                                                                                                       |                     |   |   |           |              |   |   |   |   |   |
| *(amounts in millions)*                                                                                                                                                                                                                                                    |                     |   |   | **2014 ** |              |   | 2013  |
| Revenue from external customers                                                                                                                                                                                                                                            |                     |   |   |           |              |   |   |   |   |
|                                                                                                                                                                                                                                                                       | Canada                   |   |   | **$**          | **174.2 **   |   | $ | 205.3  |
|                                                                                                                                                                                                                                                                       | United States            |   |   |           | **665.3 **   |   |   | 617.8  |
|                                                                                                                                                                                                                                                                       | United Kingdom           |   |   |           | **256.9 **   |   |   | 236.8  |
|                                                                                                                                                                                                                                                                       | Germany                  |   |   |           | **71.5 **    |   |   | 71.2  |
|                                                                                                                                                                                                                                                                       | Other European countries |   |   |           | **374.6 **   |   |   | 320.5  |
|                                                                                                                                                                                                                                                                       | United Arab Emirates     |   |   |           | **67.5 **    |   |   | 49.2  |
|                                                                                                                                                                                                                                                                       | China                    |   |   |           | **139.5 **   |   |   | 156.8  |
|                                                                                                                                                                                                                                                                       | Other Asian countries    |   |   |           | **181.7 **   |   |   | 198.1  |
|                                                                                                                                                                                                                                                                       | Australia                |   |   |           | **79.9 **    |   |   | 91.0  |
|                                                                                                                                                                                                                                                                       | Other countries          |   |   |           | **103.8 **   |   |   | 88.5  |
|                                                                                                                                                                                                                                                                       |                     |   |   | **$**          | **2,114.9 ** |   | $ | 2,035.2  |

 

| *(amounts in millions)*                                                     |                     |   | **2014 ** |              | 2013  |
|-----------------------------------------------------------------------------|--------------------------|--------|----------------|-------------------|------------|
| Non-current assets other than financial instruments and deferred tax assets |                     |   |           |              |       |   |
|                                                                        | Canada                   |   | **$**          | **775.9 **   | $          | 600.5  |
|                                                                        | United States            |   |           | **715.9 **   |       | 614.5  |
|                                                                        | Brazil                   |   |           | **82.9 **    |       | 83.4  |
|                                                                        | United Kingdom           |   |           | **335.6 **   |       | 285.8  |
|                                                                        | Luxembourg               |   |           | **168.6 **   |       | 144.4  |
|                                                                        | Netherlands              |   |           | **128.0 **   |       | 96.8  |
|                                                                        | Other European countries |   |           | **300.7 **   |       | 266.0  |
|                                                                        | Asian countries          |   |           | **74.3 **    |       | 47.7  |
|                                                                        | Other countries          |   |           | **105.6 **   |       | 95.6  |
|                                                                        |                     |   | **$**          | **2,687.5 ** | $          | 2,234.7  |
|                                                                        |                     |   |           |              |       |   |   |   |

 

**NOTE 32 – related party relationships**

 

