NORTHERN CREDIT UNION LIMITED

Transcription

1 Consolidated Financial Statements of

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3 Consolidated Statement of Financial Position, with comparative figures for December 31, 2010 and January 1, 2010 Assets December 31, December 31, January 1, Cash and cash equivalents $ 25,253,794 $ 30,063,394 $ 25,759,857 Investments (note 8) 76,508,134 79,044,595 53,058,186 Other assets (note 9) 1,100,165 1,005,072 1,135,312 Loans to members (note 5 and 6) 561,749, ,116, ,036,336 Deferred income taxes (note 16) 964, ,627 1,151,398 Property and equipment (note 10) 17,171,799 17,024,278 12,245,974 Intangible assets (note 10) 2,147,435 1,479,141 1,315,061 Total assets $ 684,895,761 $ 662,227,451 $ 624,702,124 Liabilities and Members Equity Members deposits (note 11) $ 634,290,723 $ 612,636,566 $ 566,881,567 Accounts payable and accrued liabilities 5,131,003 5,075,197 6,374,263 Short term borrowings ,000,000 Liabilities qualifying as regulatory capital: Share capital (note 13) 10,008,977 9,929,156 9,877,477 Total liabilities 649,430, ,640, ,133,307 Members equity: Contributed surplus 8,243,485 8,243,485 8,243,485 Retained earnings 27,102,724 26,124,461 23,241,911 Accumulated other comprehensive income 118, ,586 83,421 Total members equity 35,465,058 34,586,532 31,568,817 Commitments and contingencies (note 15) Total liabilities and members equity $ 684,895,761 $ 662,227,451 $ 624,702,124 See accompanying notes to consolidated financial statements. On behalf of the Board: Director Director 1

4 Consolidated Statement of Income, with comparative figures for Revenue: Interest - residential mortgage loans $ 17,263,694 $ 18,038,363 - personal loans 5,802,343 5,955,460 - commercial loans 6,010,130 5,591,549 Investment income 1,313,425 1,849,553 30,389,592 31,434,925 Cost of financing: Interest - demand deposits 888, ,503 - term deposits 4,081,782 4,275,396 - registered savings plans 3,436,446 3,274,030 Distribution to members 234, ,638 Interest on external borrowings 1,795 54,765 8,642,929 8,506,332 Net interest income 21,746,663 22,928,593 Net impairment (gain) loss on loans (note 6) (160,051) 2,323,049 Net interest income after provision for impaired loans 21,906,714 20,605,544 Non-interest revenue 9,431,963 8,630,414 31,338,677 29,235,958 Operating expenses: Salaries, wages and benefits 15,075,766 13,356,979 Board, delegate and committee 446, ,372 Data processing and clearing 1,141,700 1,474,079 General and administration 8,030,051 6,578,822 Insurance 1,032, ,646 Occupancy 2,027,653 1,880,167 Amortization and depreciation 1,519,399 1,255,440 29,273,687 25,946,505 Operating income 2,064,990 3,289,453 Unrealized gains: Unrealized gain on interest rate swaps 217,091 63,329 Income before income taxes 2,282,081 3,352,782 Income taxes (note 16): Current 456, ,531 Deferred (44,687) 466, , ,402 Net income $ 1,870,553 $ 2,439,380 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Comprehensive Income and Changes in Members Equity, with comparative figures for 2010 Consolidated Statement of Comprehensive Income Net income $ 1,870,553 $ 2,439,380 Other comprehensive income, net of income taxes: Net change in fair value of available-forsale financial assets, net of tax of $42,745 ( $57,928) (99,737) 135,165 Defined benefit plan actuarial gain (losses) net of income tax of $382,410 ( $(189,900)) (892,290) 443,170 Comprehensive income $ 878,526 $ 3,017,715 Consolidated Statement of Changes in Members Equity Contributed surplus: Balance, beginning and end of year $ 8,243,485 $ 8,243,485 Retained earnings: Balance, beginning of year 26,124,461 23,241,911 Net earnings 1,870,553 2,439,380 Defined benefit plan actuarial gains (losses), net of tax (892,290) 443,170 Balance, end of year 27,102,724 26,124,461 Accumulated other comprehensive income: Representing the fair value reserve Balance, beginning of year 218,586 83,421 Net change in fair value of available-forsale financial assets, net of tax (99,737) 135,165 Balance, end of year 118, ,586 Members equity, end of year $ 35,465,058 $ 34,586,532 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statement of Cash Flows, with comparative figures for Cash flows from operating activities: Net income $ 1,870,553 $ 2,439,380 Adjustments for: Change in non-cash items: Net interest income (21,746,663) (22,928,593) Provision for impaired loans (160,051) 2,323,049 Provision for income tax 411, ,402 Depreciation and amortization 1,519,399 1,255,440 Net change in derivative financial instruments (217,091) (63,329) Gain on disposition of property and equipment - (143,597) (18,322,325) (16,204,248) Changes in other assets: Changes in other assets (95,093) 130,240 Changes in accounts payable and accrued liabilities (1,863,111) 226,412 (1,958,204) 356,652 Changes in member activities (net): Changes in member loans (28,359,270) (5,447,628) Changes in member deposits 20,991,808 46,160,517 (7,367,462) 40,712,889 Cash flows related to interest, dividends and income taxes: Interest received on member loans 28,961,867 29,629,943 Interest received on investments 1,064,095 2,079,443 Interest paid on member deposits (8,063,118) (8,857,085) Interest paid on external borrowings (1,795) (54,765) Income taxes paid (recovered) 60,602 (1,350,948) 22,021,651 21,446,588 (5,626,340) 46,311,881 Cash flows from financing activities: Issuance (redemption) of membership shares (7,263) 7,051 Redemption of Class A patronage shares (84,439) (79,157) Issuance of Class B investment shares 171, ,785 Repayment of Central 1 Credit Union loan - (10,000,000) 79,821 (9,948,321) Cash flows from investing activities: Proceeds from disposal of property and equipment - 575,285 Proceeds from sale of investments 3,072,133 - Purchase of investments - (26,017,805) Additions to intangible assets (723,357) (164,080) Additions to property and equipment (1,611,857) (6,453,423) 736,919 (32,060,023) Net increase (decrease) in cash and cash equivalents (4,809,600) 4,303,537 Cash and cash equivalents, beginning of year 30,063,394 25,759,857 Cash and cash equivalents, end of year $ 25,253,794 $ 30,063,394 See accompanying notes to consolidated financial statements. 4

