CONCENTRA FINANCIAL SERVICES ASSOCIATION CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2014

Transcription

1 CONCENTRA FINANCIAL SERVICES ASSOCIATION CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2014 Note ASSETS Cash resources 80,163 84,914 Securities 3 1,164,538 1,067,605 Derivative assets 5 14,551 18,571 Loans to customers 6 5,448,613 4,853,565 Trade and other receivables 1,205 3,095 Other assets 8 12,778 7,158 Goodwill 9 19,248 19,248 Current income tax assets 1, Deferred income tax assets 10 4,099 3,868 Total assets 6,746,485 6,058,077 LIABILITIES Deposits from customers 11 3,834,471 3,109,676 Derivative liabilities 5 16,635 14,303 Loans and notes payable , ,892 Liabilities for loans securitized 13 2,298,478 2,309,426 Trade and other payables 21,100 16,109 Other liabilities 1, Subordinated debentures 14 93, ,991 Current income tax liabilities 284 2,233 Total liabilities 6,452,119 5,780,755 MEMBERS' EQUITY Share capital , ,245 Retained earnings 153, ,080 Accumulated other comprehensive income (loss) 3,983 6,997 Total equity 294, ,322 Total equity and liabilities 6,746,485 6,058,077 The accompanying notes form an integral part of these consolidated financial statements Approved by Ken Kosolofski, President and Chief Executive Officer Stephen Fitzpatrick, Director and Chair, Audit and Conduct Review Committee Al Meyer, Board Chair 32

2 CONCENTRA FINANCIAL SERVICES ASSOCIATION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2014 Share Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Available-for- Sale Securities Cash Flow Hedges Total Members Equity Balance as at January 1, , ,555 8, ,607 Net income - 26, ,623 Net fair value gains (losses) on available-for-sale securities, net of tax - - (2,649) - (2,649) Cash flow hedges, net of tax Total comprehensive income for the year - 26,623 (2,649) ,813 Shares issued Dividends, Class A shares - (6,661) - - (6,661) Dividends, Class B shares - (311) - - (311) Reduction in income taxes - 1, ,874 Balance as at December 31, , ,080 6, ,322 Net income - 23, ,207 Net fair value gains (losses) on available-for-sale securities, net of tax - - (1,892) - (1,892) Cash flow hedges, net of tax (1,122) (1,122) Total comprehensive income for the year - 23,207 (1,892) (1,122) 20,193 Shares issued Dividends, Class A shares - (3,997) - - (3,997) Dividends, Class B shares - (311) - - (311) Reduction in income taxes - 1, ,159 Balance as at December 31, , ,138 4,266 (283) 294,366 The accompanying notes form an integral part of these consolidated financial statements 33

3 CONCENTRA FINANCIAL SERVICES ASSOCIATION CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2014 Note INTEREST INCOME Loans 179, ,487 Securities 20,781 21, , ,002 INTEREST EXPENSE Deposits 68,496 51,371 Loans and notes 58,806 65,614 Subordinated debentures 4,433 5,910 Other direct expenses , ,553 NET INTEREST INCOME 67,399 69,449 Loan impairment charges 6,836 5,319 NET INTEREST MARGIN 60,563 64,130 NON-INTEREST INCOME Fee for service 16 13,942 15,010 Gain on financial instruments 17 6,520 1,226 Securitization income Unrealized and realized gains (losses) on derivatives (2,636) (584) 18,651 15,759 79,214 79,889 NON-INTEREST EXPENSE Salaries and employee benefits 28,202 26,662 Professional and advisory services 11,082 9,516 General business 6,715 6,002 Occupancy 1,707 1,741 47,706 43,921 INCOME BEFORE INCOME TAXES 31,508 35,968 Income tax expense 10 8,301 9,345 NET INCOME 23,207 26,623 The accompanying notes form an integral part of these consolidated financial statements 34

