Quarterly report, IFRS 15 adopted, modified retrospective method adopted, effect on current period

Nuvo Pharmaceuticals Inc.  – Quarterly report – 31 March 2018 

Industry: pharma

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited) (extract)

Unless noted otherwise, all amounts shown are in thousands of Canadian dollars, except per share amounts.

  1. BASIS OF PREPARATION (extract)

Accounting Standards Adopted (extract)

IFRS 15 – Revenue from Contracts with Customers

The Company has adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) with a date of initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company applied IFRS 15 using the modified retrospective approach which requires the Company to recognize the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of equity as at January 1, 2018. Therefore, the comparative information has not been restated and continues to be reported under IAS 18 – Revenue. See Note 3, Changes in Accounting Policies, for details of the significant changes and quantitative impact of the changes.

The Company applied IFRS 15 using the practical expedient under which the Company elected to apply IFRS 15 retrospectively only to contracts that were not completed at the date of initial application.

For all contracts that were modified before the beginning of the earliest period presented, the Company applied IFRS 15 using the practical expedient, whereby the Company reflects the aggregate effect of all of the modifications that occurred as at January 1, 2018 when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the remaining performance obligations.

Revenue Recognition

Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue when it transfers control over a product or service to a customer.

The following is a description of principal activities where the Company generates revenue. The Company has disclosed the nature, timing of satisfaction of performance obligations and significant payment terms.

Product Sales

Revenue from product sales is recognized when the Company transfers control of the product. Control of the product transfers upon shipment of the product to the customer or when the product is made available to the customer, provided transfer of title to the customer occurs and the Company has not retained any significant risks of ownership or future obligations with respect to the product shipped. The transaction price is documented on the sales invoice and agreed to by the customer. Payment is generally due at the time of delivery, as such a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due.

License Revenue

The Company enters into licensing agreements for IP rights to the Company’s commercial products. Consideration tied to the licensing arrangement may include non-refundable upfront fees, milestone payments and sales-based royalties.

Under the terms of the licensing arrangements, the Company provides the customer with a right to use the Company’s IP as it exists at the point in time the license is granted. Revenue arising from the license of IP rights is recognized when the Company transfers control of the IP. This usually occurs when the customer signs the agreement or shortly thereafter.

The Company has applied the royalty exception for both sales-based royalties and milestone payments contingent on sales-based thresholds. Royalties are typically calculated as a percentage of net sales realized by the Company’s licensees of its products (including their sublicensees), as specifically defined in each agreement. The licensees’ sales generally consist of revenue from product sales of the Company’s pharmaceutical products, and net sales are generally determined by deducting the following: estimates for chargebacks, rebates, sales incentives and allowances, returns and losses and other customary deductions in each region where the Company has licensees. The Company recognizes the sales-based royalties and milestone payments contingent on sales-based thresholds monthly as the subsequent sales occur.

For milestone payments that are not contingent on sales-based thresholds, the Company applies a most-likely amount approach on a contract-by-contract basis. Management makes an assessment of the amount of revenue expected to be received based on the probability of the milestone outcome. Variable consideration is included in revenue only to the extent that it is highly probable that the amount will not be subject to a significant reversal when the uncertainty is resolved (generally when the milestone outcome is satisfied).

When licensing agreements include minimum guaranteed sales-based royalties, the Company assesses whether the contractual minimums are subject to any uncertainty. If the contractual minimums are considered fixed consideration (where a significant reversal is remote), the Company recognizes all of the contractual minimums when control of the IP rights is transferred. Any sales-based royalties earned in excess of the contractual minimums would be recognized in accordance with the royalty exception (when the subsequent sales occur). Revenues earned from minimum guaranteed sales-based royalties are billed as the customer generates net sales; generally, on a quarterly basis in accordance with the agreed-upon contractual terms. The Company’s customer contracts can range from 1 to 10 years; therefore, there can be a significant time differential between revenue recognition and the corresponding receipt of cash flows. As a result, the Company has adjusted the fixed consideration for the effects of the time value of money applying a discount rate of 25%.

