Spin Master Corp. — Annual Report 2020

Mar 1, 2021

Spin Master Corp.

Annual consolidated financial statements

For the years ended December 31, 2020 and December 31, 2019

Deloitte LLP Bay Adelaide East 8 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Canada

Tel: 416-601-6150 Fax: 416-601-6151 www.deloitte.ca

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Independent Auditor’s Report

To the Shareholders of Spin Master Corp.

Opinion

We have audited the consolidated financial statements of Spin Master Corp. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2020 and 2019, and the consolidated statements of earnings and comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2020 and 2019, and its financial performance and its 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 (“Canadian GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our 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.

Key Audit Matter

A key audit matter is a matter that, in our professional judgment, was of most significance in our audit of the financial statements for the year ended December 31, 2020. This matter was addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter.

Provisions for sales allowances - Refer to Notes 2F, 3D and 10 to the financial statements Key Audit Matter Description

The Company routinely enters into arrangements with its customers to provide sales incentives, support customer promotional activities and provide compensation for defective merchandise. Such arrangements are considered variable consideration for revenue recognition purposes, and the Company uses the expected value method to quantify the variable consideration. A sales allowance is established to reflect amounts for programs which can be contractual or discretionary by nature. Contractual allowances are fixed and determinable at the time of sale, which do not require management to make significant judgments. The determination of the provisions for discretionary sales allowances are impacted by various current and forward-looking factors including customer sales volumes, channel inventory positions, product performance at retail, historical performance, market conditions and other considerations.

Given the significant judgments made by management to estimate the provisions for discretionary sales allowances, performing audit procedures to evaluate their reasonableness required a high degree of auditor judgment and an increased extent of audit effort.

How the Key Audit Matter Was Addressed in the Audit

Our audit procedures related to the determination of the provisions for discretionary sales allowances included the following procedures, among others:

• Evaluated management’s methods around the development of the provisions for discretionary sales allowances.

• Evaluated the reasonableness of the assumptions used by management to develop the provisions for discretionary sales allowances, including assessing the completeness and appropriateness of information considered by management.

• Tested the underlying inputs used in the determination of the provisions for discretionary sales allowances.

• Assessed management’s historical ability to estimate the provisions for discretionary sales allowances by comparing the prior year estimated amounts to actual allowances utilized in the current year.

• Evaluated the reasonableness of the provisions for discretionary sales allowances by comparing a sample to the actual results of transactions occurring after year end.

Other Information

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

• Management’s Discussion and Analysis

• The information, other than the financial statements and our auditor’s report thereon, in the Annual Report

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, or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor’s 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 this auditor’s report. We have nothing to report in this regard.

The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance.

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 IFRS, 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.

Auditor’s 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 auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS 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 these financial statements.

As part of an audit in accordance with Canadian GAAS, we exercise professional judgment 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 auditor’s 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 auditor’s 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 presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We 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.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine 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 auditor's 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 report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Steve Lawrenson.

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Chartered Professional Accountants Licensed Public Accountants March 1, 2021

Spin Master Corp.

Consolidated statements of financial position

		Dec 31,	Dec 31,
(US$ millions)	Notes	2020	2019
Assets
Current assets
Cash		320.6	115.3
Trade receivables	10	265.2	370.7
Other receivables	10	73.4	57.0
Inventories	11	102.0	185.3
Advances on royalties		17.2	18.0
Prepaid expenses		7.9	14.4
Other assets	12	3.0	—
		789.3	760.7
Non-current assets
Intangible assets	14	192.0	182.4
Goodwill	15	138.0	138.8
Right-of-use assets	24	67.0	78.3
Property, plant and equipment	13	53.4	66.8
Deferred income tax assets	9	98.7	26.2
Advances on royalties		0.7	3.2
Other assets	12	3.0	—
		552.8	495.7
Total assets		1,342.1	1,256.4
Liabilities
Current liabilities
Trade payables and accrued liabilities	16	314.4	345.6
Contract liabilities	17	25.3	7.6
Provisions and contingent liabilities	19	29.2	26.2
Income tax payable	9	21.1	4.5
Lease liabilities	24	15.4	15.1
		405.4	399.0
Non-current liabilities
Provisions and contingent liabilities	19	5.2	9.0
Deferred income tax liabilities	9	29.6	20.4
Lease liabilities	24	59.0	67.6
		93.8	97.0
Total liabilities		499.2	496.0
Shareholders’ equity
Share capital	20	724.8	714.5
Retained earnings (accumulated deficit)		17.4	(28.1)
Contributed surplus		36.6	35.8
Accumulated other comprehensive income		64.1	38.2
Total shareholders’ equity		842.9	760.4
Total liabilities and shareholders’ equity		1,342.1	1,256.4

Approved by the Board of Directors on March 1, 2021.

The accompanying notes on pages 5 to 44 are an integral part of these consolidated financial statements.

1

Spin Master Corp.

Consolidated statements of earnings and comprehensive income

		Year Ended Dec 31	Year Ended Dec 31
(US$ millions, except earnings per share)	Notes	2020	2019
Revenue	4	1,570.6	1,581.6
Cost of sales		842.7	796.6
Gross profit		727.9	785.0
Expenses
Selling, marketing, distribution and product development	7	367.8	395.4
Administrative expenses	7	264.6	247.9
Depreciation and amortization expenses	7	37.7	32.6
Other expenses	5	8.7	6.6
Foreign exchange loss	8	27.6	5.8
Finance costs	6	12.1	11.7
Income before income tax (recovery) expense		9.4	85.0
Income tax(recovery)expense	9	(36.1)	20.7
Net income		45.5	64.3
Earnings per share
Basic	21	0.45	0.63
Diluted	21	0.44	0.62
		Year Ended Dec 31
(US$ millions)	Notes	2020	2019
Net income		45.5	64.3
Items that may be subsequently reclassified to net income
Foreign currencytranslationgain on foreign operations		25.9	18.3
Other comprehensive income		25.9	18.3
Total comprehensive income		71.4	82.6

The accompanying notes on pages 5 to 44 are an integral part of these consolidated financial statements.

2

Spin Master Corp.

Consolidated statements of changes in shareholders' equity

		Share	(Accumulated deficit) retained	Contributed	Accumulated other comprehensive
(US$ millions)	Note	capital	earnings	surplus	income	Total
January 1, 2019		694.1	(92.4)	40.9	19.9	662.5
Net income		—	64.3	—	—	64.3
Other comprehensive income		—	—	—	18.3	18.3
Share-based compensation	20	—	—	15.2	—	15.2
Shares released from equity participation	20	8.4	—	(8.4)	—	—
Exercise of share options	20	0.2	—	(0.1)	—	0.1
Shares issued upon settlement of LTIP	20	11.8	—	(11.8)	—	—
December 31, 2019		714.5	(28.1)	35.8	38.2	760.4
January 1, 2020		714.5	(28.1)	35.8	38.2	760.4
Net income		—	45.5	—	—	45.5
Other comprehensive income		—	—	—	25.9	25.9
Cancellation of common shares	20	(1.1)	—	—	—	(1.1)
Share-based compensation	20	—	—	12.2	—	12.2
Shares released from equity participation	20	8.2	—	(8.2)	—	—
Shares issued upon settlement of LTIP	20	3.2	—	(3.2)	—	—
December 31, 2020		724.8	17.4	36.6	64.1	842.9

The accompanying notes on pages 5 to 44 are an integral part of these consolidated financial statements.

3

Spin Master Corp. Consolidated statements of cash flows

(US$ millions)	Notes	2020	2019
Operating activities
Net income		45.5	64.3
Adjustments to reconcile net income to cash provided by operating activities
Income tax (recovery) expense	9	(36.1)	20.7
Interest expense (income)	6	1.7	(1.6)
Depreciation and amortization expense	7	103.0	84.6
Gain on disposal of property, plant and equipment	13	(0.1)	—
Accretion expense	6	5.6	6.5
Amortization of financing costs	6	0.4	0.9
Impairment of intangible asset and property, plant and equipment	13, 14	0.9	5.6
Unrealized foreign exchange loss	8	41.7	11.7
Share-based compensation expense	20	12.2	15.2
Net change in non-cash working capital	22	153.0	(91.6)
Net change in provisions and contingent liabilities		(1.8)	7.2
Income taxes paid		(25.6)	(27.0)
Income taxes received		12.1	—
Interest(paid)received		(1.7)	1.9
Cashprovided by operating activities		310.8	98.4
Investing activities
Investment in property, plant and equipment	13	(21.0)	(40.9)
Investment in intangible assets	14	(57.7)	(53.3)
Business acquisitions, net of cash acquired	15	0.7	(22.5)
Advance paid for business acquisitions	12, 29	(3.0)	—
Investment in limited partnership	12	(1.8)	—
Investment in trademark license agreement	14	(2.4)	—
Proceeds from sale of investments	15	0.3	—
Proceeds from disposal ofproperty, plant and equipment	13	—	0.5
Cash used in investing activities		(84.9)	(116.2)
Financing activities
Proceeds from loans and borrowings	18	350.0	—
Repayment of loans and borrowings	18	(350.0)	—
Payment of lease liabilities	24	(15.2)	(13.8)
Issuance of common shares from exercise of share options	20	—	0.1
Cancellation of common shares	20	(1.1)	—
Cash used in financing activities		(16.3)	(13.7)
Effect of foreign currency exchange rate changes on cash		(4.3)	3.3
Net increase (decrease) in cash during the period		205.3	(28.2)
Cash,beginningofperiod		115.3	143.5
Cash, end of period		320.6	115.3

The accompanying notes on pages 5 to 44 are an integral part of these consolidated financial statements.

4

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

Spin Master Corp.

1. Description of business

Spin Master Corp., was incorporated on June 9, 2004, under the laws of the Province of Ontario, Canada and is a global children’s entertainment company creating exceptional play experiences through a diverse portfolio of innovative toys, entertainment franchises and digital games. Spin Master Corp. creates, designs, manufactures, licenses and markets a diversified portfolio of toys, games and products, creates and produces multiplatform content, stories and characters in both original shows along with short-form series and creates digital games and apps. Its registered office is located at 225 King Street West, Suite 200, Toronto, Canada, M5V 3M2. Spin Master Corp. and its subsidiaries are together referred to, in these consolidated financial statements, as the “Company” or “Spin Master”.

The Company has three reportable operating segments: North America, Europe and Rest of World (see Note 28).

2. Summary of significant accounting policies

(A) Statement of compliance and basis of preparation and measurement

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB") with interpretations of the International Financial Reporting Interpretations Committee ("IFRIC").

All financial information is presented in millions of United States dollars ("US$") and has been rounded to the nearest hundred thousand, except as otherwise indicated.

These consolidated financial statements were approved and authorized for issuance by the Board of Directors on March 1, 2021.

The consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments that are measured at fair value, as explained in the accounting policies below. Historical cost is measured on the fair value of the consideration provided in exchange for goods and services.

(B) Application of new and revised IFRS

IFRS 16 Leases

The Company has adopted the IFRS 16 "Leases" amendment related to COVID-19 Rent Concessions effective June 1, 2020. The amendment provides lessees with a practical expedient that relieves a lessee from assessing whether a COVID-19-related rent concession is a lease modification.

