Doman Building Materials Group — Annual Report 2020

Mar 12, 2021

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

==> picture [158 x 100] intentionally omitted <==

==> picture [121 x 105] intentionally omitted <==

CanWel Building Materials Group Ltd. Consolidated Financial Statements

December 31, 2020 and 2019 (in thousands of Canadian dollars)

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

==> picture [158 x 100] intentionally omitted <==

==> picture [77 x 38] intentionally omitted <==

KPMG LLP Telephone (604) 691-3000 Chartered Professional Accountants Fax (604) 691-3031 PO Box 10426 777 Dunsmuir Street Internet www.kpmg.ca Vancouver BC V7Y 1K3 Canada

KPMG LLP

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of CanWel Building Materials Group Ltd.,

Opinion

We have audited the accompanying consolidated financial statements of CanWel Building Materials Group Ltd. (the Company), which comprise:

• the consolidated statements of financial position as at December 31, 2020 and December 31, 2019;

• the consolidated statements of earnings and comprehensive earnings for the years then ended;

• the consolidated statements of shareholders’ equity for the years then ended;

• the consolidated statements of cash flows for the years then ended;

• and notes to the consolidated financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2020 and December 31, 2019, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “ Auditors’ Responsibilities for the Audit of the Financial Statements ” section of our auditors’ report.

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

© 2021 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

==> picture [158 x 100] intentionally omitted <==

==> picture [46 x 23] intentionally omitted <==

CanWel Building Materials Group Ltd.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the financial statements, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be communicated in our auditors’ report.

Evaluation of the goodwill impairment analysis

Description of the matter

We draw attention to Notes 3 and 14 of the financial statements. The goodwill balance is $180.8 million, of which $62.6 million relates to the Canadian operations, $82.8 million relates to US operations and $35.3 million relates to Value-added services.

Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise. An impairment loss is recognized in earnings if the carrying amount exceeds its estimated recoverable amount. The recoverable amount of each of the cash generating units has been determined using fair value less cost to sell. To determine fair value less costs to sell, the Company utilized five-year cash flow forecasts using the annual budget approved by the Board of Directors as a basis for such forecasts. Significant assumptions used in determining the recoverable amount include gross margin percentages, terminal value growth rates and after-tax discount rates.

Why the matter is a Key Audit Matter

We identified the evaluation of the goodwill impairment analysis for the Canadian operations, US operations and Value-added services cash generating units to be a key audit matter. The matter represented a significant risk of material misstatement given the magnitude of goodwill and the sensitivity of the recoverable amount to changes in certain significant assumptions. Significant auditor judgment was required in evaluating the results of our audit procedures. Further, valuation professionals with specialized skills and knowledge were needed to evaluate the discount rates for each cash generating unit.

How the matter was addressed in the audit

The primary procedures we performed to address this key audit matter included the following:

• We compared the Entity’s estimated gross margin percentages and terminal value growth rates to current year and historical gross margin percentages and terminal value growth rates to assess the reasonableness of these assumptions.

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

==> picture [158 x 100] intentionally omitted <==

==> picture [46 x 23] intentionally omitted <==

CanWel Building Materials Group Ltd.

• We involved our valuations professionals with specialized skills and knowledge, who assisted in evaluating the discount rate assumptions used in the estimated recoverable amount, by comparing them against a range of discount rates that were independently developed using publicly available market data for comparable entities.

Other Information

Management is responsible for the other information. Other information comprises:

• Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

==> picture [158 x 100] intentionally omitted <==

==> picture [46 x 23] intentionally omitted <==

CanWel Building Materials Group Ltd.

Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgement and maintain professional skepticism throughout the audit.

We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair representation.

• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

==> picture [158 x 100] intentionally omitted <==

==> picture [46 x 23] intentionally omitted <==

CanWel Building Materials Group Ltd.

other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

• Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditors’ report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

==> picture [145 x 47] intentionally omitted <==

Chartered Professional Accountants

The engagement partner on the audit resulting in this auditors’ report is Andrew James.

Vancouver, Canada March 11, 2021

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Consolidated Statements of Financial Position As at December 31

==> picture [158 x 100] intentionally omitted <==

The accompanying notes are an integral part of these consolidated financial statements.

		2020	2019
(in thousands of Canadian dollars)	Notes	$	$
Assets
Current assets
Cash		1,972	-
Trade and other receivables	8	131,501	98,420
Income taxes receivable	21	1,048	8,934
Inventories	9	246,848	284,655
Prepaid expenses and deposits		11,474	10,752
		392,843	402,761
Non-current assets
Property, plant and equipment	10	73,686	90,472
Right-of-use assets	11	127,835	121,498
Timber	12	47,680	48,800
Deferred income tax assets	21	2,856	2,861
Intangible assets	13	39,256	46,709
Goodwill	14	180,808	178,421
Other assets		2,260	2,901
		474,381	491,662
Total assets		867,224	894,423
Liabilities
Current liabilities
Cheques issued in excess of funds on deposit		6,904	8,000
Trade and other payables	31	113,954	81,581
Performance bond obligations	15	10,655	12,778
Dividends payable	18	9,352	10,887
Income taxes payable	21	13,342	1,651
Current portion of loans and borrowings	16	7,023	8,024
Current portion of lease liabilities	11	18,452	18,698
Current portion of reforestation and environmental		841	1,353
		180,523	142,972
Non-current liabilities
Loans and borrowings	16	209,599	296,076
Lease liabilities	11	113,877	105,311
Reforestation and environmental		1,750	1,239
Deferred income tax liabilities	21	14,525	16,802
Retirement benefit obligations	17	6,367	3,705
		346,118	423,133
Total liabilities		526,641	566,105
Equity
Common shares	18	499,597	498,891
Contributed surplus		11,150	11,066
Foreign currency translation		266	5,940
Deficit	31	(170,430)	(187,579)
		340,583	328,318
Total liabilities and equity		867,224	894,423
Commitments and contingencies	11,30

Approved by the Board of Directors

(signed) “Amar S. Doman” Director

(signed) “Sam Fleiser” Director

7

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Consolidated Statements of Earnings and Comprehensive Earnings for the years ended December 31

==> picture [158 x 100] intentionally omitted <==

The accompanying notes are an integral part of these consolidated financial statements.

(in thousands of Canadian dollars,		2020	2019
except per share amounts)	Notes	$	$
Revenue	26,27	1,613,804	1,334,201
Cost of sales	19	1,357,635	1,142,255
Gross margin from operations		256,169	191,946
Expenses
Distribution, selling and administration	20	113,156	105,792
Depreciation of property, plant and equipment	10	15,699	13,350
Amortization of right-of-use assets	11	22,001	21,616
Amortization of intangible assets	13	6,949	6,845
		157,805	147,603
Operating earnings		98,364	44,343
Finance costs	22	15,706	21,868
Acquisition costs		620	415
Earnings before income taxes		82,038	22,060
Provision for income taxes	21	22,451	4,841
Net earnings		59,587	17,219
Other comprehensive losses
Exchange differences on translation of foreign operations(1)		(5,674)	(9,714)
Actuarial loss from pension and other benefit plans(2)	17,21	(1,912)	(365)
Comprehensive earnings		52,001	7,140
Net earnings per share
Basic and Diluted		0.77	0.22
Weighted average number of shares
Basic		77,878,231	77,714,660
Diluted		77,930,715	77,714,660

1. Item may be reclassified to earnings in subsequent periods.

2. Item will not be reclassified to earnings.

8

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Consolidated Statements of Changes in Equity for the years ended December 31

==> picture [158 x 100] intentionally omitted <==

The accompanying notes are an integral part of these consolidated financial statements.

	Common shares Contributed surplus Foreign currency translation Deficit Total
(in thousands of Canadian dollars
except share amounts)	# $ $ $ $ $
As at January 1, 2019 (Note 31)	77,744,598 499,154 10,769 15,654 (160,906 ) 363,127
Shares issued pursuant to: Restricted Equity Common Share Plan Employee Common Share Purchase Plan Repurchase of common shares Transaction costs on repurchase of shares Share-based compensation charged to operations Dividends Comprehensive (loss) earnings for the year	5,852 29 (29) - - - 157,079 630 - - - 630 (142,200) (913) 297 - - (616) (9) - - - (9) - 29 - - 29 - - - (43,527) (43,527) - - (9,714 ) 16,854 7,140
As at December 31, 2019	77,765,329 498,891 11,066 5,940 (187,579 ) 328,318
Shares issued pursuant to:
Restricted Equity Common Share Plan Employee Common Share Purchase Plan	11,589 35 (35 ) - - -
	158,801 671 - - - 671
Share-based compensation charged to
operations	- 92 - - 92
Accrued dividends on unvested restricted shares Dividends Comprehensive (loss) earnings for the year	- 27 - (27) - - - - (40,499) (40,499) - - (5,674 ) 57,675 52,001
As at December 31, 2020	77,935,719 499,597 11,150 266 (170,430 ) 340,583

9

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Consolidated Statements of Cash Flows for the years ended December 31

==> picture [158 x 100] intentionally omitted <==

The accompanying notes are an integral part of these consolidated financial statements.

		2020	2019
(in thousands of Canadian dollars)	Notes	$	$
Operating activities
Net earnings		59,587	17,219
Items not affecting cash
Provision for income taxes	21	22,451	4,841
Depreciation and amortization of:
Property, plant and equipment	10	15,699	13,350
Right-of-use assets	11	22,001	21,616
Intangible assets	13	6,949	6,845
Fair value adjustments	12	(232)	231
Timber harvested	12	1,720	3,557
Other		(262)	(2,158)
Income taxes paid		(4,181)	(9,562)
Interest paid on loans and borrowings and other		(9,104)	(16,217)
Payment of reforestation and environmental		(562)	(891)
Finance costs	22	15,706	21,868
Cash flows from operating activities before changes in non-cash working
capital		129,772	60,699
Changes in non-cash working capital	25	34,400	7,203
Net cash flows provided by operating activities		164,172	67,902
Financing activities
Dividends paid	18	(42,034)	(43,524)
Payment of lease liabilities, including interest	11	(24,660)	(23,101)
Net (repayments) advances on loans and borrowings		(91,386)	13,076
Other		370	(2,911)
Net cash flows used in financing activities		(157,710)	(56,460)
Investing activities
Business acquisitions	7	(2,983)	(15,335)
Cash and cash equivalents in business acquisitions	7	-	1,129
Purchase of property, plant and equipment	10	(2,806)	(7,316)
Proceeds from disposition of property, plant and equipment		2,124	654
Proceeds from disposition of timberlands	12	-	10,607
Other		717	(167)
Net cash flows used in investing activities		(2,948)	(10,428)
Net increase in cash and cash equivalents		3,514	1,014
Foreign exchange difference		(446)	199
Cash and cash equivalents- beginning of year		(8,000)	(9,213)
Cash and cash equivalents - end ofyear		(4,932)	(8,000)

10

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

1. NATURE OF OPERATIONS

CanWel Building Materials Group Ltd. (the “Company”) was incorporated in 2009 under the Business Corporations Act (British Columbia). On May 11, 2010, the Company was continued under the laws of Canada pursuant to section 187 of the Canada Business Corporations Act with its current name. The Company has limited liability, with its shares publicly listed on the Toronto Stock Exchange (“TSX”). The Company’s head office is located at Suite 1600 – 1100 Melville Street, Vancouver, British Columbia. The Company’s Canadian operations commenced in 1989.