7 1. Reporting entity: Northern Credit Union Limited (the Credit Union ), was incorporated under the laws of Ontario and operates in compliance with the Credit Union Caisse Populaires Act of Ontario (the Act ). The Credit Union is a member of the Deposit Insurance Corporation of Ontario ( DICO ) and of the Central 1 Credit Union. The Credit Union is domiciled in Canada. The address of the Credit Union s registered office is 280 McNabb Street, Sault Ste. Marie, Ontario. The Credit Union is primarily involved in corporate and retail banking. 2. Basis of preparation: (a) Statement of compliance: These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). This is the first time that the Credit Union has prepared its consolidated financial statements in accordance with IFRS, having previously prepared its consolidated financial statements in accordance with pre-changeover Canadian Generally Accepted Accounting Principles (pre-changeover Canadian GAAP). An explanation on how the transition from pre-changeover Canadian GAAP to IFRS has affected the financial position, financial performance and cash flows are disclosed in Note 22. These consolidated financial statements have been authorized for issue by the Board of Directors on February 23, (b) Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis except for the following: derivative financial instruments are measured at fair value non-derivative financial instruments at fair value through profit or loss are measured at fair value available for sale financial assets are measured at fair value the liability for defined benefit obligation is recognized as the present value of the defined benefit obligations less the total of the plan assets, plus unrecognized actuarial gains, less unrecognized past service cost and unrecognized actuarial losses. (c) Functional and presentation currency: The Credit Union s functional and presentation currency is the Canadian dollar. The financial statements are presented in Canadian dollars. 5