The Company, as a lessee, has elected to apply the practical expedient to all eligible contracts and has accounted for rent concessions occurring as a direct consequence of COVID-19 as if they were not lease modifications. The forgiveness of lease payments is accounted for as a variable lease payment and that part of the lease liability is derecognized. For deferrals of lease payments, interest continues to be recognized on the lease liability and the liability is reduced once payments are made to the lessor.

The Company has applied the amendment and has recognized an impact for the year ended December 31, 2020 in its lease liabilities on the balance sheet of $0.1 million related to rent forgiveness and $1.0 million related to rent deferrals.

IFRS 3 Business Combinations

The IASB published amendments to IFRS 3 "Business Combinations". The amendment clarifies the definition of a business and outputs. The amendment also adds guidance that determines if substantive processes have been acquired or if an acquired set of activities and assets is a business. The amendments are effective for fiscal years beginning on or after January 1, 2020. The Company has adopted these changes to IFRS 3 for the year ended December 31, 2020.

5

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Summary of significant accounting policies (continued)

(C) Basis of preparation

The consolidated financial statements incorporate the financial statement accounts of the Company and entities controlled by the Company and its subsidiaries (the “Group”). Control is achieved when the Company:

• has power over the investee;

• is exposed, or has rights, to variable returns from its involvement with the investee; and

• has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of earnings and comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between

members of the Group are eliminated in full on consolidation.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which has resulted in governments worldwide enacting emergency measures to combat the spread of the pandemic. These measures have caused disruption to businesses globally resulting in an economic slowdown which has impacted the demand for the Company’s products.

The Company’s financial performance in 2020 was impacted by the supply chain disruption in the first half of 2020 and the reduction in customer demand due to COVID-19. As a result of the dynamic nature of these circumstances, it is not possible to reliably estimate the length and severity of the pandemic and the impact on the financial results of the Company.

During the first quarter of 2020, due to the uncertainties caused by the COVID-19 pandemic and as a precautionary measure, the Company borrowed a total of $350.0 million under its credit facility, to maximize liquidity and increase available cash on hand. The Company repaid $50.0 million and $300.0 million in the second and third quarters of 2020, respectively.

The Company has assessed the significant accounting judgments and estimates in preparing the Company’s consolidated financial statements for the year ended December 31, 2020.

(D) Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities incurred by the Company to the former owners of the acquiree and the equity interests issued by the Company in exchange for control of the acquiree. Acquisition-related costs are recognized in profit or loss as incurred.

When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustment against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

6

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Summary of significant accounting policies (continued)

(D) Business combinations (continued)

All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with the relevant policy. Contingent consideration that is classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognized in profit or loss. There has been no changes in the fair value of contingent consideration classified as equity.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known would have affected the amounts recognized at that time.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value.

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Goodwill is measured as the excess of the sum of the consideration transferred, over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash generating units ("CGUs") (or groups of CGUs) that are expected to benefit from the combination.

(E) Goodwill

A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata based on the carrying amount of each asset in the unit.

Any impairment loss for goodwill is recognized directly in profit or loss, and an impairment loss recognized for goodwill is not reversed in subsequent periods. On disposal of the relevant CGU, the attributed amount of goodwill is included in the determination of the profit or loss on disposal.

(F) Revenue recognition

Sale of Goods

The majority of the Company’s revenue is derived from the sales of toys and related products to retail customers and distributors in domestic and international markets. Revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The Company recognizes revenue when control of the goods has transferred, which is determined by respective shipping terms and certain additional considerations. Invoices are generally issued at the time of delivery (which is when the Company has satisfied its performance obligations under the arrangement). As such, a receivable is recognized as the consideration is unconditional and only the passage of time is required before payment is due.

The Company does not have performance obligations subsequent to delivery of the sale of goods to customers and revenues from sale of goods are recognized upon the passing of control to the customer.

The Company routinely enters into arrangements with its customers to provide sales incentives, support customer promotion and provides allowances for returns and defective merchandise. Such programs are based primarily on purchases, customer performance of specified promotional activities and other specified factors, which are not necessarily stipulated in the customer's contract.

Revenue represents the amount of consideration to which the Company expects to be entitled to through the sale of goods excluding sales tax and after the application of the variable consideration constraint. Variable consideration includes estimates for defective products, sales allowances and returns by customers made based on certain judgments, contractual terms and conditions and historical data. The Company uses the expected value method to quantify the variable consideration. The Company monitors periodic results against historical data and makes any adjustments to both sales discounts and returns accruals as required. Note 3 - Significant accounting judgments and estimates outlines additional details on sales allowances.

7

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(F) Revenue recognition (continued)

Entertainment and Licensing revenue

Television distribution sales, which are generated by the use of the Company's brands and other intellectual property through the production of television and streaming programming for licensing to third parties, are recognized in accordance with the relevant agreements. The license agreement is assessed as either providing the customer with a 'right-to-use' or 'right-to-access' license and the applicable revenue is recognized at a point-in-time or over time based on the classification determined. The license to distribute television and streaming programming grants a right to use the Company's brands and other intellectual property. The licensee pays a fixed fee for the license of the produced content. Revenue is recognized upon delivery of the television or streaming programming and is measured based on the consideration to which the Company expects to be entitled to upon delivery. There are no future performance obligations associated with the delivery of the programs.

For entertainment and licensing revenues that are generated by the use of the Company’s brands and other intellectual property, the license is assessed as either providing the customer with a ‘right-to-use’ or ‘right-to-access’ license and revenue is recognized at a point-in-time or over time based on the classifications determined. Judgment is required in determining the appropriate classification. The license of the Company’s brands provide access to the intellectual property over the term of the license and is considered a right-to-access license of intellectual property. The Company records sales-based or usage-based royalty revenues for right-to-access licenses upon occurrence of the licensees’ subsequent sale or usage.

Customer advances on contracts, licensing and/or television distribution, are recorded in contract liabilities until all of the foregoing revenue recognition conditions have been met. This does not give rise to a significant financing component as the timing difference between when the customer advances are recorded and the revenue recognition conditions being fulfilled are protective for both parties of a contract, to protect against failure of completion of some of their obligations under the contract.

Digital games

The Company develops digital applications ("apps") which are hosted by third-party platform providers. The Company controls all aspects of the apps delivered to the end user. The third-party platform providers are providing the service of hosting and administrating receipt from the end users. The Company has determined that it is the principal in the arrangement and revenues are recorded in other revenue on a gross basis. The fees charged by the third-party platform providers are recorded within cost of sales. Revenue associated with the sale of apps is recognized when control is transferred. This condition is typically met when the end-user purchases and downloads the app from the third-party. The end users can make in-app purchases and the Company recognizes revenue at the time of sale. The Company has no additional performance obligations other than the delivery of apps to the third-party platform providers.

Disaggregation of revenue

The Company disaggregates its revenues from contracts with customers by geographic segment: North America, Europe and Rest of World. The Company further disaggregates revenues by product category: Activities, Games & Puzzles and Plush, Remote Control and Interactive Characters, Boys Action and Construction, Pre-School and Girls and Outdoor. The Company believes these collectively depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See Note 28 Segment information for further information.

8

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

Spin Master Corp.

2. Significant accounting policies (continued)

(G) Leases

The Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Company recognizes the leases as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are assumed.

Lease liability

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate. The incremental borrowing rate is defined as the rate of interest that the Company would have to pay to borrow over a similar term and with a similar security the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Lease payments included in the measurement of the lease liability comprise:

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

• variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

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

• the exercise of purchase options, if the lessee is reasonably certain to exercise the options; and

• payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

• the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate;

• the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); and

• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

Right-of-use asset

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The Company applies IAS 36 Impairment of Assets to determine whether a right-of-use asset is impaired.

Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognized as an expense in the period in which the event or condition that triggers those payments occurs and are included in administrative expenses in the consolidated statement of earnings and comprehensive income.

9

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(G) Leases (continued)

As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components and instead account for any lease and associated non-lease components as a single arrangement. The Company has elected to use this practical expedient.

(H) Foreign currencies

The Company reports its financial results in US$; however, the functional currency of the Company is the Canadian dollar.

The assets and liabilities of foreign operations that have a functional currency different from that of the Company are translated into the Company’s functional currency of Canadian dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in the foreign currency translation adjustment as part of other comprehensive income.

In preparing the financial statements of each individual Group entity, transactions in currencies other than the Group entity’s functional currency are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The resulting foreign currency exchange gains or losses are recognized in profit or loss.

For the purposes of presenting these consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into US$ using exchange rates prevailing at the end of each reporting period. Income and expense items are translated in the same manner as above with exchange differences impacting other comprehensive income and accumulated in equity.

At December 31, 2020 and 2019, the functional currencies of the Groups subsidiaries included the Canadian dollar, the Euro, the Great Britain pound sterling, the Hong Kong dollar, the Mexican peso, the Chinese yuan, the Vietnamese dong, the Japanese yen, the Swedish krona, the Australian dollar, the Indian rupee, the Polish zloty, and the Russian ruble.

(I) Earnings per share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding, assuming the conversion of all dilutive securities were exercised during the period. Securities refer to all outstanding share options, Restricted Stock Units ("RSUs") and Performance Share Units ("PSUs").

(J) Income taxes

Income tax expense or recovery represents the sum of the taxes currently payable or receivable and deferred taxes.

Current tax

For each entity in the Group, the tax currently payable is based on taxable income for the year. Taxable income differs from “income before income tax expense (recovery)” as reported on the consolidated statement of earnings and comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Company’s current tax expense or recovery is calculated using income tax rates that have been enacted or substantively enacted by the end of the reporting period.

10

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(J) Income taxes (continued)

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of taxable income. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are recognized for deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.

Deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than a business combination) of assets and liabilities in a transaction that does not affect either taxable income or net income before income taxes. In addition, deferred tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered.

Deferred tax liabilities and assets are measured at the income tax rates that are expected to apply in the period in which the liability is expected to be settled or the asset realized, based on income tax rates (and income tax laws) that have been enacted or substantively enacted at the end of the reporting period, reflecting the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax for the period

Current and deferred tax expense or recovery are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case the current and deferred tax expenses are also recognized in other comprehensive income or directly in equity, respectively. Where current deferred taxes arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

(K) Cash

Cash is net of outstanding bank overdrafts, if applicable.

(L) Property, plant and equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.

Depreciation is recognized so as to depreciate the cost or valuation of assets less their residual values over their useful lives, using the straight-line method or declining balance method. Repairs and maintenance costs are recognized in profit or loss as incurred.

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

The following are the estimated useful lives for the major classes of property, plant and equipment:

Land	Not depreciated
Buildings	30 years
Moulds, dies and tools	2 years
Office equipment	3 years
Leasehold improvements	Lesser of lease term or 5 years
Computer hardware	3 years
Machinery and equipment	30% declining balance

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amounts of the asset and is recognized in profit or loss.