The Company operates through its wholly owned subsidiaries as a distributor of building materials and home renovation products and as a producer of pressure treated wood products in Canada nationally and regionally in the Western United States mainland and Hawaii. Additionally, the Company has operations in timber ownership and management of private timberlands and forest licenses, full service harvesting and trucking, specialty sawmilling and agricultural post peeling and pressure treating in British Columbia and Saskatchewan for the North American market.

2. BASIS OF PRESENTATION

a) Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).

These consolidated financial statements were authorized for issuance on March 11, 2021 by the Board of Directors of the Company.

b) Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand, except per share amounts.

c) Basis of measurement

These consolidated financial statements have been prepared under the historical cost convention, except for the following items in the Consolidated Statements of Financial Position:

• (i) Standing timber on privately held forest land is characterized as a biological asset and is measured at fair value less costs to sell;

• (ii) Derivative financial instruments are measured at fair value; and

• (iii) Employee benefit plan assets and liabilities are recognized as the net of the fair value of the plan assets and the present value of the defined benefit obligations on a plan by plan basis.

11

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

d) Principles of consolidation

The consolidated financial statements of the Company include the financial statements of the Company and its subsidiaries. Subsidiaries are those entities, which the Company controls by having the power to govern the financial and operational policies of the entity. All intercompany transactions and balances have been eliminated.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.

a) Business combinations and goodwill

Business combinations are accounted for by applying the acquisition method, whereby assets obtained, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquired business are measured at fair value at the date of acquisition. The acquired business’s identifiable assets, liabilities and contingent liabilities that meet the recognition criteria under IFRS 3, Business Combinations are recognized at their fair values at the acquisition date, except for non-current assets which are classified as held-for-sale in accordance with IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations , and are recognized and measured at fair value, less costs to sell.

To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets, goodwill is recognized. To the extent the fair value of consideration paid is less than the fair value of net identifiable tangible and intangible assets, the difference is recognized in income immediately as a gain on bargain purchase. Goodwill is subsequently measured at cost less accumulated impairment losses.

The Company has an option to apply a “concentration test” that permits a simplified assessment of whether an acquired set of activities and assets is not a business. The optional concentration test is met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.

Acquisition costs associated with business combination activities are expensed in the period incurred.

b) Foreign currency translation

Foreign currency transactions are translated into the functional currency using the spot rate prevailing at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate at the reporting date. Foreign exchange gains and losses that relate to the Company’s revolving loan facility and bank overdraft are recognized in earnings within finance costs. All other foreign exchange gains and losses that relate to product purchases are accordingly presented within cost of sales.

For each foreign operation, the Company determines the functional currency, and items included in the financial statements of each entity are measured using that functional currency. The Company’s foreign operations are primarily in the Western United States mainland and Hawaii, and have the United States dollar as the functional currency. The Company uses direct method of consolidation and on disposal of a foreign operation.

12

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

On consolidation, the assets and liabilities of foreign operations are translated into Canadian dollars using the rate of exchange in effect at the reporting date, and their statements of earnings and comprehensive earnings are translated using exchange rates in effect at the dates of the transactions. The exchange differences arising on translation for consolidation are recognized in other comprehensive income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognized in net earnings.

c) Property, plant and equipment

Property, plant and equipment (“PPE”) are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. Repairs and maintenance costs are expensed as incurred.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Buildings	3%
Leasehold improvements	based on lease term
Machinery and equipment	10% to 33%
Automotive equipment	30%
Computer equipment and systems development	20% to 33%

Depreciation begins when an asset is placed in use. Land is not depreciated.

An item of PPE is derecognized upon disposal when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in earnings.

The Company conducts an annual assessment of the residual balances, useful lives, depreciation methods being used for PPE and impairment losses (as applicable), and any changes arising from the assessment are applied by the Company prospectively.

d) Timber

Standing timber on privately held forest land that is managed for timber production is characterized as a biological asset. At each reporting date, the biological asset is valued at its fair value less costs to sell with any change therein, including the impact of growth and harvest, recognized in cost of sales for the period. Costs to sell include all costs that would be necessary to sell the assets. The valuation model is performed with reference to independent third party valuators and recent comparatives of standing timber sales, costs of sustainable forest management, timber pricing and harvest volume assumptions, and the resulting net present value of future cash flows for standing timber. Harvested timber is transferred to inventory at its fair value less costs to sell at the date the timber is harvested.

Land under the standing timber is measured at cost and included in PPE.

13

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

e) Leases

(i) Lessees

At inception of a contract, an assessment is made as to whether a contract is, or contains a lease. A contract is, or contains a lease if the contract offers the right to control the use of a specific asset, for a period of time, in exchange for consideration. To determine whether a contract conveys the right to control the use of an identified asset, the following criteria are considered:

• The contract involves the use of an identified asset that is physically distinct or represents substantially all of the capacity of a physically distinct asset. No asset is identified if the supplier of the asset has substantive substitution rights;

• Whether the Company has the right to obtain substantially all of the economic benefits from the asset throughout the agreement term; and

• Whether the Company has the right to direct the use of the asset and change how and for what purpose the asset is used.

A right-of-use asset and a corresponding lease liability are recognized at the date a leased asset is available for use by the Company. Assets and liabilities arising from the lease determination are initially measured on a present value basis of the following payments:

• Fixed payments (including in-substance fixed payments), less any lease incentives receivable;

• Amounts expected to be payable by the lessee under any residual value guarantees;

• The exercise of a purchase option if the lessee is reasonably certain to exercise that option;

• Restoration costs; and

• Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate is used to calculate present value. The Company’s borrowing rate is the rate that the Company (the lessee) would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Generally, the Company uses its incremental borrowing rate as the starting point in determining the discount rate, and makes adjustments based on the lease term, if required.

The lease term determined by the Company is comprised of the non-cancellable period of the lease contract, as well as options to terminate or extend the lease term if the exercise of either option is reasonably certain.

Right-of-use assets are subsequently measured at cost less depreciation on a straight-line basis and reduced to reflect impairment losses (if any) and adjusted for any remeasurement of the lease liability. After the lease commencement date, lease liabilities are measured at amortized cost using the effective interest method, which increases the liability amount to reflect interest on the lease liability, reduces the liability carrying amount to reflect lease payments made and also reflects any remeasurement or lease modifications. If a remeasurement to the lease liability is deemed necessary, a corresponding adjustment is also made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset.

14

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Payments related to short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in profit or loss over the respective lease terms. Short-term leases are leases with a lease term of 12 months or less. Low value assets are comprised of items such as computers, cellular phones and miscellaneous office support related items.

Some distribution and treatment plant facilities leases contain extension options exercisable by the Company. Where practicable, the Company seeks to include extension options in new leases to provide operational flexibility. The extension options held are exercisable only by the Company and not the lessors. The Company assesses at lease commencement whether it is reasonably certain to exercise the extension options. The Company reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant change in circumstances within its control.

(ii) Lessors

At lease inception, the Company determines whether each lease is a finance lease or an operating lease. To classify each lease, an assessment is made as to whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset, including an assessment of whether the lease term covers the majority of the asset’s useful life. If it is determined that substantially all of the risks and rewards of ownership have been transferred, the lease is accounted for as a finance lease; otherwise it is accounted for as an operating lease.

Operating leases primarily occur in the Company’s Forestry segment, recognizing the receipt of these payments on a straight-line basis over the agreement terms and included in revenue. These operating leases do not represent a significant source of revenue for the Company.

f) Intangible assets

All intangible assets acquired by the Company through business acquisitions are recorded at fair value on the date of acquisition. Intangible assets that have indefinite lives are measured at cost less accumulated impairment losses. Intangible assets that have finite useful lives are subsequently measured at cost less accumulated amortization and accumulated impairment losses. Intangible assets comprise of brand recognition and customer relationships, which are amortized on a straight-line basis over 10 years. Amortization rates are reviewed annually to ensure they are aligned with estimates of remaining economic useful lives of the associated intangible assets.

g) Pension and other post-employment benefits

For defined benefit pension plans and other post-retirement benefits, the net periodic pension expense is actuarially determined on an annual basis by independent actuaries using the projected unit credit method. The determination of benefit expense requires assumptions such as the discount rate to measure obligations, the projected age of employees upon retirement, the expected rate of future compensation, and the expected health care cost trend rate. For the purpose of calculating the expected return on plan assets, the assets are valued at fair value. Actual results will differ from results that are estimated based on assumptions. All past service costs arising from plan amendments are recognized immediately in earnings when the plan amendment occurs or when related restructuring costs are recognized, if earlier.

The asset or liability recognized in the statement of financial position is the present value of the defined benefit obligation at the statement of financial position date less the fair value of plan assets, together with adjustments for asset ceiling impairment or additional liabilities due to onerous minimum funding requirement under International Financial Reporting Interpretations Committee (“IFRIC”) 14, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction , International Accounting Standard (“IAS”) 19, The Limit on a Defined Benefit Asset . The present value of the defined

15

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the value of the defined benefit obligation. The remeasurement of fair value of plan assets compared to expected values, together with remeasurement on plan obligations from assumption changes or experience adjustments are recognized immediately in OCI. For funded plans, surpluses are recognized only to the extent that the surplus is considered recoverable. Recoverability is primarily based on the extent to which the Company can unilaterally reduce future contributions to the plan.