8 2. Basis of preparation (continued): (d) Use of estimates and judgments: The preparation of consolidated financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgement in applying the Credit Union s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4 below. 3. Significant accounting policies: The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing the opening IFRS statement of financial position at January 1, 2010 for the purposes of transitioning to IFRSs. (a) Basis of consolidation: The consolidated financial statements include the financial statements of the wholly-owned subsidiary company, Ontario Limited. The financial statements have been prepared using uniform accounting policies for like transactions and other events in similar circumstances. All material intercompany transactions and balances have been eliminated. (b) Loans receivable from members: Loans are initially measured at fair value plus incremental direct transaction costs less loan fees received and subsequently remeasured at their amortized cost using the effective interest method. Loans receivable from members are reported net of an allowance for credit losses. (i) Loan interest: Interest income from loans is recorded on the effective yield basis. Accrued but uncollected interest is provided for when loans are determined to be impaired. (ii) Provision for credit losses: The Credit Union maintains a provision for credit losses, which, in management s opinion, is considered adequate to provide for credit-related losses. The Credit Union considers evidence of impairment for loans receivable at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. 6

9 3. Significant accounting policies (continued): (ii) Provision for credit losses (continued): In assessing collective impairment the Credit Union uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (c) Interest income and expense: Interest income and expense are recognized in the consolidated statement of income using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to its fair value at inception. The effective interest rate is established on initial recognition of the financial asset or liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received and transaction costs and discounts or premiums that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. (d) Non-interest revenue: Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. 7

10 3. Significant accounting policies (continued): (d) Non-interest revenue (continued): Net income from other financial instruments at fair value through profit or loss relates to nontrading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and financial assets and liabilities designated at fair value through profit or loss, and includes all realized and unrealized fair value changes, interest, dividends and foreign exchange differences. Dividend income is recognized when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividends are reflected as a component of net trading income, net income from other financial instruments at fair value through profit or loss or other operating income based on the underlying classification of the equity investment. (e) Cash and cash equivalents includes cash on hand, current accounts, cheques and other items in transit. Given their short term nature, the carrying value of cash and cash equivalents equals fair value. (g) Financial instruments non-derivative financial instruments: The Credit Union initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Credit Union becomes a party to the contractual provisions of the instrument. The Credit Union derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Credit Union is recognized as a separate asset or liability. The Credit Union has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. Non-derivative financial instruments comprise cash and cash equivalents, investments, loans to members, members deposits, accounts payable and accrued liabilities and liabilities qualifying as regulatory capital. 8

11 3. Significant accounting policies (continued): (g) Financial instruments non-derivative financial instruments (continued): Fair value through profit and loss: Financial assets and liabilities designated as fair value through profit and loss ( FVTPL ) are financial instruments either classified as held for trading ( HFT ) or are managed and evaluated on a fair value basis in accordance with a documented risk management strategy. HFT financial assets and liabilities are acquired or incurred principally for resale, generally within a short period of time. FVTPL financial assets and liabilities are measured at fair value at each reporting date. Gains and losses realized on disposal together with dividends and interest earned on these instruments are reported in interest and investment income. Unrealized gains and losses from market fluctuations are reported separately in the consolidated statement of income. There are regulatory restrictions imposed by the Financial Services Commission of Ontario on the use of this designation including that loan financial assets are precluded from being designated at FVTPL and that the fair value designated financial instruments are managed on a fair value basis. Offsetting: Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Credit Union has the legal right to set off the recognized amounts and it intends either to settle on a net basis or to realized the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions such as the Credit Union s trading activities. Held to maturity: Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments and a fixed maturity, other than loans and receivables, that the Credit Union has the positive intention and ability to hold to maturity. These financial assets are initially recognized at fair value including direct and incremental transaction costs. They are subsequently accounted for at amortized cost using the effective interest rate method. 9

12 3. Significant accounting policies (continued): (g) Financial instruments non-derivative financial instruments (continued): Available for sale: Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. The Credit Union s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(b) (ii)), are recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit or loss. Loans and receivables: Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. Other liabilities: The Credit Union has designated all financial liabilities with the exception of derivatives as Other Liabilities. Financial liabilities designated as Other Liabilities are recorded at amortized cost. Interest incurred on these liabilities is included in interest expense. Transaction costs related to Other Liabilities are capitalized and then amortized over the life of the instrument using the effective interest method. (h) Financial instruments - derivative financial instruments: Derivative financial instruments are financial contracts that require or provide an option to exchange cash flows or payments determined by applying certain rates, indices or changes therein to notional contract amounts. The Credit Union periodically enters into derivative contracts to manage financial risks associated with movements in interest rates and other financial indices such as interest rate swaps and equity swap agreements. The Credit Union s policy is not to utilize derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recorded on the consolidated statement of financial position at fair value, including those derivatives that are embedded in financial or nonfinancial contracts that are closely related to the host contracts. Changes in the fair value of those derivative instruments are recognized in net income for the year. The Credit Union does not apply hedge accounting on its derivative portfolio. 10