| The following table includes principal investments which significantly impact the results or assets of the Company: |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |   |   |   |   |   |   |
| **Investments in subsidiaries consolidated in the Company’s financial statements:**                           |   |   |   |   |
|                                                                                                                |   |   |   |   |   |   |
|                                                                                                                |   |   | **% equity** |   | % equity |   |
| *As at March 31*                                                                                                    |   | **interest** |   | interest |   |
| Name                                                                                                                | Country of incorporation | **2014 ** | 2013  |
| 7320701 Canada Inc.                                                                                                 | Canada | **100.0%** | 100.0% |
| 8218765 Canada Inc                                                                                                  | Canada | **100.0%** | 100.0% |
| BGT BioGraphic Technologies Inc.                                                                                    | Canada | **- ** | 100.0% |
| CAE (UK) PLC                                                                                                        | United Kingdom | **100.0%** | 100.0% |
| CAE (US) Inc.                                                                                                       | United States | **100.0%** | 100.0% |
| CAE (US) LLC                                                                                                        | United States | **100.0%** | 100.0% |
| CAE Aircrew Training Services PLC                                                                                   | United Kingdom | **77.9%** | 77.9% |
| CAE Australia Pty Ltd.                                                                                              | Australia | **100.0%** | 100.0% |
| CAE Aviation Training B.V.                                                                                          | Netherlands | **100.0%** | 100.0% |
| CAE Aviation Training Chile Limitada                                                                                | Chile | **100.0%** | 100.0% |
| CAE Aviation Training International Ltd.                                                                            | Mauritius | **100.0%** | 100.0% |
| CAE Aviation Training Peru S.A.                                                                                     | Peru | **100.0%** | 100.0% |
| CAE Beyss Grundstücksgesellschaft mbH                                                                          | Germany | **100.0%** | 100.0% |
| CAE Brunei Multi Purpose Training Centre Sdn Bhd                                                                    | Brunei | **60.0%** | 60.0% |
| CAE Center Amsterdam B.V.                                                                                           | Netherlands | **100.0%** | 100.0% |
| CAE Center Brussels N.V.                                                                                            | Belgium | **100.0%** | 100.0% |
| CAE China Support Services Company Limited                                                                          | China | **100.0%** | 100.0% |
| CAE Civil Aviation Training Solutions, Inc.                                                                         | United States | **100.0%** | 100.0% |
| CAE Delaware Buyco Inc.                                                                                             | United States | **100.0%** | 100.0% |
| CAE Dubai L.L.C.                                                                                                    | Dubai | **49.0%** | -  |
| CAE Electronik GmbH                                                                                                 | Germany | **100.0%** | 100.0% |
| CAE Engineering Korlátolt Felelősségű Társaság                                        | Hungary | **100.0%** | 100.0% |
| CAE Euroco S.à r.l.                                                                                            | Luxembourg | **100.0%** | 100.0% |
| CAE Flight & Simulator Services Sdn. Bhd.                                                                       | Malaysia | **100.0%** | 100.0% |
| CAE Flight and Simulator Services Korea, Ltd.                                                                       | Korea | **100.0%** | -  |
| CAE Flight Solutions USA Inc.                                                                                       | United States | **100.0%** | 100.0% |
| CAE Flight Training Center Mexico, S.A. de C.V.                                                                     | Mexico | **100.0%** | 100.0% |
| CAE Flightscape Inc.                                                                                                | Canada | **100.0%** | 100.0% |
| CAE Global Academy Évora, SA                                                                                   | Portugal | **100.0%** | 100.0% |
| CAE Healthcare Canada Inc.                                                                                          | Canada | **100.0%** | 100.0% |
| CAE Healthcare Inc.                                                                                                 | United States | **100.0%** | 100.0% |
| CAE Holdings B.V.                                                                                                   | Netherlands | **100.0%** | 100.0% |
| CAE Holdings Limited                                                                                                | United Kingdom | **100.0%** | 100.0% |
| CAE India Private Limited                                                                                           | India | **76.0%** | 76.0% |
| CAE Integrated Enterprise Solutions Australia Pty Ltd.                                                              | Australia | **100.0%** | 100.0% |
| CAE Integrated Enterprise Solutions USA Inc.                                                                        | United States | **100.0%** | -  |
| CAE International Capital Management Hungary LLC                                                                    | Hungary | **100.0%** | 100.0% |
| CAE International Holdings Limited                                                                                  | Canada | **100.0%** | 100.0% |
| CAE Investments S.à r.l.                                                                                       | Luxembourg | **100.0%** | 100.0% |
| CAE Japan Flight Training Inc.                                                                                      | Japan | **100.0%** | -  |
| CAE Labuan Inc.                                                                                                     | Malaysia | **100.0%** | 100.0% |
| CAE Luxembourg Acquisition, S.à r.l.                                                                           | Luxembourg | **100.0%** | 100.0% |
| CAE Luxembourg Financing, S.à r.l.                                                                             | Luxembourg | **100.0%** | 100.0% |
| CAE Management Luxembourg S.à r.l.                                                                             | Luxembourg | **100.0%** | 100.0% |
| CAE Melbourne Flight Training Pty Ltd                                                                               | Australia | **100.0%** | 100.0% |
| CAE Mining Canada Inc.                                                                                              | Canada | **100.0%** | 100.0% |
| CAE Mining Corporate Limited                                                                                        | United Kingdom | **100.0%** | 100.0% |
| CAE Mining Holdings Inc.                                                                                            | Canada | **100.0%** | 100.0% |
| CAE North East Training Inc.                                                                                        | United States | **100.0%** | 100.0% |
| CAE Oxford Aviation Academy Amsterdam B.V.                                                                          | Netherlands | **100.0%** | 100.0% |
| CAE Oxford Aviation Academy Phoenix Inc.                                                                            | United States | **100.0%** | 100.0% |
| CAE Services (Canada) Inc.                                                                                          | Canada | **100.0%** | 100.0% |
| CAE Services GmbH                                                                                                   | Germany | **100.0%** | 100.0% |
| CAE Services Italia S.r.l.                                                                                          | Italy | **100.0%** | 100.0% |
| CAE Servicios Globales de Instrucción de Vuelo (España), S.L.                                             | Spain | **100.0%** | 100.0% |
| CAE Shanghai Company, Limited                                                                                       | China | **100.0%** | 100.0% |
| CAE SimuFlite Inc.                                                                                                  | United States | **100.0%** | 100.0% |
| CAE Simulation Technologies Private Limited                                                                         | India | **100.0%** | 100.0% |
| CAE Simulator Services Inc.                                                                                         | Canada | **100.0%** | 100.0% |
| CAE Singapore (S.E.A.) Pte Ltd.                                                                                     | Singapore | **100.0%** | 100.0% |
| CAE South America Flight Training do Brasil Ltda.                                                                   | Brazil | **100.0%** | 100.0% |
| CAE STS Limited                                                                                                     | United Kingdom | **100.0%** | 100.0% |
| CAE Training & Services Brussels NV                                                                             | Belgium | **100.0%** | 100.0% |
| CAE Training & Services UK Ltd.                                                                                 | United Kingdom | **100.0%** | 100.0% |
| CAE Training Aircraft B.V.                                                                                          | Netherlands | **100.0%** | 100.0% |
| CAE Training Norway AS                                                                                              | Norway | **100.0%** | 100.0% |
| CAE USA Inc.                                                                                                        | United States | **100.0%** | 100.0% |
| CAE Verwaltungsgesellschaft mbH                                                                                     | Germany | **100.0%** | 100.0% |
| Engenuity Holdings (USA) Inc.                                                                                       | United States | **100.0%** | 100.0% |
| Flight Simulator-Capital L.P.                                                                                       | Canada | **100.0%** | 100.0% |
| Flight Training Device (Mauritius) Ltd.                                                                             | Mauritius | **100.0%** | 100.0% |
| GCAT Flight Academy Germany GmbH                                                                                    | Germany | **100.0%** | 100.0% |
| GCAT Flight Academy Malta Ltd.                                                                                      | Malta | **100.0%** | 100.0% |
| International Flight School (Mauritius) Ltd.                                                                        | Mauritius | **100.0%** | 100.0% |
| Invertron Simulators PLC                                                                                            | United Kingdom | **100.0%** | 100.0% |
| Kestrel Technologies Pte Ltd.                                                                                       | Singapore | **100.0%** | 100.0% |
| Oxford Aviation Academy European Holdings AB                                                                        | Sweden | **100.0%** | 100.0% |
| Oxford Aviation Academy Finance Ltd.                                                                                | Ireland | **100.0%** | 100.0% |
| Oxford Aviation Academy Ireland Holdings Ltd.                                                                       | Ireland | **100.0%** | 100.0% |
| Oxford Aviation Academy (Oxford) Ltd.                                                                               | United Kingdom | **100.0%** | 100.0% |
| Oxford Aviation Academy Norway Holdings AS                                                                          | Norway | **100.0%** | 100.0% |
| Presagis Canada Inc.                                                                                                | Canada | **100.0%** | 100.0% |
| Presagis Europe (S.A.)                                                                                              | France | **100.0%** | 100.0% |
| Presagis USA Inc.                                                                                                   | United States | **100.0%** | 100.0% |
| Servicios de Instrucción de Vuelo, S.L.                                                                        | Spain | **80.0%** | 80.0% |
| Simubel N.V. (a CAE Aviation Training Company)                                                                      | Belgium | **100.0%** | 100.0% |
| Simulator Sevicios Mexico, S.A. de C.V.                                                                             | Mexico | **100.0%** | 100.0% |
| SIV Ops Training, S.L.                                                                                              | Spain | **100.0%** | 100.0% |