Payments to defined contribution plans are expensed as incurred.

h) Share-based payments

Certain employees (including directors and senior executives) of the Company may receive a portion of their remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (“equity-settled transactions”).

The costs of equity-settled transactions with employees are measured by reference to the fair value at the date on which they are granted. The costs of equity-settled transactions are recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the shares (“the vesting date”). The cumulative expense is recognized for equity-settled transactions at each reporting date until the vesting date and reflects the Company’s best estimate, at such time, of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for the period represents the movement in cumulative expense recognized as at the beginning and end of that period and is recognized in net earnings as share-based compensation and the corresponding amount is recognized in contributed surplus.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied provided that all other performance and/or service conditions are satisfied.

Where the terms of an equity-settled award are modified, the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification.

i) Finance costs

The Company’s borrowings are recorded net of financing costs, which are deferred at inception and subsequently amortized over the term of the debt. Interest expense is calculated using the effective interest rate method.

j) Inventories

Inventories are stated at the lower of cost and net realizable value (“NRV”). Cost is determined using the weighted average cost method, net of vendor rebates, and includes materials, freight and, where applicable, treatment and processing costs, chemicals, direct labour and overhead. NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale.

The cost of timber transferred from standing timber to inventory is its fair value less costs to sell at the date of harvest.

16

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

k) Vendor rebates

The Company records cash consideration received from vendors as a reduction in the price of vendors’ products and reflects it as a reduction to inventory and related cost of sales.

l) Performance bonds

Certain subsidiaries of the Company issue bonds to guarantee performance and payment by certain contractors to whom the Company may supply materials. The bonds require cash to be periodically remitted to the Company from project owners or their lenders, upon satisfaction that the bonded contractor has met certain conditions of the related construction contract. The funds are disbursed to the project’s contractor subject to the Company’s satisfaction as to the progression and completion of the contracted work. Proceeds received by the Company in excess of funds disbursed are recorded in liabilities until such time as the related project is completed.

m) Income tax

Income tax expense is comprised of current and deferred tax. Income tax expense is recognized in net earnings for the year. Deferred tax relating to items recognized outside of net earnings is recognized in correlation to the underlying transaction, either in OCI or directly in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the temporary differences from the initial recognition of goodwill.

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

At each reporting period, temporary differences are evaluated. A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the temporary difference can be utilized. The recognized deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

n) Earnings per share

Basic earnings per share are computed by dividing the net earnings for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution of common share equivalents, such as outstanding stock options and restricted equity common shares, in the weighted average number of common shares outstanding during the year, if dilutive. The “treasury stock method” is used for the assumed proceeds upon the exercise of the options that are used to purchase common shares at the average market price during the year.

17

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

o) Financial instruments

(i) Non-derivative financial instruments

The Company’s non-derivative financial instruments are comprised of trade and other receivables, bank overdraft, trade and other payables, performance bonds, dividends payable, senior unsecured notes, revolving loan facility, non-revolving term loan, promissory notes, finance lease liabilities and equipment term loan.

Financial instruments are initially recognized at fair value plus, for instruments not measured at fair value on an ongoing basis, any directly attributable transaction costs. Subsequent to the initial recognition, financial instruments are measured at fair value or amortized cost. The Company has classified or designated its financial instruments as follows:

• Trade and other receivables are subsequently measured at amortized cost.

• Bank overdraft, trade and other payables, performance bonds, dividends payable, senior unsecured notes, revolving loan facility, non-revolving term loan, promissory notes, finance lease liabilities and equipment term loan are subsequently measured at amortized cost.

(ii) Derivative financial instruments

The Company at times uses derivative financial instruments for economic hedging purposes in managing lumber price risk and foreign exchange risk through the use of futures contracts and options. These derivative financial instruments are designated as held for trading with changes in fair value being recorded in net earnings.

p) Fair value measurement

The Company measures derivative financial instruments at fair value at each statement of financial position date. Also, fair values of financial instruments measured at amortized cost are disclosed in Note 24.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• (i) In the principal market for the asset or liability, or

• (ii) In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

18

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

q) Equity

Share capital represents the amount received for shares issued. When shares are issued on a business acquisition, the amount recognized is the fair value at the acquisition date.

Contributed surplus includes the compensation cost relating to the Company’s share-based payment transactions. It also includes the difference between the cost of repurchased shares and the average book value.

Dividends on common shares attributable to shareholders are presented in current liabilities when approved prior to the reporting date.

r) Revenue recognition

The Company recognizes revenue from the sale of building products from its network of distribution centers across Canada nationally and regionally in the Western United States mainland and Hawaii, as well as, from the sale of timber products harvested in British Columbia and Saskatchewan as products in the sales category. The Company owns wood treatment and processing facilities that produce specialty products for sale through its distribution network that also generate revenue through the provision of these services to external customers. Provisions of services from the Company’s facilities to external customers are presented as services in the sales category.

Revenue from the sale of products and services is recognized, net of discounts and customer rebates, at the point in time the transfer of control of the related products has taken place (based on shipping or delivery terms as specified in the sales contract), and collectability is reasonably assured.

s) Provisions

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

A provision for an onerous contract is recognized when the economic benefits to be received under the contract are less than the unavoidable costs of meeting the obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating or performing the contract. Before establishing a provision, the Company recognizes any impairment loss that has occurred on the assets dedicated to that contract.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as finance costs.

Provisions are reviewed at the end of each reporting period and are adjusted to reflect the best estimates at that date.

19

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

t) Impairment

(i) Financial assets

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. Regardless of whether credit risk has increased significantly, the loss allowance for trade receivables without a significant financing component classified at amortized cost, are measured using the lifetime expected credit loss approach. The Company recognizes in earnings, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are written off against the allowance account when they are assessed as uncollectible.

(ii) Non-financial assets

The carrying amounts of the Company’s PPE and intangible assets that have a finite life are reviewed at each reporting date to determine whether there is any indication of impairment. Goodwill is reviewed for impairment annually or more frequently if certain impairment indicators arise. The Company’s annual impairment testing date for goodwill is December 31.

If any such indication exists or when annual impairment testing for an asset is required, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit (the lowest level of identifiable cash inflows) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset group or cash-generating unit. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples or other available fair value indicators.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in net earnings for the year.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

20

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

u) Related party transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

v) Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of operations, has been identified as the Chief Executive Officer.

The Company is managed as two reportable business segments which offer different products, require different production processes, and are based on how financial information is produced internally for the purposes of making operating decisions. The following summary describes the operations of each of the Company’s reportable segments:

• a) Building Materials Distribution – wholesale distribution of building materials and home renovation products, including value-added services such as lumber pressure treating; and

• b) Forestry – timber ownership and management of private timberlands and Crown forest licenses, harvesting and trucking operations, and value-added services such as post-peeling and post and pole pressure treating operations.

4. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES

The preparation of these financial statements requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its judgments and estimates in relation to assets, liabilities, revenue and expenses. Management uses historical experience and various other factors it believes to be reasonable under the given circumstances as the basis for its judgments and estimates. Actual outcomes may differ from these estimates under different assumptions and conditions. Significant areas requiring estimates are goodwill and related impairment testing, valuation of timber, certain actuarial and economic assumptions used in the determination for the cost and accrued benefit obligations of employee future benefits, inventory valuation and obsolescence, deferred tax assets and liabilities valuation, classification of lease agreements and judgments regarding the determination of reportable segments.

a) Goodwill

Management uses judgment in determining the fair value of the acquired net identifiable tangible and intangible assets at the date of a business combination. Any resulting goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill at December 31, 2020 relates to the Company’s acquisitions of various businesses. Goodwill is not amortized but is tested for impairment annually or more frequently if changes in circumstances indicate a potential impairment. Goodwill impairment is assessed based on a comparison of the recoverable amount of a cash-generating unit to the underlying carrying value of that cash-generating unit’s net assets, including goodwill. Significant estimates are required in determining the recoverable amount of each cash-generating unit, including a discount rate, a growth rate and revenue projections. When the carrying amount of the cash-generating unit exceeds its fair value, the recoverable amount of goodwill related to the cash-generating unit is compared to its carrying value and excess of carrying value is recognized as an impairment loss (Note 14).

21

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

b) Timber

At each reporting date, timber is valued at fair value less costs to sell with any change therein, including the impact of growth and harvest, recognized in net earnings for the period. Significant judgment is used in determining the fair value with reference to independent third party valuators and recent comparatives of standing timber sales, costs of sustainable forest management, timber pricing and harvest volume assumptions, the discount rate used, and the resulting net present value of future cash flows for standing timber.

c) Employee future benefits

The cost of defined benefit pension plans and other post-employment medical benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future (Note 17).

(i) Discount rate

The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have maturity profiles that are similar to the underlying cash flows of the defined benefit obligation.

(ii) Other assumptions

The mortality rate is based on publicly available mortality tables. Future salary increases are based on expected future inflation rates.

d) Inventory valuation

Under IFRS, inventories must be recognized at the lower of cost or their NRV, which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated costs necessary to make the sale. IFRS requires that the estimated NRV be based on the most reliable evidence available at the time the estimates are made of the amounts that inventories are expected to - realize. The measurement of an inventory write down to NRV is based on the Company’s best estimate of the NRV and expected future sale or consumption of inventories. Due to the economic environment and continued volatility in the home-building market, there is uncertainty as to whether the NRV of the inventories will remain consistent with those used in our assessment of NRV at period end. As a result, there is the risk that a write - down of on - hand and unconsumed inventories could occur in future periods. Also, a certain portion of inventory may become damaged or obsolete. A slow moving reserve is recorded, as required, based on an analysis of the length of time product has been in inventory and historical rates of damage and obsolescence (Note 19).

Inventory includes harvested timber, the cost of which is based on its fair value less costs to sell, and forms a component of the carrying value of timber inventory. Harvested timber is subsequently processed into logs and carried at the lower of cost or NRV. Significant judgment is used in determining the fair value of timber with reference to independent third party valuators and recent comparatives of standing timber sales.