11

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(M) Intangible assets

The following are the estimated useful lives for the major classes of intangible assets:

Brands	Indefinite
Trademarks and licenses	5 years
Customer lists	5 years
Intellectual property ("IP")	10 years
App and content development	1-5 years
Computer software	1-5 years

Intangible assets acquired separately in an asset acquisition

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses, if any.

Amortization is recognized on a straight-line basis over the estimated useful life of the intangible assets. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Intangible assets with indefinite useful lives, such as brands that are acquired separately are carried at cost less accumulated impairment losses.

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair values at the acquisition date (which is regarded as their initial cost).

Subsequent to initial recognition, intangible assets acquired in business combinations are reported at cost less accumulated amortization if applicable and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

- - Internally generated intangible assets research and development expenditures

Expenditures on research activities are recognized as incurred. An internally-generated intangible asset arising from development (or from the development phase of an internal project) is recognized only if all of the following have been demonstrated:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;

• the intention to complete the intangible asset for use or sale;

• the ability to use or sell the intangible asset;

• how the intangible asset will generate probable future economic benefits;

• the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

• the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internallygenerated intangible asset can be recognized, development expenditures are recognized in profit or loss in the period in which they are incurred.

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

12

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(M) Intangible assets (continued)

Television production assets

Television production assets are a component of intangible assets and are recorded at cost as content development. The Company has access to government programs, including tax credits that are designed to assist film and television production and distribution in Canada. The federal and provincial tax credits are not recognized until there is reasonable assurance that the Company will comply with the conditions attached to them and that the tax credits will be received. Capitalized costs net of expected federal and provincial tax credits are charged to amortization expense as completed episodes are delivered on a pro-rata basis over the total number of episodes for the season.

Contract liabilities related to television production assets arises as a result of consideration received in advance of the Company fulfilling its obligations.

Impairment of tangible and intangible assets other than goodwill

At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the CGU to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, otherwise, they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives or that are not yet available for use are tested for impairment at least annually and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs of disposal and value in use. 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 for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss equal to the difference between the carrying and recorded amounts is recognized immediately in profit or loss.

When an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

(N) Advances on royalties

The Company enters into license agreements with inventors and licensors for the use of their intellectual properties in its products. These agreements may call for payment in advance of minimum guaranteed amounts. Amounts paid in advance are initially recorded as an asset and subsequently expensed to net income or loss as revenue from the related products is recognized. If all or a portion of an advance does not appear to be recoverable through future use of the rights obtained under license, the non-recoverable portion is expensed immediately in profit or loss.

(O) Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. Cost includes the purchase price and other costs, such as import duties, taxes and transportation costs. Trade discounts and rebates are deducted from the purchase price. Net realizable value represents the estimated selling price for inventories in the ordinary course of business, less all estimated costs of completion and costs necessary to make the sale. Reserves for excess and obsolete inventory are based upon quantities on hand, projected volumes from demand forecast and net realizable value. The impact of changes in inventory reserves is reflected in cost of sales.

13

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(P) Provisions and contingent liabilities

A provision is a liability of uncertain timing or amount. Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and if the amount can be reliably estimated. Provisions are measured at the present value of the amount expected to be required to settle the obligation and are re-measured each reporting date.

Contingent consideration

Where the Company is committed to pay royalties on sales of acquired brands, the future royalty obligation is based on the Company’s estimate of the related brands future sales, discounted for the timing of expected payments.

Provision for defectives

Defectives refer to when the end consumer returns defective goods to the Company’s customers. Customers without a fixed allowance for defectives are eligible for a credit for the cost of the product if returned as defective by the end consumer. The estimate of defectives is made based on the class and nature of the product and is recorded as a reduction to revenue in the consolidated statement of earnings and comprehensive income.

Supplier obligations

Supplier obligations represent the estimated compensation to be paid to suppliers for lower than expected volumes purchased, resulting in the supplier having excess raw material and finished goods inventories. While payments are not contractually required, the Company regularly compensates suppliers to maintain supplier relationships, which represents a constructive obligation due to past practices. The supplier obligation is based on an estimate of the cost of the supplier’s excess raw material and finished goods inventory.

(Q) Share-based payments

As part of the Company’s Initial Public Offering (the “Initial Offering”), employees were granted subordinate voting shares through equity participation arrangements. The Initial Offering price multiplied by the number of shares that an employee was entitled to receive is recognized as an expense in administrative expenses, with a corresponding increase in contributed surplus over the vesting period, at the end of which, the employees become unconditionally entitled to the shares. The amount expensed is adjusted for forfeitures as required.

The Company has one share option plan for key employees, which forms part of their long-term incentive compensation plan. Under the plan, the exercise price of each option equals the market price of the Company’s shares on the date of grant and the options have a maximum term of ten years. Options vest between zero and four years.

The equity based compensation plan providing for the issuance of securities from treasury under which the grants will be made by the Company. Under the long-term incentive plan ("LTIP"), the Board may at its discretion from time to time, grant share options, share units (in the form of RSUs and PSUs), Stock Appreciation Rights ("SARs"), restricted stock and any other equity based awards. These awards may be settled in shares at the option of the Company. LTIP liabilities are recorded in shareholders equity and not marked to market.

(R) Financial instruments

Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the respective instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are included in the initial carrying value of the related instrument and are amortized using the effective interest method. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

14

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(R) Financial instruments (continued)

Fair value estimates are made at the consolidated statement of financial position date based on relevant market information and information about the financial instrument. All financial instruments are classified into either: fair value through profit or loss (“FVTPL”) or amortized cost.

The Company has made the following classifications:

Cash	Amortized cost
Trade and other receivables	Amortized cost
Other long-term assets	Amortized cost
Investment in a limited partnership	FVTPL
Trade payables and other liabilities	Amortized cost
Loans and borrowings	Amortized cost
Interest payable	Amortized cost
Other long-term liabilities	Amortized cost
Foreign exchange forward contracts	FVTPL

(S) Financial assets

The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Financial assets at FVTPL

Financial assets are classified as FVTPL when the financial asset is either held for trading or it is designated as FVTPL. A financial asset is classified as held for trading if:

• it has been acquired principally for the purpose of selling it in the near term;

• on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or

• it is a derivative that is not designated and effective as a hedging instrument.

Financial assets at amortized cost

Financial assets at amortized cost are non-derivative financial assets which are held within a business model whose objective is to hold assets to collect contractual cash flows and whose contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A financial asset (unless it is a trade receivable without a significant financing component that is initially measured at the transaction price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition. Subsequent to initial recognition, financial assets are measured at amortized cost using the effective interest method, less any impairment.

Impairment of financial assets

Financial assets, other than those classified as FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been decreased.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account.

When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are offset against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss. Loss allowances are based on the lifetime expected credit losses that result from all possible default events over the expected life of the trade receivable, using the simplified approach.

15

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies (continued)

(T) Financial liabilities and equity instruments

For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

Classification as debt or equity

Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized as the proceeds received, net of direct issue costs.

Other financial liabilities

Other financial liabilities (including loans and borrowings and trade payables and other liabilities) are initially measured at fair value, net of transaction costs. Subsequently, other financial liabilities are measured at amortized cost using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

(U) Derivative financial instruments

The Company enters into foreign exchange forward contracts to manage its exposure to foreign exchange rate risks.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently re-measured at their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss.

(V) Fair value hierarchy and liquidity risk disclosure

Fair value measurements are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The fair value hierarchy has the following levels:

• Level 1 - valuation based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

• Level 2 - valuation techniques based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

• Level 3 - valuation techniques using inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The fair value of short-term financial instruments approximates their carrying amounts due to the relatively short period to maturity. These include cash, trade and other receivables, as well as trade payables and other liabilities and provisions. Fair value amounts represent point-in-time estimates and may not reflect fair value in the future.

16

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

2. Significant accounting policies ( continued )

(W) Accounting standards issued but not yet adopted

IAS 1 Presentation of Financial Statements

The IASB published amendments to IAS 1 "Presentation of Financial Statements". The amendments clarify the requirements for classifying liabilities as current or non-current. In particular, they specify the conditions which exist at the end of the reporting period will be used to determine if a right to defer settlement of a liability exists, and clarify the situations that are considered settlement of a liability. The amendments are effective for fiscal years beginning on or after January 1, 2023 and are applicable retrospectively. The Company is currently assessing these changes and their potential impact on the Company's financial statements.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

The IASB published amendments to IAS 37 "Provisions, Contingent Liabilities and Contingent Assets". The amendments specify that the cost of fulfilling a contract consists of both incremental costs of fulfilling the contract and an allocation of other costs that relate directly to fulfilling contracts. The amendments are effective for fiscal years beginning on or after January 1, 2022. The Company is currently assessing these changes and their potential impact on the Company's financial statements.

3. Significant accounting judgments and estimates

In the application of the Company’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. As these estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant, actual results may differ. The estimates and underlying assumptions are reviewed on an ongoing basis. Adjustments are recognized in the period in which the estimate is modified if the change affects only that period, or in the period the estimate is modified and future periods if the revision affects both current and future periods.

Critical judgments in applying accounting policies

The Company has identified the following judgments, apart from estimates, which management has made in the process of applying the Company’s accounting policies and which have the most significant effect on the amounts recognized in the consolidated financial statements.

(A) Determination of CGUs

A CGU is defined as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Determining the impact of impairment requires significant judgment in identifying which assets or groups of assets are CGUs of the Company.

(B) Functional currency

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates as of the dates the transactions occur. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date.

Determining the appropriate functional currencies for entities in the Group requires analysis of various factors, including the currencies and country-specific factors that mainly influence sales prices, and the currencies that mainly influence labour, materials and other costs of providing goods or services.

Significant estimates and assumptions

The Company has identified the following accounting policies under which significant judgments, estimates and assumptions are made, where actual results may differ from these estimates under different assumptions and conditions, and which may materially affect the Company's financial results or financial position in future periods.

(A) Useful life of property, plant and equipment and intangible assets with finite useful lives

The Company employs significant estimates to determine useful lives of property, plant and equipment and intangible assets with finite useful lives, considering industry trends such as technological advancements, past experience, expected use and review of asset lives.

17

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

3. Significant accounting judgments and estimates ( continued )

Components of an item of property, plant and equipment may have different useful lives. The Company makes estimates when determining depreciation methods, depreciation rates and useful lives, which require taking into account industry trends and company-specific factors. The Company reviews depreciation methods, useful lives and residual values annually or when circumstances change and adjusts, if necessary, its depreciation methods and assumptions prospectively.

(B) Impairment testing of goodwill and indefinite life intangible assets

Goodwill and indefinite life intangible assets are assessed for impairment at least annually, and whenever there is an indication of impairment. The Company determines the fair value of its CGU groupings and indefinite life intangible assets using discounted cash flow models corroborated by other valuation techniques.

The process of determining these fair values requires the Company to make estimates and assumptions of a longterm nature regarding discount rates, projected revenues, royalty rates and margins derived from past experience, actual operating results and budgets. These estimates and assumptions may change in the future due to uncertain competitive and economic market conditions or changes in business strategies.

(C) Provision for inventories

Inventories are stated at the lower of cost and estimated net realizable value. The Company estimates net realizable value as the amount at which inventories are expected to be sold, taking into consideration fluctuations in retail prices due to seasonality less estimated costs required to sell. Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices.