4 CONCENTRA FINANCIAL SERVICES ASSOCIATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2014 Note NET INCOME 23,207 26,623 OTHER COMPREHENSIVE INCOME (LOSS) Items that will be reclassified subsequently to net income Available-for-sale securities Net unrealized (losses) gains on available-for-sale securities, before tax 5,524 (3,151) Reclassification of (gains) losses on available-for-sale securities to net income, before tax (7,835) (83) Cash flow hedges Net gains (losses) on derivatives designated as cash flow hedges, before tax 5 (1,388) 1,329 Reclassification of (gains) losses on derivatives designated as cash flow hedges to net income, before tax 5 (146) (182) Income tax relating to components of other comprehensive income that will be reclassified subsequently to net income OTHER COMPREHENSIVE INCOME (LOSS) FOR THE YEAR, NET OF TAX (3,014) (1,810) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 20,193 24,813 The accompanying notes form an integral part of these consolidated financial statements 35

5 CONCENTRA FINANCIAL SERVICES ASSOCIATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2014 Note CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net income 23,207 26,623 Adjustments to determine net cash from (used in) operating activities Income tax expense 10 8,301 9,345 Net interest income (67,399) (69,449) Amortization of premises and equipment Other amortization Loan impairment charges 6,836 5,319 Unrealized and realized (gains) losses on derivatives 2, Gain on financial instruments 17 (6,520) (1,226) Gain (loss) on sale of retained interests 18-5 Other securitization revenue 18 (736) (110) Changes in operating assets and liabilities Loans to customers, net of repayments and sales (615,262) (169,193) Deposits from customers, net of withdrawals 709, ,566 Trade and other receivables 1,794 (719) Other assets (2,828) (3,122) Trade and other payables 4,992 (1,404) Other liabilities 184 (468) Interest paid (116,907) (119,003) Interest received 220, ,444 Net realized gains (losses) from derivatives 1,220 (2,536) Net realized gains (losses) from derivatives designated as cash flow hedges (1,422) 1,147 Income tax paid (9,728) (2,981) Net cash from operating activities 159, ,726 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Proceeds from sales and maturities of securities 2,690,600 2,421,626 Purchase of securities (2,876,235) (2,451,789) Premises and equipment purchases, net of disposals (90) (157) Intangible asset purchases, net of transfers (709) (970) Net cash used in investing activities (186,434) (31,290) CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Loans and notes payable, net of repayments (28,746) 5,788 Liabilities for loans securitized, net of repayments 75,463 (167,279) Redemption of subordinated debentures 14 (20,000) (25,000) Dividends paid 15 (4,308) (6,972) Net cash from (used in) financing activities 22,409 (193,463) NET (DECREASE) INCREASE IN CASH RESOURCES (4,751) 61,973 Cash resources, beginning of year 84,914 22,941 CASH RESOURCES, END OF YEAR 80,163 84,914 The accompanying notes form an integral part of these consolidated financial statements 36

6 Concentra Financial Services Association Page 1 1. GENERAL INFORMATION Concentra Financial Services Association (the Company) is a company domiciled in Canada and carries on business pursuant to the Cooperative Credit Associations Act (Canada). The address of the Company s registered office is 333 Third Avenue North, Saskatoon, Saskatchewan, Canada, S7K 2M2. The Company provides financial intermediation and trust services to Canadian credit unions and associated commercial and retail customers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of Presentation (a) Statement of Compliance The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements of the Company have been prepared in accordance with subsection 292(4) of the Cooperative Credit Associations Act (Canada) which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions Canada (OSFI), the consolidated financial statements are to be prepared in accordance with Canadian generally accepted accounting principles which require publicly accountable enterprises to report using IFRS. The significant accounting policies followed in the preparation of these consolidated financial statements, including the accounting requirements of OSFI, are summarized below. These policies have been consistently applied to all years presented and conform in all material respects to IFRS. The consolidated financial statements for the year ended December 31, 2014, were approved for issue by the Board of Directors on February 18, (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except the availablefor-sale financial assets, financial assets and financial liabilities held at fair value through profit or loss and all derivative contracts, which have been measured at fair value. (c) Functional and presentation currency The consolidated financial statements are presented in Canadian dollars, which is the Company s functional currency. Except as otherwise indicated, financial information presented in Canadian dollars has been rounded to the nearest thousand. (d) Use of estimates and judgment The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates thereby impacting the consolidated financial statements. Management believes that the underlying assumptions are appropriate and that the Company s financial statements therefore present the financial position and results fairly. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Information about key estimates and critical judgements are described in Note