22

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

e) Income taxes

At each statement of financial position date, a deferred income tax asset may be recognized for all deductible temporary differences, unused tax losses and income tax reductions, to the extent that their realization is probable. The determination of this requires significant judgment. This evaluation includes review of the ability to carryback operating losses to offset taxes paid in prior years; the carryforward periods of the losses; and an assessment of the excess of fair value over the tax basis of the Company’s net assets. If based on this review it is not probable such assets will be realized, then no deferred income tax asset is recognized (Note 21).

f) Leases

When assessing the lease agreement, certain estimates and assumptions need to be made and applied, which include, but are not limited to, the determination of the expected lease term and minimum lease payments, the assessment of the likelihood of exercising options and estimation of the fair value of the lease property (Note 11).

g) Revenue recognition

Areas of significant judgement and estimation related to point in time revenue recognition include the estimation of the expected value of consideration to be received from customers, who may be subsequently impacted by volume discounts, manufacturer rebates and other incentives offered. The Company applies judgement in using weight scale readings and the application of conversion factors to determine the volume of forestry products sold. The Company also applies judgements in identifying performance obligations and determining the costs associated with the acquisition of contracts, which are recognized as they occur, unless the contract has a performance obligation that extends beyond one year.

5. CHANGES IN ACCOUNTING STANDARDS

The Company has adopted amendments to IFRS 3, Business Combinations , effective January 1, 2020, in accordance with the applicable transactional provisions.

The Company applied Definition of a Business (Amendments to IFRS 3) to business combinations whose acquisition dates are on or after January 1, 2020 in assessing whether it had acquired a business or a group of assets. The details of this accounting policy are set out in Note 3(a). See also Note 7 for details of the Company’s acquisition during the year.

A number of other new standards are also effective from January 1, 2020, but do not have a material effect on these consolidated financial statements.

23

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

6. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

The following is an overview of accounting standard changes the Company will be required to adopt in future years.

IAS 37, Provisions, contingent liabilities and contingent assets

Amendments to IAS 37 specify which costs should be included in determining the cost of fulfilling a contract for the purpose of assessing whether the contract is onerous. The amendments apply for annual reporting periods beginning on or after January 1, 2022 to contracts existing at the date when the amendments are first applied. At the date of initial application, the cumulative effect of applying the amendments is recognized as an opening balance adjustment to retained earnings or other components of equity, as appropriate. The comparative figures are not restated. The Company will continue to evaluate the impact of these amendments on its consolidated financial statements.

IAS 1, Presentation of financial statements

On January 23, 2020, the International Accounting Standards Board issued Classification of Liabilities as Current or Non-current (Amendments to IAS 1) , providing a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments were originally effective for annual reporting periods beginning on or after January 1, 2022, however, their effective date has been delayed to January 1, 2023. The Company will continue to evaluate the impact of these amendments on its consolidated financial statements.

7. BUSINESS ACQUISITIONS

2020 Acquisition

On November 9, 2020, the Company completed the acquisition of a truss design and manufacturing plant, including the related equipment and business, formerly owned by Vickers Island Truss, Ltd. (“Island Truss”) (the “Island Truss Acquisition”) in Kauai, Hawaii.

Total purchase consideration comprised of US$3,500 and is subject to certain post-closing adjustments. The foreign exchange rate used to translate the purchase price consideration and fair values of assets acquired and liabilities assumed was based on the exchange rate as at the date of the acquisition.

The majority of the purchase price was allocated to goodwill, which was primarily attributable to the expected synergies arising from the acquisition and the expertise and reputation of the assembled management and workforce. Goodwill is expected to be deductible for income tax purposes.

2019 Acquisition

On April 1, 2019, the Company completed the acquisition of all issued and outstanding partnership interests of Lignum Forest Products LLP (“Lignum”) (the “Lignum Acquisition”), a well-established brand in the lumber and forestry distribution market in Western Canada and the United States.

Total purchase consideration comprised of US$11,476 and was subject to certain post-closing adjustments. The foreign exchange rate used to translate the purchase price consideration and fair values of assets acquired and liabilities assumed was based on the exchange rate as at the date of the acquisition.

24

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Details of the allocation of the purchase price to the fair values of the identifiable assets and liabilities acquired at the date of the above noted acquisition were as follows (in thousands of Canadian dollars):

	2019
	$
Fair value of purchase consideration
Cash consideration	15,335
Fair value of assets acquired(1)
Cash and cash equivalents	1,129
Non-cash working capital	12,856
Right-of-use assets	520
Lease liabilities	(506)
Total identifiable net assets at fair value	13,999
Goodwill arising on acquisition	1,336
Assets acquired	15,335

Goodwill recognized was primarily attributed to the expected synergies arising from the acquisition and the expertise and reputation of the assembled management and workforce. Goodwill is not expected to be deductible for income tax purposes.

8. TRADE AND OTHER RECEIVABLES

The Company’s trade and other receivables arise primarily from sales of building materials to customers. These are summarized as follows:

	2020	2019
	$	$
Trade receivables	123,278	91,760
Allowance for doubtful accounts	(562)	(856)
Net trade receivables	122,716	90,904
Other receivables	8,785	7,516
Total trade and other receivables	131,501	98,420

The aging analysis of trade and other receivables was as follows:

	2020	2019
	$	$
Neither past due nor impaired	121,449	79,324
Past due but not impaired:
Less than 1 month	5,194	9,446
1 to 3 months	4,408	6,414
3 to 6 months	450	3,236
Total trade and other receivables	131,501	98,420

25

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Activity in the Company’s provision for doubtful accounts was as follows:

	2020	2019
	$	$
Balance at January 1	856	871
Accruals during the year	44	99
Additions arising on acquisition	-	91
Accounts written off	(343)	(174)
Foreign exchange difference	5	(32)
Balance at December 31	562	856

The Company holds no collateral for any receivable amounts outstanding as at December 31, 2020.

Further information on the valuation of trade and other receivables in disclosed in Note 30.

9. INVENTORIES

9. INVENTORIES
	2020	2019
	$	$
Inventories held for resale	182,723	238,718
Inventories held for processing	64,125	45,937
	246,848	284,655

The expenses related to the sale of inventories were recorded in cost of sales, as described in Note 19. Further information on the valuation of inventories in disclosed in Note 30.

26

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

10. PROPERTY, PLANT AND EQUIPMENT

		Buildings, leasehold	Machinery, automotive	Computer equipment
		improvements	and other	and systems
	Land	and roads	equipment	development	Total
	$	$	$	$	$
Cost
Cost at January 1, 2019	35,644	18,666	90,647	5,205	150,162
Additions	-	4,223	2,616	477	7,316
Disposals	(3,882)	-	(1,175)	(54)	(5,111)
Foreign exchange difference	-	(82)	(1,177)	(15)	(1,274)
Cost at December 31, 2019	31,762	22,807	90,911	5,613	151,093
Additions	109	1,224	1,308	165	2,806
Additions arising on acquisition	-	-	194	-	194
Disposals	(633)	-	(8,798)	(85)	(9,516)
Foreign exchange difference	-	(68)	(543)	(12)	(623)
Cost at December 31, 2020	31,238	23,963	83,072	5,681	143,954
Accumulated depreciation
Accumulated depreciation at
January 1, 2019	-	4,255	40,633	3,500	48,388
Depreciation	-	1,505	10,801	1,044	13,350
Disposals	-	-	(838)	(42)	(880)
Foreign exchange difference	-	(16)	(217)	(4)	(237)
Accumulated depreciation at
December 31, 2019	-	5,744	50,379	4,498	60,621
Depreciation	-	2,084	12,967	648	15,699
Disposals	-	-	(5,588)	(78)	(5,666)
Foreign exchange difference	-	(34)	(346)	(6)	(386)
Accumulated depreciation
at December 31, 2020	-	7,794	57,412	5,062	70,268
Net book value at
December 31,2019	31,762	17,063	40,532	1,115	90,472
Net book value at
December 31, 2020	31,238	16,169	25,660	619	73,686

27

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

11. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

The Company enters into various leases for the operation of its business, including distribution facilities, treatment plant facilities, computer equipment, light vehicles, forklifts and other equipment as required to operate efficiently.

During the year ended December 31, 2020, the Company revised certain assumptions regarding determination of the expected lease term, minimum lease payments and assessment of the likelihood of exercising extension options, as a result of certain lease modifications relating to several of the Company’s facility leases. Consequently, these lease modifications resulted in a remeasurement, which increased the existing right-of-use assets and lease liabilities by $20,289.

Right-of-use assets

Right-of-use assets
		Machinery,
		automotive
		and other	Computer
	Facilities(1)	equipment(2)	Equipment	Total
	$	$	$	$
As at January 1, 2019	111,301	13,626	520	125,447
Additions	15,536	7,135	77	22,748
Additions arising on acquisition (Note 7)	520	-	-	520
Amortization	(16,164)	(5,289)	(163)	(21,616)
Disposals	(1,609)	(720)	-	(2,329)
Foreign exchange movements	(3,048)	(215)	(9)	(3,272)
As at December 31, 2019	106,536	14,537	425	121,498
Additions	4,232	4,277	-	8,509
Additions arising on acquisition	824	-	-	824
Lease modifications and
other remeasurements	20,289	-	-	20,289
Amortization	(17,070)	(4,765)	(166)	(22,001)
Disposals	-	(3)	-	(3)
Foreign exchange movements	(1,151)	(130)	-	(1,281)
Balance at December 31, 2020	113,660	13,916	259	127,835

1. Includes agreements related to distribution, wood treatment and office facility leases.

2. Includes forklifts, tractors, light vehicles and other heavy equipment leases.

28

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Lease liabilities

Lease liabilities
		Machinery,
		automotive
		and other	Computer
	Facilities(1)	equipment(2)	Equipment	Total
	$	$	$	$
As at January 1, 2019	111,301	12,927	511	124,739
Additions	15,536	7,163	77	22,776
Additions arising on acquisition (Note 7)	506	-	-	506
Disposals	(1,674)	(667)	-	(2,341)
Finance costs	4,077	560	22	4,659
Lease payments	(17,954)	(4,972)	(175)	(23,101)
Foreign exchange movements	(2,979)	(240)	(10)	(3,229)
As at December 31, 2019	108,813	14,771	425	124,009
Additions	4,232	4,277	-	8,509
Additions arising on acquisition	824	-	-	824
Lease modifications and
other remeasurements	20,289	-	-	20,289
Disposals	(46)	(44)	-	(90)
Finance costs	4,104	541	15	4,660
Lease payments	(19,375)	(5,109)	(176)	(24,660)
Foreign exchange movements	(1,054)	(158)	-	(1,212)
Balance at December 31, 2020	117,787	14,278	264	132,329
Less: current portion	(13,837)	(4,467)	(148)	(18,452)
	103,950	9,811	116	113,877

1. Includes agreements related to distribution, wood treatment and office facility leases.

2. Includes forklifts, tractors, light vehicles and other heavy equipment leases.

Right-of-use assets and corresponding lease liabilities entered into during the year have been recorded using the Company’s incremental borrowing rate, ranging between 1.5% and 5.0%.