(D) Sales allowances

A sales allowance is established to reflect amounts for programs which can be contractual or discretionary by nature, and can include negotiated discounts, customer audits, defective products and refund of costs incurred by customers to sell the Company’s products. Contractual allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Discretionary allowances can vary depending on future outcomes such as customer sales volume, inventory position, product performance at retail, historical performance, market conditions and other considerations. The Company may adjust its estimate of sales allowances when facts and circumstances used in the estimation process change.

(E) Income and other taxes

The calculation of current and deferred income taxes requires the Company to make estimates and assumptions and to exercise judgment regarding the carrying values of assets and liabilities which are subject to accounting estimates inherent in those balances, the interpretation of income tax legislation across various jurisdictions, expectations about future operating results, the timing of reversal of temporary differences and possible audits of income tax filings by tax authorities.

Changes or differences in underlying estimates or assumptions may result in changes to the current or deferred income tax balances on the consolidated statements of financial position, a charge or credit to income tax expense in the consolidated statement of earnings and comprehensive income and may result in cash payments or receipts. All income, capital and commodity tax filings are subject to audits and reassessments. Changes in interpretations or judgments may result in a change in the Company’s income, capital or commodity tax provisions in the future. The amount of such a change cannot be reliably estimated.

18

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

Spin Master Corp.

4. Revenue

The Company earns revenue from the following primary sources:

• a. Sales of toys and related products;

• b. Entertainment and Licensing revenue; and

• c. Digital games revenue.

	Year	Ended Dec 31
(US$ millions)	2020	2019
Revenue from sale of goods	1,415.6	1,463.7
Entertainment and Licensing revenue	78.2	91.7
Digitalgames revenue	76.8	26.2
Revenue	1,570.6	1,581.6

5. Other expenses

		Year Ended Dec 31	Year Ended Dec 31
(US$ millions)	Notes	2020	2019
Impairment of non-current assets	13, 14	0.9	5.6
Other		7.8	1.0
Other expenses		8.7	6.6

The Company agreed to a legal settlement of $5.5 million included in other expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020. The legal settlement was recorded in accrued liabilities and paid subsequent to December 31, 2020.

Other includes $3.7 million in contingent consideration related to previous acquisitions (see Note 19) (2019 - $4.3 million).

6. Finance costs

Finance costs
	Year Ended Dec 31
(US$ millions)	2020	2019
Bank fees	4.4	5.9
Accretion expense - lease liabilities	4.6	4.8
Accretion expense - other	1.0	1.7
Amortization of financing costs	0.4	0.9
Interest expense(income)	1.7	(1.6)
Finance costs	12.1	11.7

7. Expenses

Included within expenses are the following: selling, marketing, distribution and product development expenses; administrative expenses, which include employee benefit expenses, property and operations and professional fees; and depreciation and amortization expenses.

Selling, marketing, distribution and product development expenses

	Year Ended Dec 31	Year Ended Dec 31
(US$ millions)	2020	2019
Selling	109.5	112.0
Marketing	133.1	155.0
Distribution	90.7	98.1
Product development	34.5	30.3
Selling, marketing, distribution and product development expenses	367.8	395.4

19

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

7. Expenses (continued)

Administrative expenses

	Year Ended Dec 31	Year Ended Dec 31
(US$ millions)	2020	2019
Employee compensation and benefits	184.5	172.1
Professional services	26.9	22.8
Property and operations	17.2	27.6
Technology	13.7	12.2
Recruiting and training	8.0	6.9
Bad debts	3.3	0.2
Other taxes	3.2	2.3
Restructuring	—	2.7
Other	7.8	1.1
Administrative expenses	264.6	247.9

Employee compensation and benefits

	Year Ended Dec 31	Year Ended Dec 31
(US$ millions)	2020	2019
Salaries, wages and bonuses	5.8	5.6
Employee benefits	1.2	0.9
Employee compensation and benefits expenses in cost of sales	7.0	6.5
Salaries, wages and bonuses	144.3	130.5
Share-based compensation	12.2	15.2
Restructuring expense	5.3	6.1
Employee benefits	22.7	20.3
Employee compensation and benefits in administrative expenses	184.5	172.1
Employee compensation and benefits	191.5	178.6

Depreciation and amortization expenses

	Year Ended Dec 31	Year Ended Dec 31
(US$ millions)	2020	2019
Property, plant and equipment
Moulds, dies and tools, included in cost of sales	23.6	20.9
Equipment	4.2	3.4
Land and leasehold improvements	6.3	5.8
Computer hardware	1.6	1.4
	35.7	31.5
Intangible assets
Trademarks, licenses, IP & customer lists - definite	7.7	6.8
Content development, included in cost of sales	38.6	28.8
App development, included in cost of sales	3.1	2.3
Computer software	4.6	2.2
	54.0	40.1
Right-of-use assets	13.3	13.0
Depreciation and amortization expenses	103.0	84.6

20

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

8. Foreign exchange loss

For the year ended December 31, 2020, the Company incurred a foreign exchange loss (net of gains) of $27.6 million (2019 - $5.8 million).

(US$ millions)	2020	2019
Unrealized foreign exchange losses	41.7	11.7
Realized foreign exchangegains	(14.1)	(5.9)
Foreign exchange loss	27.6	5.8

Unrealized foreign exchange gains and losses are generated by the translation of monetary assets and liabilities denominated in a currency other than the functional currency and also includes gains and losses related to the Company's hedging programs. Realized foreign exchange gains and losses are recognized when monetary assets and liabilities denominated in a currency other than the functional currency of the applicable entity are settled. The Company uses derivative financial instruments such as foreign exchange forward contracts to manage foreign currency risk (see Note 27).

9. Income tax

The income tax (recovery) expense recognized in the consolidated statement of earnings and comprehensive income comprise of the following:

(US$ millions)	2020	2019
Current income tax expense	27.4	22.9
Deferred income tax recovery	(63.5)	(2.2)
Income tax (recovery) expense	(36.1)	20.7

The income tax (recovery) expense is calculated as follows:

(US$ millions)	2020		2019
Income before income tax(recovery)expense	9.4		85.0
Income tax expense at Canadian statutory tax rate of 26.5% (2019 - 26.5%)	2.5	26.5 %	22.5	26.5 %
Effect of:
Different tax rates of subsidiaries operating in other jurisdictions	(5.0)	(53.1) %	(4.2)	(5.0) %
Unused tax losses and tax attributes not recognized as deferred tax assets	1.7	18.1 %	1.5	1.8 %
(Income) expenses not (taxable) deductible in determining taxable income	(0.3)	(3.2) %	0.5	0.6 %
Recognition of previously unrecognized tax losses and other deferred tax assets	—	— %	(0.4)	(0.5) %
Internal transfer of intangible property	(33.3)	(354.2) %	—	— %
Other	(1.7)	(18.1)%	0.8	1.0 %
Income tax (recovery) expense	(36.1)	**(384.0) % **	20.7	24.4 %

The tax rates used for the reconciliations above are the Canadian statutory tax rates of the parent payable by corporate entities in the Group, on taxable profits under tax laws in the respective jurisdictions in which the Company operates.

Current tax assets and liabilities

As at December 31, 2020, the Company had an income tax payable of $21.1 million (2019 - $4.5 million).

Deferred income tax balances

The following is the analysis of deferred income tax assets and liabilities presented in the consolidated statements of financial position:

(US$ millions)	2020	2019
Deferred income tax assets	98.7	26.2
Deferred income tax liabilities	(29.6)	(20.4)
Net deferred income tax assets	69.1	5.8

21

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

9. Income tax (continued)

The sources of deferred income tax balances are as follows:

		Recognized	Foreign	Recognized
		in	currency	on business
(US$ millions)	2018	net income	translation	combination	2019
Property, plant and equipment	(1.6)	3.2	—	—	1.6
Intangible assets	(7.9)	(1.5)	—	(1.7)	(11.1)
Provisions and contingent liabilities	9.6	1.8	(0.1)	—	11.3
Allowance for doubtful accounts	0.2	—	—	—	0.2
	0.3	3.5	(0.1)	(1.7)	2.0
Benefits of tax loss carryforwards	6.4	0.4	(0.1)	—	6.7
Other temporarydifferences in basis	(1.2)	(1.7)	—	—	(2.9)
Net deferred tax assets	5.5	2.2	(0.2)	(1.7)	5.8

		Recognized	Foreign
		in	currency
(US$ millions)	2019	net income	translation	2020
Property, plant and equipment	1.6	5.5	(0.1)	7.0
Intangible assets	(11.1)	52.6	0.7	42.2
Provisions and contingent liabilities	11.3	5.4	(0.6)	16.1
Allowance for doubtful accounts	0.2	(0.5)	—	(0.3)
	2.0	63.0	—	65.0
Benefits of tax loss carryforwards	6.7	1.3	(0.4)	7.6
Other temporarydifferences in basis	(2.9)	(0.8)	0.2	(3.5)
Net deferred tax assets	5.8	63.5	(0.2)	69.1

Unused tax losses

As at December 31, 2020, the Company had unused tax losses of $5.5 million (2019 - $5.7 million). Unused tax losses of $0.4 million will expire between 2021 and 2030, $2.6 million will expire beyond 2030 and $2.5 million may be carried forward indefinitely. There were no unrecognized deductible temporary differences for the year ended December 31, 2020 (2019 - nil).

Unrecognized taxable temporary differences associated with investments

liabilities were not recognized as at December 31, 2020, are $219.0 million (2019 - $236.2 million).

22

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

10. Trade and other receivables

Trade receivables

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Trade receivables	426.5	546.2
Provisions for sales allowances	(158.1)	(174.9)
Allowance for doubtful accounts	(3.2)	(0.6)
Trade receivables	265.2	370.7

Trade receivables disclosed above include amounts that are past due as at the end of the reporting period.

Trade receivables past due but not impaired

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
61-90 days	1.5	6.7
91-120 days	0.7	2.9
> 120 days	10.9	19.7
Total trade receivables past due but not impaired	13.1	29.3

Movement in the allowance for doubtful accounts

Movement in the allowance for doubtful accounts
	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Beginning of year	0.6	2.2
Net impairment losses (net recoveries) recognized	4.1	(0.8)
Amounts written off during the year as uncollectible	(1.6)	(0.8)
Foreign currencytranslation	0.1	—
End of year	3.2	0.6

In determining the recoverability of a trade receivable, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period.

During the year ended December 31, 2019, the Company recognized a bad debt recovery of $0.9 million in administrative expenses (other), related to the legal motion filed by Toys R Us Inc. on March 15, 2018, to wind down and liquidate certain of Toys R Us Inc.'s global businesses.

Other receivables

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Investment tax credits receivable	31.8	24.2
Royalty receivables	11.5	14.2
Production receivables	10.6	2.9
Sales tax receivables	7.6	12.0
Digital games receivables	4.3	3.4
Unrealized foreign exchange gain	3.7	—
Other	3.9	0.3
Other receivables	73.4	57.0

23

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

11. Inventories

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Raw materials	7.8	12.4
Finishedgoods	94.2	172.9
Inventories	102.0	185.3

The cost of inventories recognized as an expense in cost of sales during the year was $692.4 million (2019 - $686.9 million).