7 Concentra Financial Services Association Page 2 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Basis of Consolidation The Company conducts business through various corporate structures including subsidiaries and other investments. The consolidated financial statements include the Company s assets, liabilities and results of operations, after the elimination of intercompany transactions and balances, of all subsidiaries for which the Company has concluded it controls. Control is achieved when the Company has (1) power over the investee; (2) exposure, or rights, to variable returns from its involvement with the investee; and (3) the ability to use its power over the investee to affect the amount of the Company s returns. The Company reassesses whether it controls an investee if facts and circumstances indicate that there are changes to one or more of these three elements of control. The financial statements have been prepared using consistent accounting policies and valuation methods for like transactions and other events in similar circumstances. The following entities are included in the consolidated financial statements of the Company: Concentra Trust The Company owns 100% of the common shares of Concentra Trust; as such, these consolidated financial statements include the assets and liabilities and results of operations of this wholly owned subsidiary. Celero Solutions The Company s 5.8% interest in Celero Solutions, an unincorporated entity, is recorded using the cost method of accounting. Under this method the investment is initially recorded at cost and income is recognized only to the extent any distributions are received or receivable. Losses, other than a temporary decline in value, are recorded in other non-interest income. 2.3 Sales and Repurchase Agreements Securities sold subject to repurchase agreements are treated as collateralized borrowing transactions when the transferee has the right by contract or custom to sell or repledge the collateral and are classified as available-for-sale and recorded at fair value. Obligations related to securities sold under repurchase agreements are recorded in loans and notes payable. Interest incurred on repurchase agreements is included in loans and notes interest expense. 2.4 Financial Assets and Liabilities In accordance with IAS 39, all financial assets and liabilities, including derivative financial instruments are recognized in the consolidated balance sheet and measured in accordance with their assigned category. Standards for recognizing and measuring financial assets and financial liabilities require that financial assets and financial liabilities, including derivatives, be recognized on the consolidated balance sheet when the Company becomes a party to the contractual provisions of a financial instrument or nonfinancial derivative contract. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on the classification of the financial instrument. The Company uses trade date accounting for regular way contracts when recording financial asset transactions Financial Assets The Company classifies financial assets into the following IAS 39 categories: financial assets at fair value through profit or loss; available-for-sale financial assets; and loans and receivables. Management determines the classification of its financial instruments at initial recognition. (a) Financial assets at fair value through profit or loss This category comprises two sub-categories: financial assets classified as held-for-trading and financial assets designated by the Company as at fair value through profit or loss upon initial recognition. The Company has no financial assets designated at fair value through profit or loss. 38

8 Concentra Financial Services Association Page 3 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A financial asset is classified as held-for-trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held-for-trading unless they are designated and effective as hedging instruments. Gains and losses arising from changes in fair value of derivative financial assets classified as held-fortrading are included in the consolidated statement of income and are reported as unrealized and realized gains (losses) on derivatives unless they are related to certain sales transactions, in which case they are reported in either securitization income or gain on financial instruments. (b) Available-for-sale financial assets Available-for-sale securities are non-derivative financial assets that are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices or that are not classified as loans and receivables, held-tomaturity investments or financial assets at fair value through profit or loss. Available-for-sale financial assets are initially recognized at fair value, which is the cash consideration including any transaction costs, and measured subsequently at fair value with gains and losses being recognized in other comprehensive income (loss) (OCI) in the consolidated statement of comprehensive income, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognized. Available-for-sale financial assets are subject to impairment review at the end of each reporting period. If an available-for-sale financial asset is determined to be impaired, the cumulative gain or loss previously recognized in OCI in the consolidated statement of comprehensive income is recognized in the consolidated statement of income. Interest is calculated using the effective interest method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognized in the consolidated statement of income. Purchase premiums or discounts on available-for-sale securities are amortized over the life of the security using the effective interest method and are recognized in securities interest income. Interest income accruing on available-for-sale securities is recorded in securities interest income. Dividends on available-for-sale equity instruments are recognized in the consolidated statement of income in securities interest income when the Company s right to receive payment is established. Gains and losses realized on disposal of available-for-sale securities are included in gain on financial instruments. Investments in equity instruments of co-operative enterprises classified as available-for-sale that do not have a quoted market price in an active market are measured at cost which is considered to be fair value due to the nature of the holdings. (c) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: (1) those that the Company intends to sell immediately or in the near term, which are classified as held-for-trading, and those that the Company upon initial recognition designates as at fair value through profit or loss; (2) those that the Company upon initial recognition designates as available-for-sale; or (3) those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which are classified as available-for-sale. Loans are initially recognized at fair value, which is the cash consideration to originate or purchase the loan including any transaction costs, and measured subsequently at amortized cost using the effective interest rate method. Loan fees, premiums and commissions paid on the acquisition of loans are amortized to loan interest income using the effective interest method. Loans are reported in the consolidated balance sheet as loans to customers. Interest on loans is included in the consolidated statement of income and is reported as loan interest income. Realized gains from the sale of loans to customers are recorded in realized gains on sale of loans within gain on financial instruments. In the case of an impairment, the impairment loss is reported as a deduction from the carrying value of the loan. Interest income continues to be accrued at the original effective interest rate of the loan based on the net carrying value of impaired loans. 39