Lease commitments

Future undiscounted payments due under the terms of all agreements, including these leases, were as follows (including certain leases with related parties, as disclosed in Note 23):

Years ending December 31	$
2021	24,973
2022	23,325
2023	21,722
2024	17,450
2025	12,539
Thereafter	54,440
	154,449

29

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

12. TIMBER

12. TIMBER
	2020	2019
	$	$
Balance at January 1	48,800	62,659
Reforestation provision on harvested land	368	654
Harvested timber transferred to inventory in the year	(1,720)	(3,557)
Dispositions	-	(4,465)
Reclassification to intangible assets	-	(6,260)
Change in fair value resulting from growth and pricing	232	(231)
Balance at December 31	47,680	48,800

The Company’s private timberlands comprised an area of approximately 45,983 hectares (“ha”) of land as at December 31, 2020 (2019 - 45,983), with standing timber consisting of mixed-species softwood forests.

In October 2019, the Company completed the sale of a 7,542-hectare parcel of timberlands (approximately 14% of total holdings) to an entity that held a pre-existing option to purchase the subject lands. Gross proceeds of $12,201 were used to partially pay down the non-revolving term loan ($8,542), with the balance paid to satisfy pre-existing contractual obligations to Tembec Inc. (now Rayonier Advanced Materials Inc.), a former owner of the lands. The Company retained the rights to harvest remaining timber on the subject lands for a period of 13 years. The retention of these harvesting rights resulted in a reclassification of the subject timber to intangible assets (Note 13).

During the year ended December 31, 2020, the Company harvested approximately 178,286 cubic metres (“m[3] ”) from its private timberlands (2019 - 315,415 m[3] ).

Measurement of fair values

The table above reconciles the opening balances to the closing balances for Level 3 fair values (as defined in Note 24). For the years ended December 31, 2020 and 2019, the fair value measurement for the Company’s standing timber, as disclosed above, had been categorized as Level 3 fair value, and was based on the inputs to the valuation technique discussed below.

Valuation Technique

Discounted cash flow analysis: The valuation model considers the present value of the net cash flows expected to be generated by the private timberlands over a period of 20 years. The expected net cash flows are discounted using a risk-adjusted discount rate.

Significant Unobservable Inputs in future periods

Estimated timber prices of $43(1)per m3(weighted average sawlog and pulpwood prices) plus harvest and delivery charges (where applicable) of $50(1)(2019 - $36(1)per m3and $50(1)per m3, respectively) Estimated total costs, including harvest, delivery (where applicable) and stewardship costs, of $53(1)per m3(2019 - $55(1)per m3) Estimated harvest annual volume of 146,260 – 224,750 m3(20-year rolling average m3– 184,199 m3(2019 – 223,518 m3)) Risk-adjusted discount rate of 9.5% (2019 – 9.5%)

1. In whole dollars, not thousands

30

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

13. INTANGIBLE ASSETS

13. INTANGIBLE ASSETS
			Value-
	Canadian	US	added	Forestry
	**operations **	operations	services	operations	Total
	$	$	$	$	$
Cost
Cost at January 1, 2019	10,000	56,898	1,633	2,146	70,677
Reclassification from timber (Note 12)	-	-	-	6,260	6,260
Foreign exchange difference	-	(2,730)	-	-	(2,730)
Cost at December 31, 2019	10,000	54,168	1,633	8,406	74,207
Disposal	-	-	-	(50)	(50)
Foreign exchange difference	-	(1,068)	-	-	(1,068)
Cost at December 31, 2020	10,000	53,100	1,633	8,356	73,089
Accumulated amortization
Accumulated amortization at January 1, 2019	8,917	11,454	898	54	21,323
Amortization	1,000	5,643	163	39	6,845
Foreign exchange difference	-	(670)	-	-	(670)
Accumulated amortization at December 31, 2019	9,917	16,427	1,061	93	27,498
Amortization	83	5,705	163	998	6,949
Foreign exchange difference	-	(614)	-	-	(614)
Accumulated amortization at December 31, 2020	10,000	21,518	1,224	1,091	33,833
Net intangible assets at December 31,2019	83	37,741	572	8,313	46,709
Net intangible assets at December 31, 2020	-	31,582	409	7,265	39,256

Intangible assets at December 31, 2020 relate to customer lists and trade names for the Distribution business segment and harvesting rights for the Forestry business segment, as described in Note 27.

31

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

14. GOODWILL

14. GOODWILL
	Canadian	US	Value-added
	operations	operations	services	Total
	$	$	$	$
Balance at January 1, 2019	62,624	83,186	35,347	181,157
Additions arising on acquisition (Note 7)	-	1,336	-	1,336
Foreign exchange difference	-	(4,072)	-	(4,072)
Balance at December 31, 2019	62,624	80,450	35,347	178,421
Additions arising on acquisition (Note 7)	-	4,047	-	4,047
Foreign exchange difference	-	(1,660)	-	(1,660)
Balance at December 31, 2020	62,624	82,837	35,347	180,808

Goodwill at December 31, 2020 relates to the Company’s Distribution business segment, as described in Note 27.

The Company performed its annual test for goodwill impairment as at December 31, 2020. The recoverable amount of each of the cash-generating units has been determined using fair value less costs to sell. To determine fair value less costs to sell, the Company utilized five-year cash flow forecasts using the annual budget approved by the Board of Directors as a basis for such forecasts. Cash flow forecasts beyond that of the budget were prepared using a stable growth rate for future periods. These forecasts were based on historical data and future trends expected by the Company.

The Company’s valuation model also takes into account working capital and capital investments required to maintain the condition of the assets.

Forecasted cash flows were discounted using after-tax rates of approximately 8% in all cash-generating units for the purpose of the annual impairment test. Other significant assumptions used in the estimation of the recoverable amounts included terminal value growth rate of 2%, and gross margins ranging between 5% and 26%.

Based on the impairment tests, the fair value of each of the cash-generating units exceeded their carrying amounts. As a result, no provision for impairment of goodwill was provided.

There is a material degree of uncertainty with respect to the estimates of the recoverable amounts of the cash-generating units’ net assets given that these estimates involve making key assumptions about the future. In making such assumptions, management has given its best estimate of future economic and market conditions.

32

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

15. PERFORMANCE BOND OBLIGATIONS

The Company assumes performance bond obligations related to certain construction projects. Proceeds temporarily received by the Company in excess of payments with respect to outstanding projects’ performance bonds are outlined below.

performance bonds are outlined below.
	2020	2019
	$	$
Funds received on bonding obligations(1)	88,041	91,797
Payments made on bonding obligations(1)	(77,755 )	(79,418)
Receipts in excess of payments	10,286	12,379
Provision for loss on bonds	369	399
Balance at December 31	10,655	12,778

1. Funds received and disbursed, from contract commencement to reporting date.

Activity in the Company’s performance bond obligations was as follows:

	2020	2019
	$	$
Balance at January 1	12,778	13,507
Net payments on bonding obligations during the year	(1,948 )	(98)
Change in provision for loss on bonds	(23 )	14
Foreign exchange difference	(152 )	(645)
Balance at December 31	10,655	12,778

Total gross bonding contracts on all outstanding projects at December 31, 2020 were $133,386 (December 31, 2019 - $146,812).

The Company manages risk associated with exposure to loss on these performance bond obligations through rigorous underwriting practices which include reviewing construction estimates, evaluating contractors’ experience and financial condition, managing bond proceeds assigned to the Company, and obtaining security or personal guarantees from contracted parties for certain performance bond obligations.

33

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

16. LOANS AND BORROWINGS

16. LOANS AND BORROWINGS
	2020	2019
	$	$
Total loans and borrowings
Unsecured notes(1)	58,095	57,424
Revolving loan facility(1)	130,467	211,940
Non-revolving term loan(1)	19,770	22,404
Promissory notes	3,018	3,052
Equipment term loan, equipment line and other loans(1)	5,272	9,280
Total loans and borrowings	216,622	304,100
Current portion of loans and borrowings
Non-revolving term loan	2,667	2,667
Promissory notes	2,100	1,515
Equipment term loan, equipment line and other loans	2,256	3,842
Total currentportion of loans and borrowings	7,023	8,024
Non-currentportion of loans and borrowings	209,599	296,076

1. Amounts reflect financing costs net of amortization totaling $3,866 as at December 31, 2020 and $4,972 as at December 31, 2019.

On December 6, 2019, the Company amended its existing revolving loan facility. The maximum credit available was increased from $300,000 to $360,000 with a revised maturity date of December 6, 2024. Concurrent with the amendment to the revolving loan facility, the maturity date of the non-revolving term loan was also extended to December 6, 2024.

34

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Terms and repayment schedule

The terms and conditions of the outstanding loan facilities were as follows:

December 31, 2020 Currency Nominal interest rate % Maturity Face value $ Carrying amount $	December 31, 2019
	Face value $ Carrying amount $
Unsecured notes(1) CDN 6.375 Oct 9, 2023 60,000 58,095 Revolving loan facility(2) CDN Based on Canadian prime rate or Canadian Offered Rate Dec 6, 2024 118,839 117,300 Revolving loan facility(2) USDBased on US prime rate or London Interbank Offered Rate Dec 6, 2024 13,206 13,167 Non-revolving term loan(3) CDN Based on Canadian prime rate or Canadian Banker’s Acceptance Rate Dec 6, 2024 20,125 19,770 Promissory notes(4) USD Various Dec 3, 2021 - Nov 9, 2023 3,018 3,018 Equipment term loan(5) CDN Based on Business Development Bank of Canada Floating Base Rate Jul 1, 2021 1,644 1,616 Equipment line(5) CDN Based on Business Development Bank of Canada Floating Base Rate Jul 1, 2025 3,644 3,644 Other CDN 5.000 Dec 31, 2020 12 12	60,000 57,424 164,725 162,912 49,149 49,028 22,791 22,404 3,052 3,052 5,080 5,005 4,226 4,226 49 49
Total loans and borrowings 220,488 216,622	309,072 304,100

1. Includes a non-call protection of three years with a declining call schedule thereafter; interest is payable semi-annually.