During the year ended December 31, 2020, $1.1 million of inventories were written down to net realizable value (2019 - $9.0 million). This charge is included within cost of sales in the consolidated statement of earnings and comprehensive income.

12. Other assets

Other assets
	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Current	3.0	—
Non-current	3.0	—
Other assets	6.0	—

The current portion of the other assets includes $3.0 million relating to the Company's deposit for the acquisition of Rubik's Brand Limited subsequent to December 31, 2020 (see Note 29).

The non-current portion of the other assets includes $3.0 million relating to the Company's investment in a limited partnership. The Company has paid $1.8 million and is obligated to pay the remaining $1.2 million upon receiving capital calls over the remaining term of the limited partnership agreement. The investment is held for medium to long-term strategic purposes (see Note 27).

24

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

Spin Master Corp.

13. Property, plant and equipment

			Land and
	Moulds, dies		leasehold	Computer
(US$ millions)	and tools	Equipment	improvements	hardware	Total
Cost
December 31, 2018	114.0	24.4	33.8	11.3	183.5
Additions	24.7	7.6	5.6	3.0	40.9
Disposals	(8.7)	(2.3)	(1.9)	(0.2)	(13.1)
Foreign currencytranslation	(1.1)	—	1.6	0.1	0.6
December 31, 2019	128.9	29.7	39.1	14.2	211.9
Additions	18.9	1.4	0.3	0.4	21.0
Disposals	(2.8)	(0.1)	—	(0.1)	(3.0)
Asset impairments	—	(0.6)	—	—	(0.6)
Foreign currencytranslation	7.5	0.8	0.7	0.5	9.5
December 31, 2020	152.5	31.2	40.1	15.0	238.8
Accumulated depreciation
December 31, 2018	(93.5)	(15.2)	(10.4)	(8.4)	(127.5)
Depreciation	(20.9)	(3.4)	(5.8)	(1.4)	(31.5)
Disposals	8.7	2.3	1.9	0.2	13.1
Foreign currencytranslation	1.4	(0.1)	(0.5)	—	0.8
December 31, 2019	(104.3)	(16.4)	(14.8)	(9.6)	(145.1)
Depreciation	(23.6)	(4.2)	(6.3)	(1.6)	(35.7)
Disposals	2.8	0.2	—	0.1	3.1
Asset Impairments	—	0.1	—	—	0.1
Foreign currencytranslation	(5.5)	(1.2)	(0.7)	(0.4)	(7.8)
December 31, 2020	(130.6)	(21.5)	(21.8)	(11.5)	(185.4)
Net carrying amount
December 31, 2019	24.6	13.3	24.3	4.6	66.8
December 31, 2020	21.9	9.7	18.3	3.5	53.4

Using a discounted cash flow approach, the Company assessed tangible assets for any indication of impairment. Impairment losses are recorded when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount was based on the asset's value in use. For the year ended December 31, 2020, the Company recorded impairment losses of $0.5 million (2019 - nil).

25

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

14. Intangible assets

(US$ millions) Note	Brands - indefinite Trademarks, licenses, IP & customer lists - definite Content development Computer software Total
Cost December 31, 2018 Additions Asset impairments Assets acquired through business combinations 26 Foreign currencytranslation	113.4 45.9 113.2 19.7 292.2 — — 48.1 5.2 53.3 (5.6) — — — (5.6) 6.5 5.5 — — 12.0 1.4 0.3 3.2 1.0 5.9
December 31, 2019	115.7 51.7 164.5 25.9 357.8
Additions Disposals Asset impairments Assets acquired through business combinations Foreign currencytranslation	— 1.2 50.6 5.9 57.7 — — — (0.2) (0.2) — — (0.4) — (0.4) — 2.4 — — 2.4 1.8 (0.5) 9.5 1.1 11.9
December 31, 2020	117.5 54.8 224.2 32.7 429.2
Accumulated amortization December 31, 2018 Amortization Foreign currencytranslation	— (11.9) (97.3) (17.2) (126.4) — (6.8) (31.1) (2.2) (40.1) — 0.2 (8.3) (0.8) (8.9)
December 31, 2019	— (18.5) (136.7) (20.2) (175.4)
Amortization Disposal Foreign currencytranslation	— (7.7) (41.7) (4.6) (54.0) — — — 0.2 0.2 — — (7.2) (0.8) (8.0)
December 31, 2020	— (26.2) (185.6) (25.4) (237.2)
Net carrying amount
December 31, 2019 December 31, 2020	115.7 33.2 27.8 5.7 182.4
	117.5 28.6 38.6 7.3 192.0

The Company has capitalized content development costs for an entertainment production with a carrying amount of $16.9 million at December 31, 2020 (2019 - $6.1 million). Amortization of these costs will begin once the content has been delivered and will be amortized over an estimated 2 year period.

The Company holds intellectual property relating to the Games and Puzzles CGU. The carrying amount of $5.7 million at December 31, 2020 (2019 - $6.6 million) will be fully amortized in 6 years.

The carrying amount of indefinite life brands by CGU is as follows:

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Games and Puzzles	33.4	31.6
GUND	33.9	33.9
Swimways	27.8	27.8
Toca Boca	13.0	13.0
Etch A Sketch	7.2	7.2
Meccano	2.2	2.2
Total	117.5	115.7

26

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

14. Intangible assets (continued)

The Company has assessed these intangible assets to have indefinite useful lives as they will generate economic benefit with no foreseeable limit. Therefore, the Company does not amortize these intangible assets, but tests for impairment in accordance with the Company's policy.

Using a discounted cash flow approach, the Company assessed intangible assets for any indication of impairment. For assets where indicators of impairment existed, the Company has determined the recoverable amount of net assets. Impairment losses are recorded where the carrying amount of the CGU exceeds its recoverable amount.

The recoverable amount of a CGU is determined based on a value in use calculation which uses cash flow projections based on financial forecasts covering a five-year period and a terminal value. The terminal value is the value attributed to the CGU's cash flows beyond the five-year period. The key assumptions used in the value in use calculation are discount rates and growth rates.

The discount rate applied to each CGU to determine the value in use is a pre-tax discount rate that reflects current market assessments of the time value of money and considers the risk-free rate, market equity risk premium, size premium and the risks specific to each CGU's cash flow projections. The pre-tax discount rates used by the Company for the purpose of its value in use calculations ranged from 10% to 18% (2019 - 11% to 14%).

Revenue growth rates are based on management's best estimates considering historical and expected future operating and plans, economic considerations and the general outlook for the industry and markets in which the CGU operates. Cash flow projections during the forecast period are determined using expected gross margins and raw materials price inflation throughout the forecast period. The projections are prepared separately for each of the Company's CGUs and are based on the most recent financial budgets approved by management. The terminal value is projected using a 1.0% (2019 - 1.0%) per annum growth rate in perpetuity which is the projected long-term average growth rate.

The Company has conducted a sensitivity analysis on the key assumptions used to determine the recoverable amount for each of the CGUs. Management believes that any reasonable change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the related CGUs.

For the year ended December 31, 2020, the Company completed its annual impairment tests for indefinite life intangible assets and concluded there was no impairment (2019 - $5.6 million in 1 CGU).

The Company recorded an impairment loss of $0.4 million in content development (2019 - nil).

15. Goodwill

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Balance, beginning of year	138.8	124.2
Additions during the year	—	13.6
Measurement period adjustment	(0.7)	—
Proceeds from sale during the year	(0.3)	—
Foreign currencytranslation	0.2	1.0
Balance, end of year	138.0	138.8

27

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

15. Goodwill (continued)

The carrying amount of goodwill was allocated to these CGUs as follows:

The carrying amount of goodwill was allocated to these CGUs as follows:
	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Games and Puzzles	48.5	48.2
Swimways	42.1	42.1
GUND	20.3	20.3
Toca Boca	11.5	11.5
Orbeez	8.0	9.0
Etch A Sketch	4.1	4.1
Meccano	2.1	2.2
Tech Deck	1.2	1.2
Spin Master UK	0.2	0.2
Goodwill	138.0	138.8

The Company assessed goodwill for any indication of impairment. The recoverable amount of the CGUs for goodwill have been determined on the same basis and assumptions as the indefinite lived intangible assets (see Note 14). There have been no impairment losses recognized with respect to goodwill during 2020 (2019 - nil).

16. Trade payables and accrued liabilities

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Trade payables	161.4	215.8
Accrued liabilities	153.0	129.8
Trade payables and accrued liabilities	314.4	345.6

Accrued liabilities are comprised of payroll related liabilities, accrued royalties, commodity tax and other balances.

During the year ended December 31, 2020, the Company announced changes in senior leadership. Included within accrued liabilities is a restructuring provision of $1.1 million (December 31, 2019 - $2.1 million). In the prior year, the Company executed the restructuring of the GUND, Swimways, Cardinal and other business units.

17. Contract liabilities

Contract liabilities are comprised of advances on contracts relating to entertainment and licensing revenue, which arise as a result of consideration received in advance of the Company fulfilling its obligations. As at December 31, 2020, the Company had contract liabilities of $25.3 million (December 31, 2019 - $7.6 million).

During the year ended December 31, 2020, the Company recognized revenue of $5.6 million previously deferred in contract liabilities (2019 - $4.2 million). There was no revenue recognized that related to performance obligations from a prior year.

18. Loans and borrowings

Secured Debt

Bank Facilities

• (i) The Company has a secured revolving credit facility (the “Facility”) in the amount of $510.0 million, which matures in July 2023. Advances under the Facility may be used for general corporate purposes including refinancing existing indebtedness, funding working capital requirements, permitted acquisitions and permitted distributions. The Facility also has an option which permits the Company to increase the total capital available by an additional $200.0 million.

28

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

18. Loans and borrowings (continued)

Available borrowing options under the Facility include:

• Prime Rate Loans;

• Base Rate Loans;

• Bankers’ Acceptances from BA Lenders with a maturity of thirty, sixty, ninety or one hundred and eighty days, subject to availability;

• BA Equivalent Loans from the Non-BA Lenders with a maturity of thirty, sixty, ninety or one hundred and eighty days, subject to availability;

• LIBOR Loans with an interest period of one, two, three or six months, subject to availability;

• Swing Loans; or

• Letters of Credit

As at December 31, 2020, the Company had utilized $0.4 million (December 31, 2019 - $0.7 million) of the Facility: $0.4 million (December 31, 2019 - $0.7 million) drawn in letters of credit and nil (December 31, 2019 - nil) drawn in LIBOR Loans.

The obligation under the Facility is secured by a general security and pledge agreement in respect of all present and future personal property, assets and undertaking of the credit parties. This facility is subject to the maintenance of the following financial covenants:

• Total leverage ratio, defined as the ratio of (a) total debt at such time, to (b) EBITDA for the applicable twelve-month period, is calculated on a quarterly basis, of 3.00 to 1.00 or less, provided that, in the event the borrower used proceeds of a borrowing to complete a single permitted acquisition with aggregate consideration greater than $100.0 million during any two consecutive fiscal quarters falling within the twelve-month reporting period immediately following such permitted acquisition, the borrower must only maintain a total leverage ratio 3.50 to 1.00 or less; and

• Interest coverage ratio, calculated on a consolidated, rolling four quarter basis, of 3.00:1.00 or greater.