13 3. Significant accounting policies (continued): (i) Financial instruments derecognition: For securitization transactions initiated prior to the date of transition to IFRS, in accordance with pre-changeover Canadian GAAP, the loan securitizations were treated as a sale, provided that control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been received in exchange. Gains on these transactions were reported as non-interest revenue. The amount of these gains are based on the present value of expected future cash flows using management s best estimates and key assumptions such as prepayment rates, excess spread, credit (losses) and discount rates. The Credit Union has a contractual obligation to service the loans on behalf of the transferee. For securitization transactions initiated after the date of transition to IFRS, loans are derecognized only when the contractual rights to receive the cash flows from these assets have ceased to exist or substantially all the risks and rewards of the loans have been transferred. If the criteria for derecognition has not been met, the securitization is reflected as a financing transaction and the related liability is initially recorded at fair value and subsequently measured at amortized costs, using the effective interest rate method. (j) Other assets: Included in other assets are costs incurred in equity swap agreement hedge premiums and prepaid software maintenance costs. Hedge premiums are recorded as expense using the effective interest rate method over the term of the agreement. (k) Intangible assets: Computer software that is not an integral part of other property and equipment is accounted for as intangible assets. Computer software is stated at cost less accumulated amortization and is presented as part of property and equipment on the consolidated statement of financial position. Amortization of computer software is calculated by applying the straight-line method at rates based on estimated useful lives between 3 and 10 years. 11

14 3. Significant accounting policies (continued): (l) Property and equipment: Property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements Parking areas Furniture, office and computer equipment Automated banking machines Leasehold improvements 5 to 50 years 3 to 50 years 3 to 20 years 5 to 10 years 5 years Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. (m) Impairment of non-financial assets: Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset s cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. The Credit Union has 25 cash-generating units. Impairment charges are included in net income. (n) Income taxes: Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither accounting or taxable profit or loss. 12

15 3. Significant accounting policies (continued): (n) Income taxes (continued): Recognition of deferred tax assets for unused tax (losses), tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the reporting date and are expected to apply when the liabilities / (assets) are settled / (recovered). Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. (o) Foreign currency translation: The consolidated financial statements are presented in Canadian dollars, which is the Credit Union s presentation and functional currency. Assets and liabilities denominated in foreign currencies, primarily US dollars, are translated into Canadian dollars at rates prevailing at the year end date. Income and expenses are translated at the exchanges rates in effect on the date of the transactions. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments are recognized in other comprehensive income. 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. 13

16 3. Significant accounting policies (continued): (p) Employee retirement benefits: i) Defined benefit plans The Credit Union provides retirement benefits to certain management employees. These benefits include a registered pension plan. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Credit Union s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Credit Union s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Credit Union, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Credit Union. An economic benefit is available to the Credit Union if it is realizable during the life of the plan, or on settlement of the plan liabilities. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in profit or loss. The Credit Union recognizes all actuarial gains and losses arising from defined benefit plans immediately in other comprehensive income, and reports them in retained earnings. ii) Defined contribution plans The Credit Union also has defined contribution plans providing pension benefits for all other employees. 14

17 3. Significant accounting policies (continued): (p) Employee retirement benefits (continued): A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value. (q) Leased assets: Leases in terms of which the Credit Union assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and, except for investment property, the leased assets are not recognized in the Credit Union s statement of financial position. Investment property held under an operating lease is recognized in the Credit Union s statement of financial position at its fair value. (r) Provisions: A provision is recognized if, as a result of a past event, the Credit Union has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. (s) New standards and interpretations not yet effective: Certain new standards, amendments and interpretations have been published that are mandatory for the Credit Union s accounting periods beginning on or after January 1, 2012 or later periods that the Credit Union has decided not to early adopt. The standards, amendments and interpretations that will be relevant to the Credit Union are: 15