2. Maximum credit available is $360,000. Amount advanced under the facility at any time is limited to a defined percentage of inventories and trade receivables, less certain reserves. The facility is secured by a first charge over the Company’s assets and an assignment of trade receivables and requires that certain covenants be met by the Company.

3. Principal is amortized over 15 years and is payable in quarterly instalments. The loan is secured by a first charge against the Company’s timberlands and certain other assets, and a subordinated charge over the Company’s remaining assets, and requires that certain covenants be met by the Company.

4. Various unsecured notes were issued as partial consideration for acquisitions (Note 7).

5. The loans are secured by a first charge against the specific equipment being financed under this arrangement, and a subordinated charge over the Company’s other assets.

The Company was not in breach of any of its covenants during the year ended December 31, 2020.

35

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

17. PENSIONS AND OTHER POST-RETIREMENT BENEFITS

Defined benefit pension plans

The Company sponsors two non-contributory defined benefit pension plans: one a registered pension plan for salaried employees and the other a non-registered historical pension plan for certain retired executives. Both plans provide benefits based on years of service and historical highest average salary. The plans were closed to new participants effective August 1, 2000. The Company amended the registered defined benefit pension plan effective January 1, 2005 to reduce the benefit formula for future years of service and to allow members of the defined benefit pension plan to participate in the defined contribution plan. In respect of the non-registered historical executive pension plan, the Company has issued letters of credit amounting to $1,330 (2019 - $1,390) based on actuarial estimates determined annually.

The most recent actuarial valuation of the registered pension plan for funding purposes was as at December 31, 2019. The next actuarial valuation for the registered pension plan is required to be performed as at December 31, 2022.

Annuity contract

During the year ended December 31, 2020, the Company purchased an annuity buy-in for plan retirees for $6,292 through its defined benefit pension plan. Future cash flows from the annuity will match the amount and timing of benefits payable under the plan, substantially mitigating the exposure to future volatility in the related pension obligation. An actuarial gain of $300 relating to the purchase was recognized in other comprehensive income (loss), reflecting the difference between the annuity buy-in rate (which is comparable to solvency rates) compared to the discount rate used to value the obligations on a going concern basis.

At December 31, 2020, total buy-in annuities purchased to date were $42,301, representing 78% (2019 - 63%) of the defined benefit pension plan obligation which was fully hedged against changes in future discount rates and longevity risk (potential increases in life expectancy of plan members).

Defined contribution plans

The Company sponsors defined contribution plans for eligible employees. Pension expense for the defined contribution plans for the year ended December 31, 2020 amounted to $1,271 (2019 - $1,065) and was included in distribution, selling and administration expenses.

Post-retirement benefits other than pensions

The Company provides extended health care benefits and pays provincial medical plan premiums on behalf of qualifying employees. The Company also pays for the dental benefits of certain retirees who had been employed at a predecessor company.

Total cash payments

Total cash payments for employee future benefits for 2020, consisting of cash contributed by the Company to defined benefit plans, defined contribution plans, and other post-retirement benefits, were $1,897 (2019 - $1,727), with no solvency deficiency contributions.

Included in total cash payments, based on 2020 experience, the Company expects the 2021 contributions for its defined benefit plans to be approximately $279. Solvency deficiency contributions are not required.

36

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

The status of the defined benefit pension and post-retirement benefit plans were as follows:

	Pension benefit plan 2020 $ 2019 $	Other benefit plans
		2020 $ 2019 $
Net benefit expense Current service cost Non-investment expenses Interest cost on benefit obligation Interest on effect of asset ceiling impairment at beginning of year Expected return on plan assets	414 350 120 100 1,416 1,696 - 34 (1,361) (1,683)	- - - - 63 79 - - - -
Net benefit expense	589 497	63 79
Defined benefit obligation Defined benefit obligation at January 1 Current service cost Interest cost on benefit obligation Benefits paid Actuarial losses on obligation	48,248 45,661 414 350 1,416 1,696 (2,914) (3,350) 5,725 3,891	2,179 2,198 - - 63 79 (237) (202) 261 104
Defined benefit obligation at December 31	52,889 48,248	2,266 2,179
Plan assets Fair value of plan assets at January 1 Expected return on plan assets Employer contributions Non-investment expenses Benefits paid Actuarial gains on plan assets	46,722 45,461 1,361 1,683 389 460 (120) (100) (2,914) (3,350) 3,350 2,568	- - - - 237 202 - - (237) (202) - -
Fair value ofplan assets at December 31	48,788 46,722	- -
Net benefit liability Fair value of plan assets at December 31 Accrued benefit obligation at December 31	48,788 46,722 (52,889) (48,248)	- - (2,266) (2,179)
Net benefit liability	(4,101) (1,526)	(2,266) (2,179)

37

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

The Company has recorded net benefit expense and actuarial gains as follows:

	Pension benefit plan 2020 $ 2019 $	Other benefit plans
		2020 $ 2019 $
Distribution, selling and administration Current service cost Non-investment expenses	414 350 120 100	- - - -
	534 450	- -
Finance costs Interest cost on benefit obligation Interest on effect of asset ceiling impairment at beginning of year Expected return on plan assets	1,416 1,696 - 34 (1,361) (1,683)	63 79 - - - -
	55 47	63 79
Other comprehensive (losses) income Actuarial losses on obligation due to changes in financial assumptions Actuarial (losses) gains on obligation due to changes in demographic assumptions Actuarial (losses) gains on obligation due to changes in experience Actuarial gains on plan assets Net change in effect of asset ceiling	(4,070) (3,891) (1,116) - (539) - 3,350 2,568 - 926	(378) (118) 216 - (99) 14 - - - -
	(2,375) (397)	(261) (104)

Assets

The weighted average asset allocation of the defined benefit plan consisted of:

	2020	2019
	%	%
Annuity	78	63
Debt securities	18	31
Short-term securities	4	5
Equity securities	**- **	1
	100	100

38

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

The major categories of plan assets of the fair value of the total plan assets were as follows:

	2020	2019
	%	%
Annuity	78	63
Unquoted investments (pooled funds)	22	36
Investments quoted in active markets	**- **	1
	100	100

Significant assumptions

The significant weighted average assumptions used were as follows:

	Pension benefit plan 2020 % 2019 %	Other benefit plans
		2020 % 2019 %
Accrued benefit obligation as of December 31 Discount rate Rate of compensation increase Benefit costs for year ended December 31 Discount rate Rate of compensation increase	2.30 3.00 3.25 3.25 3.00 3.80 3.25 3.25	2.30 3.00 3.00 3.80

Assumed health care cost trend rates at December 31 were as follows:

	2020	2019
Health care initial cost trend rate	7.0%	8.0%
Health care ultimate cost trend date	3.5%	3.5%
Year that the rate reaches the ultimate trend rate	2037	2027

The mortality assumptions were based on the 2014 Canadian Pensioners Mortality Private table with generational projection using mortality improvement scale CPM-B and adjusted for size of pensions.

Sensitivity analysis

A one-percentage point change in the assumed rate of increase in health care costs would have the following effects:

	Other benefit plans	Other benefit plans
	2020	2019
	Increase $ Decrease $	Increase $ Decrease $
Effect on the defined benefit obligation Effect on the aggregate current service cost and interest cost	240 (220) 6 (5)	233 (208) 8 (5)

39

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

A one-percentage point change in the assumed discount rate would have the following effects:

	Pension benefit plan	Other benefit plans
	Increase $ Decrease $	Increase $ Decrease $
2020 Effect on the defined benefit obligation Effect on the aggregate current service cost and interest cost for the next year 2019 Effect on the defined benefit obligation Effect on the aggregate current service cost and interest cost for the next year	(5,509) 6,690 279 (360) (4,792) 5,822 210 (266)	(172) 190 16 (19) (146) 165 15 (17)

The average duration of the defined benefit plan obligation at December 31, 2020 was 12 years.

18. SHARE CAPITAL

The authorized capital of the Company consists of an unlimited number of common and preferred shares with no par value.

Normal Course Issuer Bid

In 2018, the Company commenced a Normal Course Issuer Bid (“NCIB”) with respect to its common shares. Under the terms of the NCIB, the Company may purchase for cancellation up to an authorized number of common shares over a twelve-month period. Shares acquired will be at the market price of the shares at the time of acquisition.

Since the inception of the NCIB, the Company’s NCIB activity was as follows:

				Remaining
	Authorized	Repurchased	Expired	authorized
Effectiveperiod	#	#	#	#
November 26, 2018 - November 25, 2019	6,085,605	142,200	5,943,405	-
November 26, 2019 - November 25, 2020	5,995,340	-	5,995,340	-
November 26, 2020-November 25, 2021	5,972,461	-	-	5,972,461
As at December 31, 2020		142,200	11,938,745	5,972,461

Upon the cancellation of the common shares, the difference between the consideration paid for the repurchased shares and the average carrying value of the common shares is credited to contributed surplus.

40

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Restricted Equity Common Share Plan (“RECSP”)

Outstanding Restricted Stock Units (“RSUs”) pursuant to the RECSP were as follows:

	Years ended December 31,	Years ended December 31,
	2020	2019
	#	#
Balance at January 1	-	-
Granted	59,388	5,852
Additional RSUs earned as notional dividends	5,625	-
Vested and converted to common shares during the period	(11,589)	(5,852)
Balance at December 31	53,424	-

Compensation expense in respect of RSUs for the year ended December 31, 2020 was $92 (2019 - $29).

Employee Common Share Purchase Plan (“ECSPP”)

For the year ended December 31, 2020, the Company issued 158,801 (2019 – 157,079) common shares from treasury for gross proceeds of $671 (2019 - $630), pursuant to the ECSPP.

Subsequent to December 31, 2020, the Company issued 61,036 shares under the ECSPP for gross proceeds of $393.