9 Concentra Financial Services Association Page 4 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial Liabilities The Company s holdings in financial liabilities includes financial liabilities measured at amortized cost and hedging derivatives, which are classified as held for trading unless they are designated and effective as hedging instruments. Financial liabilities are derecognized when extinguished. Gains and losses arising from changes in fair value of derivative financial liabilities classified as held-fortrading are included in the consolidated statement of income and are reported as unrealized and realized gains (losses) on derivatives Classes of Financial Instruments The classification made can be seen in the table below: Financial Assets Category as Defined by IAS 39 Financial assets at fair value through profit or loss Class as Determined by the Company Financial assets classified as held-for-trading Derivative assets Loans and receivables Cash resources Loans and advances Loans to customers Trade and other receivables Financial Liabilities Available-for-sale financial assets Financial liabilities at fair value through profit or loss Available-for-sale securities debt securities Available-for-sale securities equity securities Financial liabilities classified as held-for-trading Derivative liabilities Financial liabilities at amortized cost Deposits from customers Loans and notes payable Liabilities for loans securitized Trade and other payables Subordinated debentures Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. The Company follows a fair value hierarchy to categorize the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Valuation techniques used to measure fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Fair values are determined by reference to quoted bid or asking prices, as appropriate, in the principal market or most advantageous market for that instrument to which the Company has immediate access (Level 1). 40

10 Concentra Financial Services Association Page 5 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include the following: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active; (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads; and (d) market-corroborated inputs. Fair values determined using valuation models require the use of assumptions concerning the amount and timing of estimated future cash flows and discount rates. In determining those assumptions, the Company looks primarily to external readily observable market inputs including factors such as interest rate yield curves, currency rates, and price and rate volatilities, as applicable (Level 2). In limited circumstances, the Company uses one or more input parameters that are not based on observable market data or uses observable inputs that require significant adjustment based on unobservable inputs (Level 3). The impact on net income of financial instrument valuations reflecting non-market observable inputs (Level 3 valuations) is disclosed in Note The Company believes that using possible alternative assumptions will not result in significantly different fair values. The credit quality of financial assets and financial liabilities, including derivative instruments, is considered in determining the fair value of these instruments. In determining the credit quality of the instrument both the Company s own credit risk and the risk of the counterparty are considered elements of this credit quality. The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions the Company holds. Valuations are therefore adjusted, where appropriate, to allow for additional factors including model risks, liquidity risk and counterparty credit risk. 2.5 Impairment of Financial Assets (a) Loans carried at amortized cost The Company maintains an allowance to absorb credit-related losses in portfolios of on-balance sheet items. The allowance for impairment consists of specific and collective allowances, which are reviewed by management on an ongoing basis. The allowance for impairment is deducted from the related asset category. Loans are classified as impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the loan that can be reliably estimated. The criteria that the Company uses to determine that there is objective evidence of impairment include: Delinquency in contractual payments of principal or interest Cash flow difficulties experienced by the borrower Breach of loan covenants or conditions Initiation of bankruptcy proceedings Deterioration of the borrower s competitive position Deterioration in the value of collateral The Company first assesses whether objective evidence of impairment exists individually for loans that are individually significant, and individually or collectively for loans that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed loan, whether significant or not, it includes the loan in a group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognized through the use of a specific allowance are not included in a collective assessment of impairment. Collective allowances for impairment are established to recognize incurred loss events for which there is objective evidence of loss but whose effects are not yet evident. Loans are assessed for impairment collectively, in groups of loans with similar credit risk characteristics (i.e. loan type, geographical location, industry, collateral type, past-due status, and other relevant factors). 41