18 3. Significant accounting policies (continued): (s) New standards and interpretations not yet effective (continued): i. IFRS 9 Financial Instruments is part of the IASB s wider project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets, amortized cost and fair value. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. The standard is effective for annual periods beginning on or after January 1, The Credit Union is in the process of evaluating the impact of the new standard. ii. IFRS 13 Fair Value Measurement defines fair value, provides guidance on the measurement of fair value, and requires disclosures about fair value measurements. IFRS 13 does not determine when an asset, a liability or an entity s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value (with limited exceptions). The standard is effective for annual periods beginning on or after January 1, The Credit Union is in the process of evaluating the impact of the new standard. iii. IAS 19 Employee Benefits The amendments require the following: Recognition of actuarial gains and losses immediately in other comprehensive income Full recognition of past service costs immediately in profit or loss Recognition of expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation Additional disclosures that explain the characteristics of the entity s defined benefit plans and risks associated with the plans, as well as disclosures that describe how defined benefit plans may affect the amount, timing and uncertainty of future cash flows, and details of any asset-liability match strategies used to manage risks. The amendments also impact termination benefits, which would now be recognized at the earlier of when the entity recognizes costs for a restructuring within the scope of IAS 37 Provisions, and when the entity can no longer withdraw the offer of the termination benefits. The Company intends to adopt the amendments in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of the amendments has not yet been determined. 16

19 3. Significant accounting policies (continued): (s) New standards and interpretations not yet effective (continued): Certain new standards, amendments and interpretations have been published that are mandatory for the Credit Union s accounting periods beginning on or after January 1, 2012 or later periods that the Credit Union has decided to early adopt. The Credit Union has early adopted the amendments to IFRS 1 which replaces references to a fixed date of 1 January 2004 with the date of transition to IFRSs. This eliminates the need for the Credit Union to restate derecognition transactions that occurred before the date of transition to IFRS. The amendment is effective for year-ends beginning on or after July 1, 2011 however, the Credit Union has early adopted the amendment. The impact of the amendment and early adoption is that the Credit Union only applies IAS 39 derecognition requirements to transactions that occurred after the date of transition. 4. Critical accounting estimates and judgments: The Credit Union makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only; or in the period of the change and future periods, if the change affects both. Fair value of financial instruments: The Credit Union determines the fair value of financial instruments that are not quoted in an active market, using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately. The methods, and assumptions applied, and the valuation techniques used, for financial instruments that are not quoted in an active market are disclosed in note 18. Member loan loss provision: In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Credit Union makes judgment on whether objective evidence of impairment exists individually for financial assets that are individually significant. Where this does not exist, the Credit Union uses its judgment to group member loans with similar credit risk characteristics to allow a collective assessment of the group to determine any impairment loss. 17

20 4. Critical accounting estimates and judgments (continued): In determining the collective loan loss provision management uses estimates based on historical loss experience for assets with similar credit risk characteristics and objective evidence of impairment. Further details on the estimates used to determine the allowance for impaired loans collective provision are provided in note 6. Income taxes: The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit by the tax authorities based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. 5. Loans to members: Principal and Allowance for December 31, 2011 interest impaired loans Net Residential mortgage loans $ 373,395,026 $ 35,301 $ 373,359,725 Personal loans 83,107, ,083 82,200,041 Commercial loans 107,488,093 1,297, ,190,199 $ 563,990,243 $ 2,240,278 $ 561,749,965 Principal and Allowance for December 31, 2010 interest impaired loans Net Residential mortgage loans $ 362,984,275 $ 109,237 $ 362,875,038 Personal loans 85,009,062 1,141,754 83,867,308 Commercial loans 88,260,009 1,886,011 86,373,998 $ 536,253,346 $ 3,137,002 $ 533,116,344 Principal and Allowance for January 1, 2010 interest impaired loans Net Residential mortgage loans $ 356,454,551 $ 68,123 $ 356,386,428 Personal loans 91,491,404 1,391,525 90,099,879 Commercial loans 84,187, ,469 83,550,029 $ 532,133,453 $ 2,097,117 $ 530,036,336 18