Dividends

The following dividends were declared and paid by the Company:

Quarter 1 Quarter 2 Quarter 3 Quarter 4		2020 Declared Per share $ Amount $ 0.14 10,897 0.14 10,898 0.12 9,352 0.12 9,352 0.52 40,499	Payment date Apr 15, 2020 Jul 15, 2020 Oct 15,2020 Jan 15, 2021	2019 Declared Record date Per share $ Amount $ Mar 29, 2019 0.14 10,876 Jun 28, 2019 0.14 10,877 Sep 30, 2019 0.14 10,887 Dec 31, 2019 0.14 10,887 0.56 43,527
	Record date			Record date	Payment date
	Mar 31, 2020 Jun 30, 2020 Sep 30, 2020 Dec 31, 2020			Mar 29, 2019 Jun 28, 2019 Sep 30, 2019 Dec 31, 2019	Apr 15, 2019 Jul 15, 2019 Oct 15, 2019 Jan 15, 2020

The Company is continually assessing its dividend policy in the context of overall profitability, cash flows, capital requirements, general economic conditions and other business needs. Accordingly, on June 15, 2020, the Company announced a dividend reduction beginning with the dividend payable on October 15, 2020, to shareholders of record on September 30, 2020, reducing its quarterly dividend from $0.14 to $0.12 per share.

41

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

19. COST OF SALES

Cost of sales includes the following costs:

	2020	2019
	$	$
Purchased and treated building materials	1,307,527	1,078,409
Salaries and benefits	25,627	29,581
Timber and related products	22,882	30,168
Inventory provisions	1,292	3,213
Others	539	653
Fair value adjustments	(232)	231
	1,357,635	1,142,255

20. DISTRIBUTION, SELLING AND ADMINISTRATION COSTS

Distribution, selling and administration costs include the following:

	2020	2019
	$	$
Salaries and benefits	78,635	70,223
Building occupancy costs	14,370	14,312
Office and miscellaneous	9,829	8,758
Travel, promotion and entertainment	5,263	8,020
Professional and management fees	5,059	4,479
	113,156	105,792

21. INCOME TAXES

Income tax for the Company consisted of the following:

Consolidated Statements of Earnings

	2020	2019
	$	$
Current income tax expense	23,832	6,876
Deferred income tax recovery	(1,381)	(2,035)
	22,451	4,841

42

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Consolidated Statements of Comprehensive Earnings

	2020	2019
	$	$
Deferred tax recovery related to items recorded in OCI during the year
Actuarial losses	(724)	(136)

The Company’s effective income tax rate differs from the statutory income tax rate. The difference arises from the following items:

	2020	2019
	$	$
Earnings before income taxes	82,038	22,060
Income tax at statutory rates	21,923	5,908
Adjustment to deferred tax assets related to changes in tax rates	(87)	5
Permanent differences and other	615	(1,072)
Income tax expense	22,451	4,841

Temporary differences that give rise to deferred income tax assets and liabilities were as follows:

	2020	2019
	$	$
Deferred income tax (liabilities) assets:
Property, plant and equipment	(5,646)	(9,497)
Timber	(9,499)	(8,636)
Pensions and other post-retirement benefits	1,717	1,000
Non-capital losses	6,811	7,835
Non-deductible reserves	3,726	4,361
Intangible assets and goodwill	(8,778)	(9,004)
Net deferred income tax liabilities	(11,669)	(13,941)

Net deferred income tax liabilities consisted of the following:

	2020	2019
	$	$
Deferred income tax assets	2,856	2,861
Deferred income tax liabilities	(14,525)	(16,802)
Net deferred income tax liabilities	(11,669)	(13,941)

43

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

At December 31, 2020, the Company had approximately $40,680 of Canadian non-capital losses that may be available for deduction against taxable income in future years. These losses expire as follows:

Years ending December 31	$
2028	386
2029	1,284
2030	3,527
2031	1,411
2032	1,856
Thereafter	32,216
	40,680

At December 31, 2020, approximately $15,000 of these non-capital losses have not been recognized as deferred income tax assets.

22. FINANCE COSTS

Finance costs include the following:

Finance costs include the following:
	2020	2019
	$	$
Loans and borrowings	9,824	14,858
Lease liabilities	4,660	4,659
Other	(301)	145
Net interest	14,183	19,662
Amortization of financing costs	1,405	1,706
Accretion of earn-out commitment	-	374
Interest on net defined benefit liability	118	126
	15,706	21,868

44

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

23. RELATED PARTY TRANSACTIONS

Transactions

The Company had transactions with related parties in the normal course of operations at amounts as agreed between the related parties as follows:

	2020	2019
	$	$
Leased facilities: distribution(1)and treatment(2)	3,983	3,638
Purchase of product(3)(4)	2,888	3,818
Management fees and other(5)	876	1,349
Professional fees and other(6)	534	542

1. Paid to a company in which a member of key management personnel who is a director and officer of the Company has an interest.

2. Paid to a company solely controlled by a director and officer of the Company.

3. Paid to a public company that a member of key management personnel who is a director and officer of the Company has an ownership interest in: $2,888 (2019 - $3,423).

4. Paid to a company owned by a director of the Company: $nil (2019 - $395).

5. Paid to a company controlled by a member of key management personnel who is also a director and officer of the Company .

6. Paid to a company controlled by an officer of the Company.

Commitments with related parties

Future undiscounted minimum payments under the terms of the leases with companies, in which a member of key management personnel who is also a director and officer of the Company has an interest in, were as follows:

Years ending December 31	$
2021	4,166
2022	4,172
2023	4,190
2024	3,910
2025	2,455
Thereafter	13,796
	32,689

Payable to related parties

As at December 31, 2020, trade and other payables include amounts due to related parties as follows:

	2020	2019
	$	$
Purchase of product(1)	131	18
Management fees and other(2)	42	96
Professional fees and other(3)	112	159

1. Owing to a public company that a member of key management personnel who is a director and officer of the Company has an ownership interest in.

2. Owing to a company controlled by a member of key management personnel who is also a director and officer of the Company .

3. Owing to a company controlled by an officer of the Company.

45

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Compensation of key management personnel

Compensation of key management was reported on the accrual basis of accounting consistent with the amounts recognized on the consolidated statement of earnings. Key management includes the Company’s Board of Directors, the Chief Executive Officer, the President, and the Chief Financial Officer. Compensation awarded to key management is summarized as follows:

	2020	2019
	$	$
Salaries and other benefits	3,221	3,100
Share-based compensation	92	29
	3,313	3,129

24. FINANCIAL INSTRUMENTS

Non-derivative financial instruments

The carrying amounts of non-derivative financial instruments approximate fair value, with the exception of the following:

	December 31, 2020 Carrying amount $ Fair value $	December 31, 2019
		Carrying amount $ Fair value $
Revolving loan facility Unsecured notes Non-revolving term loan Equipment term loan and equipment line	130,467 132,045 58,095 60,780 19,770 20,125 5,272 5,300	211,940 213,874 57,424 58,026 22,404 22,791 9,280 9,355

The following methods and assumptions were used to determine the estimated fair value of each class of financial instrument:

• The fair values of cash, trade and other receivables, cheques issued in excess of funds on deposit, trade and other payables, performance bond obligations and dividends payable were comparable to their carrying amounts, given the short maturity periods.

• The fair values of the Company’s revolving loan facility, non-revolving term loan, equipment term loan and equipment line approximate their carrying values as they bear interest at variable rates based on current market rates. The fair values have been estimated as the carrying values excluding unamortized financing costs.

• The fair value of the Company’s unsecured notes was based on the quoted active market price at December 31, 2020.

• The fair values of the Company’s promissory notes and lease liabilities approximate their carrying values as they bear interest that approximates current market rates.

46

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

IFRS 13, Fair Value Measurement requires classification of financial instruments within a hierarchy that prioritizes the inputs to fair value measurement.

The three levels of the fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

• Level 2 – Inputs other than quoted prices that are observable for the asset and liability, either directly or indirectly; and

Level 3 – Inputs that are not based on observable market data.

All of the Company’s assets and liabilities are categorized as Level 3 fair values, with the exception of unsecured notes and dividends payable, which are categorized as Level 1 and Level 2, respectively.

The expenses resulting from financial assets and liabilities recorded in net earnings are as disclosed in Note 22.

Derivative financial instruments

The Company uses derivative financial instruments for economic hedging purposes in managing lumber price risk and foreign exchange risk through the use of futures contracts and options. Derivative instruments are measured at fair value through profit and loss, with changes in fair value recorded in net earnings.

At December 31, 2020, the Company held various outstanding foreign exchange contracts to purchase an aggregate of US$2,600 (2019 - US$3,100) for economic hedging purposes. Additionally, the Company held a nominal amount of lumber futures contracts.

When held by the Company, these derivative financial instruments are traded through well-established financial services firms with a long history of providing trading, exchange and clearing services for commodities and currencies. As trading activities are closely monitored and restricted by senior management, including limits for a maximum number of outstanding contracts at any point in time, the risk of credit loss on these financial instruments is considered low.

Financial risk management

The Company’s activities result in exposure to a variety of financial risks from its financial assets and financial liabilities, including risks related to credit, interest rates, currency, liquidity and wood product prices.

Financial assets include trade and other receivables, which are measured at amortized cost. Financial liabilities include cheques issued in excess of funds on deposit, trade and other payables, performance bond obligations, dividends payable, unsecured notes, revolving loan facility, non-revolving term loan, promissory notes, lease liabilities, and equipment term loan and equipment line. All financial liabilities are measured at amortized cost.

The Board of Directors has overall responsibility for establishment and oversight of the Company’s risk management, which seeks to minimize any potential adverse effects on the Company’s financial performance.

47

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Credit risk

Credit risk is the risk of financial loss to the Company if a customer fails to meet its contractual obligations, and arises primarily from the Company’s trade and other receivables. The Company grants credit to its customers in the normal course of operations. To limit its exposure to credit risk, the Company performs ongoing evaluations of the credit quality of its customers and follows diligent credit granting and collection procedures. Purchase limits are established for each customer and are reviewed regularly.

The Company regularly reviews the collectability of its trade accounts receivable and establishes an allowance for doubtful accounts based on its best estimate of any potentially uncollectible accounts.

As at December 31, 2020, trade accounts receivable, excluding other receivables, were as follows:

	$
Current	122,670
Past due over 60 days	608
Trade receivables	123,278
Less: Allowance for doubtful accounts	(562)
	122,716

As at December 31, 2020, the maximum exposure to credit risk, including both trade and other receivables, is $131,501 (December 31, 2019 - $98,420), which represents the carrying value amount of financial instruments classified as trade and other receivables.