The Company was in compliance with all covenants as at December 31, 2020.

• (ii) On December 2, 2019, the Company reduced the limit of the credit facility (the "Production Facility") to $10.0 million CAD ($7.8 million US$) to better align with the Company's borrowing needs under the Production Facility. As at December 31, 2020, the balance of the Production Facility was nil.

Unsecured Debt

Bank Overdraft Facility

• (iii) On December 19, 2018, the Company entered into an uncommitted Overdraft Facility Agreement (the "European Facility") for €15.0 million ($18.4 million US$). The European Facility will be used to fund working capital requirements in Europe. As at December 31, 2020, the outstanding balance was nil (December 31, 2019 - nil).

19. Provisions and contingent liabilities

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Defectives(i)	13.0	13.8
Supplier liabilities(ii)	5.6	4.9
Contingent consideration,acquisitions(iii)	15.8	16.5
Provisions and contingent liabilities	34.4	35.2
Current	29.2	26.2
Non-current	5.2	9.0
Provisions and contingent liabilities	34.4	35.2

29

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

19. Provisions and contingent liabilities (continued)

	Defectives(i)	Supplier liabilities(ii)	Contingent consideration, acquisitions(iii)	Total
December 31, 2018	9.8	6.2	14.9	30.9
Provisions recognized	15.8	0.5	4.3	20.6
Accretion recognized	—	—	1.7	1.7
Payments	(11.8)	(1.8)	(4.4)	(18.0)
December 31, 2019	13.8	4.9	16.5	35.2
Provisions recognized	12.8	5.7	3.7	22.2
Accretion recognized	—	—	1.0	1.0
Payments	(13.6)	(5.0)	(5.4)	(24.0)
December 31, 2020	13.0	5.6	15.8	34.4

Provisions

• (i) Defectives refer to when the end consumer returns faulty goods to the Company’s customers. Customers without a fixed allowance for defectives are eligible for a credit for the cost of the product if returned as defective by the end consumer. The estimate of defectives is made based on the class and nature of the product and reduces the net sales figure in the consolidated statement of earnings and comprehensive income.

• (ii) Supplier liabilities represent the estimated compensation to be paid to suppliers for lower than expected volumes purchased, resulting in the supplier having excess raw material and finished goods inventory. While payments are not legally required, the Company will regularly compensate suppliers to maintain supplier relationships. The supplier obligation is based on the Company’s estimate of the cost of the supplier’s excess raw material and finished goods inventory. The provision for supplier obligations is recorded in cost of sales in the consolidated statement of earnings and comprehensive income.

• (iii) Business combinations as described in Note 26 include a royalty payable over the next seven calendar years. The fair value of the total contingent consideration on December 31, 2020 was $15.8 million (2019 - $16.5 million) and is based on the achievement of certain financial performance criteria. The accretion of the royalty is recorded in finance costs in the consolidated statement of earnings and comprehensive income. Subsequent reviews of financial performance may result in the recording of additional considerations or reductions of the existing provision in other expenses in the consolidated statement of earnings and comprehensive income. For the year ended December 31, 2020, $3.7 million was recorded in other expenses relating to additional contingent consideration for previous acquisitions (2019 - $4.3 million).

The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not probable to have a material adverse effect on the Company’s business, financial condition and/or its results of operations. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period.

30

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

20. Share capital

• (a) Authorized as at December 31, 2020 and December 31, 2019

• Unlimited number of multiple voting shares;

• Unlimited number of subordinate voting shares; and

• Unlimited number of preferred shares issuable in series.

Multiple voting shares and subordinate voting shares entitle the holder to receive dividends, and to receive the proceeds of liquidation, dissolution or winding up the Company in proportion to the number of shares held. These rights are subject to the prior rights of the holders of any shares ranking prior to the multiple voting shares and the subordinate voting shares.

The holders of the multiple voting shares are entitled to 10 votes for each share held and the holders of the subordinate voting shares are entitled to 1 vote for each share held.

Multiple voting shares are convertible at any time into an equivalent number of subordinate voting shares. Subordinate voting shares do not have any redemption or conversion rights.

Preferred shares of each series will be entitled to preference over the multiple voting shares and subordinate voting shares with respect to the payment of dividends and to receive the proceeds of liquidation, dissolution or winding up of the Company.

	2020	2020	2019	2019
	Shares	Amount	Shares	Amount
	(millions)	(US$ millions)	(millions)	(US$ millions)
Multiple voting shares:
Balance, beginning of year	70.6	360.5	70.7	360.8
Conversion to subordinate votingshares	—	—	(0.1)	(0.3)
Balance, end of year	70.6	360.5	70.6	360.5
Subordinate voting shares:
Balance, beginning of year	31.6	354.0	31.1	333.3
Issuance of common shares	0.2	11.4	0.4	20.4
Cancellation of common shares	(0.1)	(1.1)	—	—
Forfeiture of common shares	(0.3)	—	—	—
Conversion from multiple votingshares	—	—	0.1	0.3
Balance, end ofyear	31.4	364.3	31.6	354.0
Common shares issued and outstanding, end of year	102.0	724.8	102.2	714.5

As at December 31, 2020, the Company does not hold any of its outstanding shares (2019 - nil).

(b) Share-based plans

Participation arrangements

The Company had equity participation arrangements (“Participation Arrangements”) with six senior employees and four former employees pursuant to which all were entitled to receive a cash payment and shares on the Initial Offering of the Company. The Participation Arrangements served to reward past service and encourage retention. The terms of the Participation Arrangements differ between participants with vested participants being entitled to some or all of their shares between six months and six years following the Initial Offering.

The Company satisfied the participants’ entitlements by making a one-time cash payment to participants and by issuing an aggregate of 4,790,178 subordinate voting shares immediately prior to the closing of the Initial Offering. The compensation expense for the Participation Arrangements is calculated based on the fair value of each participation arrangement, as determined by the value of the Company at the closing of the Initial Offering, less the value of the cash settlement. The Company recognizes compensation expense over the vesting period of the Participation Arrangements, which is between six months and six years.

31

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

20. Share capital (continued)

On February 18, 2020, the Company announced changes to senior leadership. As a result of these changes, 301,160 subordinate voting shares were forfeited and 133,550 subordinate voting shares with a fair value of $1.1 million were canceled.

As at December 31, 2020, 151,993 (December 31, 2019 - 1,068,258) subordinate voting shares were outstanding relating to the Participation Arrangements with a weighted average grant date fair value of $2.1 million (December 31, 2019 - $14.9 million) based on the weighted average of the contractual life remaining of 7 months.

Share based compensation expense of $1.5 million (2019 - $3.3 million) relating to Participation Arrangements is recorded in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020.

Long-Term Incentive Plan

The Company has an equity based compensation plan providing for the issuance of securities from treasury under which the grants will be made by the Company. Under the LTIP, the Board may at its discretion from time to time, grant share options, share units, in the form of RSUs and PSUs, Stock Appreciation Rights, restricted stock and any other equity based awards.

The Company settled vested LTIP grants during the year ended December 31, 2020 through the issuance of shares. The settlements resulted in a transfer of $3.2 million (2019 - $11.8 million) from contributed surplus to share capital.

RSUs and PSUs

Below is a summary of the activity related to RSUs and PSUs outstanding as at December 31, 2020 and December 31, 2019.

	Dec 31,	Dec 31,
(number of units)	2020	2019
Outstanding, beginning of year	713,908	708,090
Granted	1,418,898	460,559
Exercised	(260,854)	(413,088)
Forfeited	(126,907)	(41,653)
Outstanding, end of year	1,745,045	713,908

Included in the above table are grants of 918,929 PSUs to certain key employees during the year ended December 31, 2020 (December 31, 2019 - 453,246).

Share based compensation expense of $9.9 million (2019 - $10.1 million) relating to RSUs and PSUs is recorded in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020 with corresponding entries recorded in contributed surplus.

Deferred Share Units ("DSUs")

Below is a summary of the activity related to DSUs outstanding as at December 31, 2020 and December 31, 2019.

	Dec 31,	Dec 31,
(number of units)	2020	2019
Outstanding, beginning of year	78,311	60,393
Granted	43,460	17,918
Outstanding, end of year	121,771	78,311

32

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

20. Share capital (continued)

Share based compensation expense of $0.7 million (2019 - $0.5 million) with a mark to market gain of $0.4 million (2019 - loss of $0.1 million) relating to DSUs is recorded in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020. A corresponding amount was recorded in accrued liabilities.

Share Purchase Options (“Options”)

The Company has one share option plan for key employees, which forms part of their LTIP. Under this plan, the exercise price of each option equals the market price of the Company’s shares on the date of grant and the Options have a maximum term of ten years. The Options vest ratably over four years.

The Company did not issue any Options in 2020. As at December 31, 2020, 545,322 (December 31, 2019 - 836,596) Options were outstanding with a weighted average exercise price of $34.42 CAD (December 31, 2019 - $34.60 CAD).

Share based compensation expense of $0.8 million (2019 - $1.8 million) relating to Options is recorded in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020.

The total expense recognized for employee services received during the period for equity-settled transactions is shown in the following table:

	Year Ended Dec 31	Year Ended Dec 31
(US$ millions)	2020	2019
Equity-settled RSUs and PSUs	9.9	10.1
Equity-settled Participation Arrangement transactions	1.5	3.3
Sharepurchase options	0.8	1.8
Share based compensation expense	12.2	15.2

Share based compensation expense of $12.2 million (2019 - $15.2 million) is recorded in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020. A corresponding amount was recorded in contributed surplus.

33

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

21. Earnings per share

(Number of shares in millions)	2020 2019 Weighted average number of shares Per share amount (US$) Weighted average number of shares Per share amount (US$)
Basic Diluted	102.0 0.45 102.1 0.63 104.2 0.44 102.9 0.62

The Participation Arrangements issued to employees upon the Initial Offering as subordinate voting shares resulted in the issuance of fewer multiple voting shares to the principal shareholders. As these share issuances are antidilutive, they are not included in the computation of diluted earnings per share.

22. Changes in net working capital

Changes in net working capital
(US$ millions)	2020	2019
Decrease (increase) in:
Trade receivables	97.5	(103.9)
Other receivables	(23.5)	11.8
Inventories	82.3	(75.1)
Prepaid expenses	7.3	0.6
Advances on royalties	2.4	6.9
	166.0	(159.7)
(Decrease) increase in:
Trade payables and accrued liabilities	(29.7)	68.8
Contract liabilities	17.8	0.6
Provisions and contingent liabilities	0.1	(3.1)
Other	(1.2)	1.8
	(13.0)	68.1
Total changes in net working capital	153.0	(91.6)

23. Related party transactions

During the years ended December 31, 2020 and 2019, the Company engaged the services of a law firm whose managing partner is also a member of the Company's Board of Directors. For the year ended December 31, 2020, related party transactions were included in administrative expenses in the consolidated statement of earnings and comprehensive income of the Company in the amount of $1.6 million (December 31, 2019 - $0.5 million).