21 5. Loans to members (continued): Commercial loans consist of the following loan types: December 31, December 31, January 1, Commercial $ 99,546,547 $ 80,241,314 $ 79,590,336 Syndicated 6,914,436 7,236,003 3,670,340 Agricultural - 167, ,029 Institutional 956, , ,872 Unincorporated associations 70,829 85,986 70,921 Allowance for impaired loans (1,297,894) (1,886,011) (637,469) $ 106,190,199 $ 86,373,998 $ 83,550,029 Certain Residential Mortgage Loans are securitized and have been legally transferred to other entities for funding purposes. These loans are administered by the Credit Union and recognized on the consolidated statement of financial position to the extent of the Credit Union s continuing involvement. A summary of the carrying values of Residential Mortgage Loans is as follows: December 31, December 31, January 1, Loans held by the Credit Union $ 563,990,243 $ 536,253,346 $ 532,133,453 Loans transferred to Central 1 10,526,556 13,562,825 15,154,744 $ 574,516,799 $ 549,816,171 $ 547,288,197 The following summarizes the Credit Union s loan portfolio by the contractual repricing or maturity date, whichever is earlier: Principal Average Principal Average Balance Yield Balance Yield Floating $ 141,779, % $ 160,225, % Within 1 year 123,339, % 50,566, % Over 1 year 298,871, % 325,461, % 563,990, % 536,253, % Provision for loan losses 2,240,278 3,137,002 $ 561,749,965 $ 533,116,344 19

22 5. Loans to members (continued): January 1, 2010 Principal Average Balance Yield Floating $ 186,709, % Within 1 year 42,529, % Over 1 year 302,894, % 532,133, % Provision for loan losses 2,097,117 $ 530,036, Allowance for impaired loans: Details of the activity in the allowance for impaired loans are as follows: Residential Personal Commercial Mortgage Loans Loans Loans Total Total Balance, beginning of year $ 109,237 1,141,754 1,886,011 3,137,002 $ 2,097,116 Recoveries - 125, , ,671 Loans written-off (137,097) (703,341) (21,598) (862,036) (1,413,834) Provision for impaired loans during the year 63, ,307 (566,519) (160,051) 2,323,049 Balance, end of year $ 35, ,083 1,297,894 2,240,278 $ 3,137,002 For the year ended December 31, 2011, interest of $93,431 was recorded on impaired loans ( $261,572). Details of the impaired loans, net of specific allowances are as follows: Residential Personal Commercial December 31, 2011 Mortgage Loans Loans Loans Total Impaired loans $ 3,728,306 1,152,923 3,469,504 8,350,733 Specific allowance 20, ,471 1,277,895 2,140,279 Net $ 3,707, ,452 2,191,609 6,210,454 20

23 6. Allowance for impaired loans (continued): Residential Personal Commercial December 31, 2010 Mortgage Loans Loans Loans Total Impaired loans $ 2,267,267 1,585,934 3,040,496 6,893,697 Specific allowance 74,625 1,056,366 1,786,011 2,917,002 Net $ 2,192, ,568 1,254,485 3,976,695 Residential Personal Commercial January 1, 2010 Mortgage Loans Loans Loans Total Impaired loans $ 3,067,714 1,680, ,288 5,383,560 Specific allowance 42,549 1,257, ,469 1,787,117 Net $ 3,025, , ,819 3,596,443 The Credit Union s commercial loan portfolio contains Member concentration risk, whereby a large amount of the loans are connected to certain individuals. Collectively, the largest five commercial Members by loan dollar value are associated with approximately 17% ( %) of the commercial loan portfolio. The Credit Union s commercial loan portfolio consists of the following industry sectors: December 31, December 31, January 1, Hospitality 10% 15% 13% Retail & Commercial Buildings 54% 57% 59% Other 36% 28% 28% Past due but not impaired loans: The Credit Union has the following loans that are past due but not impaired: December 31, December 31, January 1, to 90 days past due $ 3,438,488 $ 2,204,697 $ 3,570,292 21