Interest rate risk

The Company is exposed to interest rate risk through its variable rate revolving loan facility, non-revolving term loan, and equipment term loan and equipment line (Note 16). Based on the Company’s average revolving loan facility, non-revolving term loan, equipment term loan and equipment line balances during the year ended December 31, 2020, the sensitivity of a 1% increase in interest rates would result in an approximate decrease of $1,688 in annual net earnings.

Currency risk

Currency risk is the risk that changes in market prices of foreign exchange rates will affect the Company’s earnings or the value of its holdings of financial instruments. The Company is exposed to currency risk on the United States dollar components of its revolving loan facility, as well as revenues and purchase transactions that are denominated in United States dollars.

As at December 31, 2020, a $0.05 increase in the United States dollar versus the Canadian dollar would have an insignificant impact on net earnings, and an increase in other comprehensive earnings of approximately $11,177.

48

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due or at a reasonable cost. The Company manages liquidity risk by having appropriate credit facilities available at all times. In addition, the Company continuously monitors and reviews both actual and forecasted cash flows. The Company is exposed to refinancing risks, as there can be no assurance that the Company will be able to secure credit on the same terms or amount when the facility expires.

Other price risk

Other price risk is defined as the potential adverse impact on net earnings and economic value due to price movement and volatilities. The Company is exposed to other price risk with respect to certain wood products. The Company closely monitors wood product prices.

25. CHANGES IN NON-CASH WORKING CAPITAL

	2020	2019
	$	$
Trade and other receivables	(32,163)	4,534
Inventories	35,833	5,807
Prepaid expenses and deposits	(2,439)	(2,939)
Trade and other payables	35,140	(116)
Performance bond obligations	(1,971)	(83)
	34,400	7,203

26. REVENUE

The following table presents disaggregated revenues from contracts for the Company in categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows were affected by economic factors.

	2020 Distribution $ Forestry $ Total $ 1,010,215 29,451 1,039,666 567,615 6,523 574,138 1,577,830 35,974 1,613,804 1,574,441 35,974 1,610,415 3,389 - 3,389 1,577,830 35,974 1,613,804	2019
		Distribution $ Forestry $ Total $
Primary geographic markets Canada United States		866,611 40,513 907,124 419,169 7,908 427,077
		1,285,780 48,421 1,334,201
Revenue categories Products Services		1,281,953 48,421 1,330,374 3,827 - 3,827
		1,285,780 48,421 1,334,201

49

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Certain customers elect to prepay for goods and services, for which the Company has recorded a contract liability of $4,539 as at December 31, 2020 (December 31, 2019 - $4,059), related to these future performance obligations (unearned revenues). These amounts are included in trade and other payables in the unaudited Interim Condensed Consolidated Statement of Financial Position.

The Company has sold products to certain customers who comprise greater than 10% of its revenues. During the year ended December 31, 2020, two customers individually accounted for revenues in excess of 10%, purchasing an aggregate of $522,777 (2019 - $353,740, representing two customers).

27. SEGMENTED INFORMATION

The Company operates in two reportable business segments and two geographic areas.

The two reportable business segments offer different products, require different production processes, and are based on how financial information is produced internally for the purposes of making operating decisions. The following summary describes the operations of each of the Company’s reportable business segments:

• Distribution – wholesale distribution of building materials and home renovation products, including value-added services such as lumber pressure treating; and

• Forestry – timber ownership and management of private timberlands and forest licenses, harvesting and trucking operations, and value-added services such as post-peeling and post and pole pressure treating operations.

Revenues between segments are accounted for at prices that approximate fair value. No business segments have been aggregated to form the above reportable business segments.

Business segment revenues and specified expenses were as follows:

	2020	2019
	Distribution $ Forestry $ Adjustments and eliminations(1) $ Consolidated $	Distribution $ Forestry $ Adjustments and eliminations(1) $ Consolidated $
Revenue External customers Inter-segment	1,577,830 35,974 - 1,613,804 - 2,679 (2,679) -	1,285,780 48,421 - 1,334,201 - 2,142 (2,142) -
	1,577,830 38,653 (2,679) 1,613,804	1,285,780 50,563 (2,142) 1,334,201
Specified expenses Depreciation and amortization Finance costs Net earnings (loss)	35,057 9,592 - 44,649 14,396 1,310 - 15,706 65,202 (5,615) - 59,587	34,288 7,523 - 41,811 19,132 2,736 - 21,868 17,981 (762) - 17,219
Purchase of property, plant and equipment	2,336 470 - 2,806	3,943 3,373 - 7,316

1. Includes inter-segment eliminations and income and expenses that are not allocated to reportable business segments.

50

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

Business segment long-term assets were as follows:

	December 31, 2020 Distribution $ Forestry $ Percent % Consolidated $ 177,270 103,078 59 280,348 194,033 - 41 194,033 371,303 103,078 100 474,381	December 31, 2019
		Distribution $ Forestry $ Percent % Consolidated $
Canada United States		170,694 116,962 59 287,656 204,006 - 41 204,006
Long-term assets		374,700 116,962 100 491,662

The percentage of total revenue from external customers from product groups was as follows:

	2020	2019
	%	%
Construction materials	65	58
Specialty and allied	29	35
Forestry and other	6	7
	100	100

28. CAPITAL DISCLOSURES

The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide dividends to shareholders and benefits for other stakeholders. The Company includes debt and equity, comprising shareholders’ capital, contributed surplus, deficit and cumulative dividends on shares, in the definition of capital.

The Company seeks to maintain a balance between the higher returns that might be possible with the leverage afforded by higher borrowing levels and the security afforded by a sound capital structure. It does this by maintaining appropriate debt levels in relation to its working capital and other assets in order to provide the maximum dividends to shareholders commensurate with the level of risk. Also, the Company utilizes its debt capabilities to buy back shares, where appropriate, in order to maximize cash distribution rates for remaining shareholders.

The Company manages the capital structure and adjusts it in light of changes in economic conditions. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase shares in the market, issue new shares, or sell assets to reduce debt.

The Company’s policy is to dividend all available cash from operations to shareholders after provision for cash required for maintenance of capital expenditures and other reserves considered advisable by the Company’s directors. The Company has eliminated the impact of seasonal fluctuations by equalizing quarterly dividends.

There are no externally imposed capital requirements and the Company’s loan agreements do not contain any capital maintenance covenants.

There were no changes to the Company’s approach to capital management during the current year.

51

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

29. SEASONALITY

The Company’s revenues are subject to seasonal variances that fluctuate in accordance with the normal home building season. The Company generally experiences higher revenues in the second and third quarters compared to the first and fourth quarters. In addition, forestry operations and harvesting activities can be compromised by inaccessibility to some sites during wet seasons, extreme winter weather conditions and periods of extreme heat and low humidity, resulting in decreased harvest and customer delivery levels. This creates a timing difference between free cash flow earned and dividends paid. While the Company has leveled dividends to provide a regular income stream to shareholders over the course of a year, the second and third quarters have historically been the Company’s most profitable.

30. CONTINGENCIES

Global pandemic

On March 11, 2020, the World Health Organization declared the novel coronavirus (specifically identified as “COVID-19”) a global pandemic (the “Pandemic”). COVID-19’s impact on global markets has been significant through the year ended December 31, 2020, and as the situation continues to rapidly evolve, the magnitude of its effects on the economy and on the Company’s financial and operational performance, is uncertain at this time.

At the time these consolidated financial statements were authorized for issuance, the Company has been classified as an essential service for the majority of its operations in Canada and the United States, and therefore has not been required to shut down. Additionally, certain jurisdictions in which the Company’s customers operate have re-opened. However, due to the uncertainty of the spread of COVID-19, these or other markets may be required to close in the future. The Company has taken steps to mitigate the Pandemic’s impact on its customers, operations and cash flows by optimizing its working capital, implementing salary and working hours reductions, initiating temporary employee layoffs, deferring or eliminating certain non-essential operating expenditures, minimizing capital expenditures, evaluating ongoing cost savings opportunities and reducing dividends (as discussed in Note 18).

The Company will continue to closely monitor the COVID-19 situation and should the duration, spread or intensity of the Pandemic further develop, the supply chain, market pricing and customer demand could be affected.

These factors may further impact the Company’s operating plan, its liquidity and cash flows, its operating results and the valuation of its long-lived assets, inventory and trade and other receivables.

Product liability and other claims

During the normal course of business, certain product liability and other claims have been brought against the Company and, where applicable, its suppliers. While there is inherent difficulty in predicting the outcome of such matters, management has vigorously contested the validity of these claims, where applicable, and, based on current knowledge, believes that they are without merit and does not expect that the outcome of any of these matters, in consideration of insurance coverage maintained, or the nature of the claims, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, results of operations or future earnings of the Company.

52

CanWel Building Materials Group Ltd. 2020 ANNUAL REPORT

Notes to the Consolidated Financial Statements for the years ended December 31, 2020 and 2019

==> picture [158 x 100] intentionally omitted <==

31. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year, including an immaterial reclassification between trade and other payables and opening equity as at January 1, 2019.

53

==> picture [123 x 105] intentionally omitted <==

Corporate Information

Directors

Ian M. Baskerville Toronto, Ontario

Amar S. Doman Vancouver, British Columbia

Tom Donaldson Saint John, New Brunswick

Kelvin Dushnisky Toronto, Ontario

Sam Fleiser Toronto, Ontario

Stephen W. Marshall Vancouver, British Columbia

Harry Rosenfeld Vancouver, British Columbia

Marc Seguin Vancouver, British Columbia

Siegfried J. Thoma Portland, Oregon

Officers

Amar S. Doman Chairman and CEO James Code Chief Financial Officer

R.S. (Rob) Doman Corporate Secretary

CanWel Building Materials National Office 1600 – 1100 Melville Street P.O. Box 39 Vancouver BC V6E 4A6

Contact Phone: (604) 432-1400 Internet: www.canwel.com

Transfer Agent

AST Trust Company (Canada) Vancouver, British Columbia Toronto, Ontario

Investor Relations

Auditors

KPMG LLP Vancouver, British Columbia

Solicitors

Goodmans LLP Toronto, Ontario

DLA Piper (Canada) LLP Vancouver, British Columbia

Contact Ali Mahdavi Phone: (416) 962-3300

Stock Exchange Toronto Stock Exchange

Trading Symbols: CWX, CWX.NT.A

==> picture [612 x 46] intentionally omitted <==