Compensation of key management personnel

The compensation of directors and other key management personnel during the years were as follows:

(US$ millions)	2020	2019
Salaries, wages and bonuses	3.2	5.4
Share-based compensation	0.6	6.6
Employee benefits	0.1	0.2
Total compensation of key management personnel	3.9	12.2

34

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

24. Leases

Amounts recognized in the balance sheet

Leased office buildings represented approximately 94.0% of the right-of-use assets with the remainder comprised of leases of distribution centres, information technology ("IT") equipment, and vehicles.

(US$ millions)	Right-of-use Assets	Lease Liabilities	Lease Liabilities
Transition, January 1, 2019	83.4		83.4
Additions	9.8		9.8
Disposals and modifications	(1.5)		(1.5)
Depreciation and amortization	(13.0)		—
Foreign currency translation	(0.4)		—
Accretion	—		4.8
Leasepayments	—		(13.8)
December 31, 2019	78.3		82.7
Additions	1.1		1.1
Disposals and modifications	(0.1)		(0.1)
Depreciation and amortization	(13.3)		—
Foreign currency translation	1.0		1.3
Accretion	—		4.6
Leasepayments	—		(15.2)
December 31, 2020	67.0		74.4
(US$ millions)		2020	2019
Lease Liabilities, current		15.4	15.1
Lease Liabilities,non-current		59.0	67.6
December 31, 2020		74.4	82.7

The Company has categorized class of assets for leases of office buildings and distribution centres as "Building" and IT equipment and vehicles are as "Equipment". The weighted average lease term is 11 years. The carrying value of right-of-use assets and depreciation by class of underlying assets at December 31, 2020 are as follows:

As at December 31, 2020	Building	Equipment	Total
Net carrying amount	65.0	2.0	67.0
Depreciation expense	12.0	1.3	13.3
As at December 31, 2019	Building	Equipment	Total
Net carrying amount	75.4	2.9	78.3
Depreciation expense	12.0	1.0	13.0

Extension and termination options are included in a number of property and equipment leases across the Company. These terms are used to maximize operational flexibility in terms of managing contracts. The majority of extension and termination options are exercisable only by the Company and not by the respective lessor.

Amounts recognized in the statement of earnings and comprehensive income

(US$ millions)	2020	2019
Depreciation expense on right-of-use assets	13.3	13.0
Accretion expense on lease liabilities	4.6	4.8
Expense relating to short-term leases	—	0.6
Expense relating to leases of low value assets	1.2	1.1
Expense relatingto variable leasepayments not included in measurement of lease liability	3.8	3.4
Total	22.9	22.9

The total cash outflows for leases for the year end December 31, 2020 was $20.2 million (2019 - $18.3 million).

35

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

25. Commitments for expenditures

Licensing and similar agreements in effect at December 31, 2020 contain provisions for future minimum payments of $40.4 million (2019 - $32.7 million).

	Less	than 1 year to	greater than 5 years
(US$ millions)	< 1 Year	1-5 Years	> 5 Years	Total
Lease liabilities - undiscounted	15.7	37.8	48.7		102.2
Guaranteedpayments due to licensors	8.4	25.3	4.0		37.7
Total commitments	24.1	63.1	52.7		139.9

26. Business acquisitions

Prior year acquisitions

Acquisition of Orbeez

On December 4, 2019, the Company acquired the rights to the Orbeez brand, pursuant to an asset purchase agreement with The Maya Group. The acquisition secures the Company the global intellectual property and the ability to sell, market and license for further penetration into existing markets as well as expansion into new territories. The acquisition also allows Spin Master to incorporate Orbeez products into new and existing product lines.

Pursuant to the terms set forth in the agreement, the Company acquired control of the Orbeez intellectual property through the acquisition of certain assets of The Maya Group for total purchase consideration of $15.2 million.

Included in the total purchase consideration of $15.2 million is $2.1 million related to the estimated fair value of future royalties. The total purchase consideration has been allocated to the identifiable intangible assets based on their estimated fair values of $5.5 million (related to the brands and trademarks), and $9.0 million of goodwill. The assets are included in the Activities, Games & Puzzles and Plush product category, belonging to the North America segment effective December 4, 2019.

The pro forma and actual results of operations for this acquisition have not been presented and are immaterial. There were $0.1 million in transaction related costs included in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2019.

Assets acquired at the date of acquisition

	Fair Value as at Dec 4, 2019
Assets acquired
Inventories	0.7
Intangible assets	5.5
Fair value of identifiable net assets acquired	6.2
Goodwill arising on acquisition
Consideration paid in cash	13.1
Present value of future royalties	2.1
Total purchase consideration	15.2
Fair value of identifiable net assets acquired	6.2
Goodwill arising from transaction	9.0

Goodwill arose on the acquisition of Orbeez as the cost of the consideration paid for the combination effectively included amounts for the benefit of expected synergies, revenue growth and future market development. These benefits are not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. Subsequently in 2020, the Company sold certain assets relating to the Orbeez acquisition, reducing the goodwill by $1.0 million to $8.0 million as at December 31, 2020.

36

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

Spin Master Corp.

26. Business acquisitions (continued)

Acquisition of Hedbanz

On August 9, 2019, the Company acquired the intellectual property associated with the Hedbanz brand, pursuant to a share purchase agreement for total cash consideration of $9.4 million. The Company originally acquired the distribution rights to Hedbanz for the U.S and Mexico in 2011. The acquisition secures the Company the global IP and the ability to sell, market and license for further penetration into markets presently under license as well as expansion into new territories.

The total purchase consideration has been allocated to the identifiable intangible assets based on their estimated fair values of $6.5 million (related to the brands and trademarks), $1.7 million related to a deferred tax liability and $4.6 million of goodwill acquired. The assets are included in the Activities, Games & Puzzles and Plush product category, belonging to the North America segment effective August 9, 2019. The pro forma and actual results of operations for this acquisition have not been presented and are immaterial. There were $0.1 million in transaction related costs included in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2019.

Assets acquired and liabilities recognized at the date of acquisition

	Fair Value as at Aug 9, 2019
Assets acquired
Intangible assets	6.5
Liabilities assumed
Deferred tax liability	1.7
Fair value of identifiable net assets acquired	4.8
Goodwill arising on acquisition
Consideration paid in cash	9.4
Fair value of identifiable net assets acquired	4.8
Goodwill arising from transaction	4.6

Goodwill arose on the acquisition of Hedbanz as the consideration paid effectively included amounts for the benefit of expected synergies, revenue growth and future market development. These benefits are not recognized separately from goodwill as they do not meet the recognition criteria for identifiable intangible assets.

27. Financial instruments and risk management

Capital management

Management includes the following items in its definition of capital:

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Share capital	724.8	714.5
Contributed surplus	36.6	35.8
Retained earnings(accumulated deficit)	17.4	(28.1)
Capital	778.8	722.2

The Company makes adjustments to its capital structure based on the funds available to the Company in supporting the operations of the business and to ensure that the subsidiaries of the Company will be able to continue on a going concern basis, while maximizing the return to stakeholders through the optimization of the debt and equity balances.

The Company manages its capital structure, and may make adjustments in light of changes in economic conditions. In order to maintain or modify the capital structure, the Company may arrange new debt with existing or new lenders, or obtain additional financing through other means.

37

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

27. Financial instruments and risk management (continued)

Management reviews its capital management strategy for reasonability on an ongoing basis and believes that this approach is reasonable. There were no changes in the Company’s approach to capital management during the year ended December 31, 2020.

The Company is subject to capital requirements under the credit facility agreement, as described in Note 18. As at December 31, 2020, the Company was in compliance with all financial covenants.

Financial risk management objectives

Management’s objective is to protect the Company and its subsidiaries on a consolidated basis against material economic exposures and the variability of results from various financial risks that include foreign currency risk, interest rate risk, credit risk and liquidity risk.

Market risk

Foreign currency risk

Due to the structure of the Company’s international operations, it is exposed to foreign currency risk driven by fluctuations in exchange rates. Risk arises because the value of monetary assets, liabilities, revenues and expenditures arising from transactions denominated in foreign currencies may vary due to changes in exchange rates (“transaction exposures”) and because the non-US dollar denominated financial statements of the Company’s subsidiaries may vary on translation into the US dollar presentation currency (“translation exposures”). These exposures could impact the Company’s earnings and cash flows.

The Company uses derivative financial instruments such as foreign exchange forward contracts with various financial institutions to manage foreign currency risk.

As at December 31, 2020, the Company is committed under outstanding foreign exchange contracts representing a total net purchase commitment of approximately $11.3 million in US$ (2019 - $15.8 million). These foreign exchange contracts have maturity dates varying from January to December 2021. The fair value of these contracts at December 31, 2020 results in an unrealized loss of $7.2 million included in accrued liabilities and an unrealized gain of $3.7 million included in other receivables (2019 - $0.5 million included in accrued liabilities). In 2020, realized losses on the Company’s matured hedges were $2.6 million (2019 - realized gains of $0.6 million) and is included in the consolidated statement of earnings and comprehensive income.

As at December 31, 2020	Notional value:	Notional value:	Unrealized
(in millions)	foreign currency	US$	(loss) gain: US$
Foreign exchange contracts
Buy US$	42.5 EUR	(49.4)	(2.9)
Buy US$	25.0 GBP	(31.9)	(2.3)
Buy US$	360.6 MXN	(15.9)	(2.0)
Sell US$	(114.2)CAD	85.9	3.7
Total		(11.3)	(3.5)

As at December 31, 2019	Notional value:	Notional value:	Unrealized
(in millions)	foreign currency	US$	gain(loss): US$
Foreign exchange contracts
Buy US$	35.5 EUR	(40.6)	0.3
Buy US$	23.0 GBP	(29.1)	(1.4)
Buy US$	270.0 MXN	(13.5)	(0.6)
Sell US$	(260.0) JPY	2.4	—
Sell US$	(85.9)CAD	65.0	1.2
Total		(15.8)	(0.5)

38

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

27. Financial instruments and risk management (continued)

- Foreign currency risk sensitivity analysis

The Company is mainly exposed to the Canadian dollar, the Great Britain pound sterling, the Mexican peso and the Euro. The following table details the Company's sensitivity to a 5.0% change in currency units against the US$. The sensitivity analysis includes all outstanding foreign currency denominated monetary assets and liabilities and adjusts their translation as at the end of the reporting period for a 5.0% change in foreign currency rates. A positive number below indicates an increase in a foreign exchange gain where the currency unit strengthens 5.0% against US$.

(US$ millions)	2020	2019
Canadian dollar	(9.9)	(5.5)
Great Britain pound sterling	0.5	0.7
Mexican peso	1.7	2.0
Euro	2.2	2.6

Interest rate risk - management

Interest rate risk is the risk that the Company’s financial assets and liabilities will increase or decrease in value due to a change in interest rates. The Company is exposed to interest rate risk as its loan facilities bears interest at a variable rate.