58 | CAE Year-End Financial Results 2014

----

Notes to the Consolidated Financial Statements 

 

| **Investments in joint ventures accounted for under the equity method:** |                     |           |         |     |
|--------------------------------------------------------------------------|--------------------------|----------------|--------------|----------|
|                                                                     |                     |           |         |     |   |   |
|                                                                     |                     |           | **% equity** |     | % equity |   |
| *As at March 31*                                                         |                     | **interest**   |         | interest |   |
| Name                                                                     | Country of incorporation | **2014 ** | 2013    |
| Asian Aviation Centre of Excellence Sdn. Bhd.                            | Malaysia                 | **50.0%**      | 50.0%        |
| CAE Flight Training (India) Private Limited                              | India                    | **50.0%**      | 50.0%        |
| CAE Japan Flight Training Inc.                                           | Japan                    | **- **    | 51.0%        |
| CAE-Lider Training do Brasil Ltda.                                       | Brazil                   | **50.0%**      | 50.0%        |
| China Southern West Australia Flying College Pty Ltd.                    | Australia                | **47.1%**      | 47.1%        |
| Embraer CAE Training Services (UK) Limited                               | United Kingdom           | **49.0%**      | 49.0%        |
| Embraer CAE Training Services, LLC                                       | United States            | **49.0%**      | 49.0%        |
| Emirates-CAE Flight Training LLC                                         | United Arab Emirates     | **49.0%**      | 49.0%        |
| Hatsoff Helicopter Training Private Limited                              | India                    | **50.0%**      | 50.0%        |
| Helicopter Training Media International GmbH                             | Germany                  | **50.0%**      | 50.0%        |
| HFTS Helicopter Flight Training Services GmbH                            | Germany                  | **25.0%**      | 25.0%        |
| National Flying Training Institute Private Limited                       | India                    | **51.0%**      | 51.0%        |
| Philippine Academy for Aviation Training Inc.                            | Philippine               | **50.0%**      | 50.0%        |
| Rotorsim s.r.l.                                                          | Italy                    | **50.0%**      | 50.0%        |
| Rotorsim USA LLC                                                         | United States            | **50.0%**      | 50.0%        |
| Zhuhai Xiang Yi Aviation Technology Company Limited                      | China                    | **49.0%**      | 49.0%        |