24 6. Allowance for impaired loans (continued): Collateral: There are documented policies and procedures in place for the valuation of financial and nonfinancial collateral. The fair valuation exercise of non-financial collateral is performed if there has been a significant change in the terms and conditions of the loan and (or) the loan is considered impaired. For impaired loans, an assessment of the collateral is taken into consideration when estimating the net realizable amount of the loan. The amount and type of collateral and other credit enhancements required depend upon the Credit Union s assessment of counterparty credit quality and repayment capacity. The Credit Union complies with industry standards for collateral valuation, frequency of recalculation of the collateral requirements, documentation, registration and perfection procedures and monitoring. Non-financial assets accepted by the Credit Union as collateral include vehicles, residential real estate, real estate under development, commercial real estate and certain business assets (accounts receivable, inventory, property and equipment). Financial collateral includes cash and negotiable securities issued by governments and investment grade issuers. Guarantees and are also accepted to reduce credit risk. The Credit Union also use credit insurance on mortgage loans to reduce the credit risk. The fair value of collateral held with respect to assets that are either past due greater than 30 days or impaired is $5,595,156 as at December 31, 2011 ( $3,415,778, January 1, $3,697,325). Credit risk: The following tables illustrate the credit quality of loans that are neither past due nor impaired: Credit quality of loans December 31, 2011 Retail Mortgage and Personal Loans Commercial Loans Rating % of Portfolio Rating % of Portfolio Undoubted 27% Superior 10% Superior 2% Satisfactory 87% Satisfactory 70% Watch List 3% Watch list 1% Refer to Note 21 Financial Risk Management for a detailed explanation of the credit risk rating process of both portfolios. 22

25 7. Mortgage securitizations: As part of its program of liquidity, capital, and interest rate risk management, the Credit Union enters into arrangements to fund loan growth by selling residential mortgages to unrelated third parties. As part of these mortgage receivable transfers, the Credit Union retains mortgage servicing responsibilities but does not receive an explicit servicing fee for its servicing responsibilities. The Credit Union s retained interest in the mortgages sold also consists of their right to future cash flows arising from any excess of the mortgage cash flows over and above the contractual return due to the mortgage pool investors. The Credit Union s retained interests are subject to credit, prepayment, and interest rate risks on the securitized mortgages. The third parties, as holders of the securitized mortgages, have recourse only to a cash collateral account and cash flow from the securitized mortgages. The investors and the third parties have no recourse to the Credit Union s other assets. The total amount of securitized mortgages under administration as at December 31, 2011 was $10,526,556 ( $13,562,825, January 1, $15,154,744). The total amount of retained interests to future excess spread recorded in increments as at December 31, 2011 was $450,695 ( $524,172, January 1, $611,362). The component of retained interests related to future excess spread are designated as Available for Sale. Sensitivity of key assumptions to adverse changes The fair value of the retained interests for the securitization activity for the year ending December 31, 2011 is $450,695 ( $524,173, January 1, $611,362). The fair value of the retained interest is primarily impacted by the prepayment rate assumption used in measuring the retained interest. An increase in the prepayment rate would cause a reduction in the fair value of the retained interest, while a decrease would in turn lead to an increase in the fair value of the retained interest. The Credit Union derives the prepayment rate assumption based upon actual historical experience, adjusted for any changes in the interest rate environment. At year end, the key economic assumptions and the sensitivity of the current fair value of retained interests related to excess spread receivables of two different adverse changes in those assumptions are as follows: Prepayment rate: Impact of a 5% increase in prepayment rate (annual %) $ (30,409) Impact of a 10% increase in prepayment rate (annual %) $ (59,791) Excess spread: Impact of a 0.5% point adverse change $ (90,116) Impact of a 1% point adverse change $ (179,429) 23

26 8. Investments: December 31, December 31, January 1, Available for sale: Central 1 Credit Union Limited: Class A shares $ 2,485,183 $ 1,469,313 $ 1,530,591 Class E shares 2,970,700 2,970,700 2,200,800 Credit Union Central of Ontario: Limited shares - 17, ,248 Cost, net of distributions received and write down 5,455,883 4,457,361 4,518,639 Retained rights loan securitizations 450, , ,362 Other investments 6,682 6,682 6,682 Fair value through profit and loss CUCO Cooperative Association 3,045, ABCP 2008 Limited Partnership - 3,134,424 2,744,593 Loans and receivables: Central 1 liquidity reserve deposits 41,144,234 45,273,486 44,298,551 Central 1 term deposits 25,506,950 25,000,000 - Accrued interest on investments 617, , ,359 Other investment 280, , ,000 $ 76,508,134 $ 79,044,595 $ 53,058,186 The following summarizes the Credit Union s investments by the contractual repricing or maturity date, whichever is earlier: Principal Average Principal Average Balance Yield Balance Yield Within 1 year $ 56,019, % $ 54,404, % Over 1 year 10,632, % 15,869, % 66,651, % 70,273, % Non-rate sensitive 9,239,151 8,402,638 Accrued interest 617, ,469 $ 76,508,134 $ 79,044,595 24