Interest rate risk - sensitivity analysis

The Company is exposed to interest rate risk on financial instruments. A sensitivity rate of 50 basis points represents management’s assessment of the reasonably possible change in interest rates to which the Company is exposed.

For the year ended December 31, 2020, with all other variables held constant, a 50 basis point decrease in interest rates would have resulted in a decrease to net interest expense of $0.2 million for the year (2019 - a decrease to interest income of $0.3 million).

Credit risk

As the Company usually grants credit to customers on an unsecured basis, credit risk arises from the possibility that customers may experience financial difficulty and may be unable to fulfill their financial obligations.

This risk is managed through the establishment of credit limits and payment terms based on an evaluation of the customer’s financial performance, ability to generate cash, financing availability and liquidity status. These factors are reviewed at least annually, with more frequent reviews performed as necessary.

In addition, the Company uses a variety of financial arrangements to ensure collectability of trade receivables, including requiring letters of credit, supplier financing programs, cash in advance of shipment and purchase of insurance on trade customer receivables, when available.

As at December 31, 2020, approximately 44.8% (2019 - 46.5%) of the Company’s trade receivables are due from three major retail customers which represent approximately 50.3% of gross product sales for the year ended December 31, 2020 (2019 - 48.0%).

The Company mitigates credit risk on its cash balance by ensuring deposits are with financial institutions with high credit-ratings assigned by international credit-rating agencies.

Liquidity risk

The following details the Company’s remaining contractual maturities for its financial liabilities with contractual repayment periods. The tables reflect the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay, including both interest and principal.

To the extent that interest rates are floating, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Company may be required to pay.

39

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

27. Financial instruments and risk management (continued)

The Company's contractual maturities are as follows:

As at December 31, 2020	< 1year	1-5years	> 5years		Total
Trade payables and accrued liabilities	314.4	—		—	314.4
Provisions and contingent liabilities	29.2	5.2		—	34.4
	343.6	5.2		—	348.8
As at December 31, 2019	< 1year	1-5years	> 5years		Total
Trade payables and accrued liabilities	345.6	—		—	345.6
Provisions and contingent liabilities	26.2	9.0		—	35.2
	371.8	9.0		—	380.8

Financing facilities

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Bank loan facilities
Amount undrawn	536.2	534.5
Bank loan facilities	536.2	534.5

Fair value measurements

With the exception of foreign exchange forward contracts which are recorded at fair value, the carrying amounts of all other financial assets or liabilities of the Company approximate their fair values as follows:

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
Financial assets
Cash	320.6	115.3
Trade receivables	265.2	370.7
Other receivables	73.4	57.0
Other assets	6.0	—
Financial assets	665.2	543.0
Financial liabilities
Trade payables and accrued liabilities	314.4	345.6
Provisions and contingent liabilities	34.4	35.2
Financial liabilities	348.8	380.8

The Company records foreign exchange forward contracts at fair value in the financial statements.

The fair value of foreign exchange forward contracts at December 31, 2020 represented an asset of $3.7 million, which is recorded in other receivables and a liability of $7.2 million recorded in accrued liabilities (2019 - liability of $0.5 million). These fair values are categorized within Level 2 of the fair value hierarchy. The fair values of over-thecounter derivative financial instruments are based on broker or observable market rates. Those quotes are tested for reasonableness by discounting expected future cash flows using market interest and exchange rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument for the Company and counterparty when appropriate. The fair value of foreign exchange contracts is estimated based on forward exchange rates observable at the end of the reporting period and contract forward rates. Realized and unrealized gains and losses on derivative financial instruments may be offset by realized and unrealized losses and gains on the underlying exposures being hedged and are recorded in earnings as they occur.

40

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

27. Financial instruments and risk management (continued)

The fair value of the investment in a limited partnership as at December 31, 2020 is recorded in other assets of $3.0 million (2019 - nil) with no impact to profit or loss for the year. This fair value is categorized within Level 3 of the fair value hierarchy (2019 - nil). As a result of the timing of the investment and limited changes in the partnership at December 31, 2020, the Company determined that the carrying amount approximates the fair value of the investment in a limited partnership.

28. Segment information

Spin Master is a global children's entertainment company. Spin Master’s portfolio includes children’s products, brands and entertainment properties which are grouped into five major categories as follows:

(i) Activities, games & puzzles and plush

• (ii) Pre-school and girls

• (iii) Boys action and construction

• (iv) Remote control and interactive characters

• (v) Outdoor

Information reported to the Chief Operating Decision Maker (“CODM”) for the purposes of resource allocation and assessment of segment performance focuses on geographical areas rather than product category. The executives of the Company have chosen to organize the Company around the 3 operating segments as follows: (i) North America, (ii) Europe, and (iii) Rest of World. Factors considered in determining the operating segments include the nature of the Company’s business activities, the management structure directly accountable to the CODM, availability of discrete financial information and strategic priorities within the organizational structure.

The North American segment is comprised of the United States and Canada. The European segment is comprised of the United Kingdom, France, Italy, the Netherlands, Germany, Austria, Switzerland, Belgium, Luxembourg, Slovakia, Hungary, Romania, Czech Republic, Poland, Turkey, Russia and Greece. The Rest of World segment is primarily comprised of Hong Kong, China, Vietnam, India, Australia, New Zealand, Japan and Mexico, as well as all other areas of the world serviced by the Company’s distribution network.

Segment revenue and results

The Company’s gross product sales and results from operations by reportable segment are as follows :

(US$ millions)	2020	2019
Revenue by segment
North America	983.4	1,026.3
Europe	451.0	430.4
Rest of World	189.3	234.5
Gross product sales	1,623.7	1,691.2
Sales allowances	(208.1)	(227.5)
Net sales	1,415.6	1,463.7
Other revenue	155.0	117.9
Revenue	1,570.6	1,581.6
Segment income (loss) before tax (recovery) expense
North America	(12.1)	51.9
Europe	17.2	23.9
Rest of World	—	18.7
Total segment income before tax (recovery) expense	5.1	94.5
Corporate and other	4.3	(9.5)
Income before income tax (recovery) expense	9.4	85.0

Revenues for North America include revenues attributable to Canada of $127.3 million (2019 - $158.3 million) for the year ended December 31, 2020.

41

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

28. Segment information (continued)

Revenue reported by segment above represents revenue generated from external customers. There were no intersegment sales in the current year (2019 - nil). The Company does not include sales adjustments such as trade discounts and other allowances in reporting revenue by segment (referred to as "gross product sales”).

The accounting policies of the reportable segments are the same as the Company’s accounting policies described in Note 2. Segment income represents income before income tax (recovery) expense earned by each segment prior to any allocation of other expenses, foreign exchange loss and finance costs. This measure is reported to the CODM for the purposes of resource allocation and assessment of segment performance.

Segment assets

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
North America	971.4	872.7
Europe	217.6	211.2
Rest of World	111.3	120.7
Total segment assets	1,300.3	1,204.6
Corporate and other	41.8	51.8
Total assets	1,342.1	1,256.4

Non-current assets by reportable segment are detailed as follows:

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
North America	426.4	395.1
Europe	33.2	26.9
Rest of World	19.9	13.4
Total segment non-current assets	479.5	435.4
Corporate and other	73.3	60.3
Total non-current assets	552.8	495.7

Non-current assets for North America include assets attributable to Canada of $139.3 million as at December 31, 2020 (December 31, 2019 - $140.2 million).

Segment liabilities

	Dec 31,	Dec 31,
(US$ millions)	2020	2019
North America	410.7	387.6
Europe	84.9	68.9
Rest of World	39.4	56.9
Total segment liabilities	535.0	513.4
Corporate and other	(35.8)	(17.4)
Total liabilities	499.2	496.0

For the purposes of monitoring segment performance and allocating resources between segments:

• all assets are allocated to reportable segments other than deferred tax assets, other long-term assets and computer software. Goodwill is allocated to cash generating units. Assets used jointly by reportable segments are allocated on the basis of the revenues earned by individual reportable segments; and

• all liabilities are allocated to reportable segments other than royalties payable (included within trade payables and accrued liabilities) and deferred tax liabilities. Liabilities for which reportable segments are jointly liable are allocated in proportion to segment assets.

42

Spin Master Corp.

Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

28. Segment information (continued)

Capital expenditures by reportable segment

(US$ millions)	2020	2019
North America	66.8	81.1
Europe	5.3	7.5
Rest of World	6.6	5.6
Total capital expenditures	78.7	94.2

Depreciation and amortization by reportable segment

(US$ millions)	2020	2019
North America	82.3	66.9
Europe	11.4	9.4
Rest of World	4.7	4.6
Total segment depreciation and amortization	98.4	80.9
Corporate and other	4.6	3.7
Total depreciation and amortization	103.0	84.6

Impairment losses of $0.9 million were recognized in respect of property, plant and equipment, intangible assets, right-of-use assets and goodwill for the year ended December 31, 2020 (2019 - $5.6 million).

Revenue from major product categories

The Company’s worldwide revenues based on its major product categories are as follows:

	Year	Ended Dec 31,
(US$ millions)	2020	2019
Activities, games & puzzles and plush	511.2	457.7
Pre-school and girls	467.2	516.2
Boys action and construction	352.1	331.4
Remote control and interactive characters	202.1	299.3
Outdoor	91.1	86.6
Gross product sales	1,623.7	1,691.2
Sales allowances	(208.1)	(227.5)
Net sales	1,415.6	1,463.7
Entertainment and Licensing revenue	78.2	91.7
Digitalgames revenue	76.8	26.2
Revenue	1,570.6	1,581.6

Major customers

Sales to the Company's three largest customers accounted for 50.3% (2019 - 48.0%) of gross product sales for the year ended December 31, 2020, respectively. Other than the top three customers, which have remained the same year over year, no other single customer contributed 10% or more to gross product sales for the year ended December 31, 2020 (2019 - nil).

December 31, 2020 (2019 - nil).
(US$ millions)	2020	2019
Gross product sales
Customer 1	363.1	403.1
Customer 2	273.1	240.8
Customer 3	180.2	168.5
Total	816.4	812.4

43

Spin Master Corp. Consolidated financial statements for the years ended December 31, 2020 and December 31, 2019

29. Subsequent event

Acquisition of Rubik's Brand Limited

On January 4, 2021, the Company acquired control of Rubik's Brand Limited through the acquisition of 100% of the shares of its holding company, Rubiks Malta Holding Company Limited. The brand will be reported in the Activities, Games & Puzzles and Plush product category beginning from the date of acquisition.

The preliminary estimate of purchase consideration of $56.4 million is comprised of $50.0 million of cash consideration plus an estimated $6.4 million related to closing values for net working capital and fair value of future royalties. Given the timing of the transaction and measurement uncertainty with final purchase agreement consideration adjustments, the purchase price allocation is not yet final. The purchase price allocation will be disclosed in the Company's first quarter 2021 condensed consolidated interim financial statements.

There were $0.9 million in transaction related costs included in administrative expenses in the consolidated statement of earnings and comprehensive income for the year ended December 31, 2020.

30. Prior year comparatives

Certain prior year comparatives have been reclassified to conform with current year presentation.

44