 

In fiscal 2014, the unrecognized share of losses of joint ventures for which the Company has ceased to recognize its share of losses when applying the equity method was $1.6 million (2013 - $1.9 million). The cumulative unrecognized share of losses for these entities was $8.9 million at March 31, 2014 (2013 - $7.3 million, April 1, 2012 - $5.4 million). The cumulative unrecognized share of comprehensive loss of joint ventures was $11.0 million (2013 - $11.9 million, April 1, 2012 - $9.2 million).

CAE Year-End Financial Results 2014 | 59

----

Notes to the Consolidated Financial Statements 

**NOTE 33 – Related Party Transactions**

The following table presents the Company’s outstanding balances with its joint ventures:

 

| *(amounts in millions)*                           |   |   |   | **2014 ** |   |   | 2013  |
|---------------------------------------------------|--------|--------|--------|----------------|--------|--------|------------|
| Accounts receivable (Note 4)                      |   |   | **$**  | **30.1 ** |   | $      | 49.9  |
| Contracts in progress: assets                     |   |   |   | **13.5 ** |   |   | 41.3  |
| Other assets                                      |   |   |   | **30.6 ** |   |   | 34.3  |
| Accounts payable and accrued liabilities (Note 9) |   |   |   | **16.3 ** |   |   | 25.3  |
| Contracts in progress: liabilities                |   |   |   | **6.3 **  |   |   | 9.3   |

 

Other assets include a finance lease receivable of $16.9 million (March 31, 2013 - $19.0 million) maturing in October 2022 and carrying an interest rate of 5.14% per annum, loans receivable of $8.4 million (March 31, 2013 - $10.4 million) maturing in September 2016 and December 2017 and carrying respectively an interest rate of LIBOR 6 month plus 1% and 11% per annum and a long-term receivable of $5.3 million (March 31, 2013 – $4.9 million) with no repayment term. As at March 31, 2014 and 2013, there are no provisions held against any of the receivables from related parties.

 

The following table presents the Company’s transactions with its joint ventures:

 

| *(amounts in millions)*                       |   |   |   | **2014 **  |   |   | 2013   |
|-----------------------------------------------|--------|--------|--------|-----------------|--------|--------|-------------|
| Revenue from products and services            |   |   | **$**  | **101.0 ** |   | $      | 131.5  |
| Purchases of products and services, and other |   |   |   | **11.3 **  |   |   | 12.3   |
| Other income transactions                     |   |   |   | **2.9 **   |   |   | 2.8    |

 

In addition, during fiscal 2014, transactions amounting to $2.7 million (2013 –  $4.3 million) were made, at normal market prices, with organizations whose partners or officers included one of the Company’s directors. 

 

**Compensation of key management personnel**

Key management personnel have the ability and responsibility to make major operational, financial and strategic decisions for the Company and include certain executive officers. The compensation of key management for employee services is shown below:

 

| *(amounts in millions)*                                             |   |   |   | **2014 ** |   |   | 2013  |
|---------------------------------------------------------------------|--------|--------|--------|----------------|--------|--------|------------|
| Salaries and other short-term employee benefits                     |   |   | **$**  | **3.8 **  |   | $      | 4.0   |
| Post-employment benefits(1)                                         |   |   |   | **1.6 **  |   |   | 2.0   |
| Termination benefits                                                |   |   |   | **2.4 **  |   |   | -     |
| Share-based payments                                                |   |   |   | **6.4 **  |   |   | 2.4   |
|                                                                |   |   | **$**  | **14.2 ** |   | $      | 8.4   |
| (1)Includes net interest on employee benefits obligations (Note 14) |   |   |   |           |   |   |       |   |   |
|                                                                |   |   |   |           |   |   |       |   |   |

 

60 | CAE Year-End Financial Results 2014