Revenues earned from the license of IP rights are billed after control has transferred. Timing of recognition will depend on the nature of the event and the terms of the arrangement, including sales-based royalties, milestone payments or upfront fees. Customers are usually required to make payment within thirty days of billing.

Contract Revenue

Revenues from contracted services are generally recognized at the point in time the contracted services are performed. Contract services are mainly derived from development services provided by the Company to its partners.

Revenues earned from contract services are billed when the related services are complete. Customers are usually required to make payment within thirty days of billing.

Contract Costs

The Company recognizes and amortizes the incremental costs of obtaining a contract when incurred consistent with the transfer to the customer of the related license or sale of IP rights.

  1. CHANGES IN ACCOUNTING POLICIES (extract)

IFRS 15 – Revenue from Contracts with Customers

The Company has adopted IFRS 15 with a date of initial application of January 1, 2018. The details of the significant changes and quantitative impact of the changes are set out below.

Product Sales

There are no significant changes to the Company’s revenue recognition policy attributable to product sales. The Company is now required to disclose the revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the reporting date; specifically as it relates to minimum purchase obligations.

License Revenue

The Company previously categorized sales-based royalties as a separate revenue stream. Under IFRS 15, the Company has tied the sales-based royalties to the distinct performance obligation to which it relates: the license of IP rights to the Company’s commercial products. With the application of the sales-based royalties exception, sales-based royalties and milestone payments contingent on sales-based thresholds continue to be recognized when the subsequent sales occur.

Under IFRS 15, when the license of IP rights includes minimum guaranteed sales-based royalties and the Company assesses the contractual minimums as fixed consideration (where a significant reversal is remote), the Company recognizes all of the contractual minimums when control of the IP rights is transferred and a contract asset is recognized. Any sales-based royalties earned, in excess of the contractual minimums, would be recognized in accordance with the royalty exception (when the subsequent sales occur). This can result in significant differences in the timing of revenue recognition and the corresponding receipt of cash flows.

As at January 1, 2018, the Company recognized $1.5 million before incomes taxes as an adjustment to the opening balance of equity for the impact of IFRS 15. The $1.5 million adjustment was primarily attributable to the Resultz ex-U.S. license agreements (See Note 1, Nature of Business – Resultz) that include minimum guaranteed sales-based royalties. Any sales-based royalties earned in excess of the contractual minimums would be recognized in accordance with the royalty exception. Under IAS 18, the contractual minimums would be recognized when the subsequent sales occur which has created timing differences in the Company’s historical revenue recognition practices.

Current and Deferred Income Taxes

The Company recognized $0.3 million in current and deferred income taxes attributable to the $1.5 million adjustment disclosed above for a net impact of $1.2 million to the Company’s opening balance of equity as at January 1, 2018. Within the scope of IAS 12, Income Taxes, the Company recognized its investment tax credits as a reduction against current and deferred income taxes payable of $0.2 million as it is now probable that future taxable income will be available to offset this corresponding tax liability. The Company has offset its current and deferred tax assets and tax liabilities as it has a legally enforceable right and the income taxes are levied by the same taxation authority.

Contract Assets

The adjustment to the Company’s opening balance of equity triggered the recognition of current and non-current contract asset accounts. The contract asset accounts represent the present value of current and future guaranteed minimum sales-based royalties that are expected to be received over the life of the licensing agreements.

Impacts on Financial Statements

The following table summarizes the impacts of adopting IFRS 15 on the Company’s Condensed Consolidated Interim Statements of Financial Position as at January 1, 2018.

nuvo1

The following tables summarize the impacts of adopting IFRS 15 on the Company’s Condensed Consolidated Interim Financial Statements as at and for the three months ended March 31, 2018.

nuvo2

(i) Balances using previous accounting policy applicable up to December 31, 2017.

nuvo3

(i) Balances using previous accounting policy applicable up to December 31, 2017.

nuvo4

(i) Balances using previous accounting policy applicable up to December 31, 2017.

 

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