11 Concentra Financial Services Association Page 6 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The amount of the impairment loss is measured as the difference between the loan s carrying value and the present value of estimated future cash flows discounted at the loan s original effective interest rate. The carrying value of the loan is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of income. When a loan is restructured, and the present value of the future principal and interest payments discounted at the loan s original effective interest rate is less than the carrying value of the loan, the restructured loan is considered impaired. In subsequent periods, if the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the allowance for impairment is adjusted and the increase in the carrying value of the loan is credited to loan impairment charges. An impairment loss is reversed only to the extent that the loan s carrying value does not exceed the carrying value that would have been determined if no impairment had been recognized. When a loan is uncollectible, it is written off to loan impairment charges and the related specific allowance for impairment is reversed. This determination is made after considering information such as the occurrence of significant changes in the borrower s financial position such that the borrower can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. Property held for resale acquired through the settlement of loans is valued at the lower of the outstanding balance of the loan at the date of acquisition adjusted for costs incurred subsequent to foreclosure or repossession and the fair value of the property less costs of disposal. Property held for resale is sold as soon as practicable, with the proceeds used to reduce the outstanding net carrying value. Property held for resale is classified in the consolidated balance sheet within loans to customers. (b) Securities classified as available-for-sale The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available-forsale financial assets, the cumulative loss measured as the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss on that financial asset previously recognized in net income is removed from accumulated other comprehensive income (loss) (AOCI), and recognized in the consolidated statement of income. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in net income, the impairment loss is reversed through the consolidated statement of income. Impairment losses recognized in the consolidated statement of income on equity instruments are not reversed through the consolidated statement of income. 2.6 Offsetting Financial Instruments Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet only when there is currently a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2.7 Interest Income and Expense Interest income and expense for all interest-bearing financial instruments are recognized within interest income and interest expense in the consolidated statement of income using the effective interest method. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 42

12 Concentra Financial Services Association Page 7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8 Derecognition of Financial Assets or Liabilities Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have ceased to exist or when the Company has transferred substantially all the risks and rewards of ownership of the assets. Where substantially all the risks and rewards of ownership of the financial asset are neither retained nor transferred, the Company derecognizes the transferred asset only if it has lost control over that asset. Control over the assets is represented by the practical ability to sell the transferred asset. If the Company retains control over the asset, it will continue to recognize the asset to the extent of its continuing involvement. When a financial asset is derecognized in full, a gain or loss is recognized in net income for an amount equal to the difference between the carrying amount of the asset and the value of the consideration received. Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. 2.9 Asset Securitization The Company periodically securitizes groups of assets by selling them to independent structured entities. As part of these transactions, the Company generally retains an interest in the securitized assets, such as servicing rights and various forms of recourse including rights to excess spread. When assets have been transferred and substantially all of the risks and rewards of ownership of the assets have also been transferred to a third party during a securitization transaction, the transaction is recorded as a sale and the Company removes the transferred assets from the consolidated balance sheet. When substantially all of the risks and rewards of ownership of the assets have not been transferred during a securitization transaction, the transaction is not accounted for as a sale and the assets remain on the consolidated balance sheet of the Company. At the time of the transaction, the securitized borrowings are recognized as liabilities for loans securitized on the consolidated balance sheet. Securitized assets are classified as either securities or loans on the consolidated balance sheet. Securities are carried at fair value. Loans are carried at amortized cost using the effective interest method. Securitized borrowings are classified as liabilities for loans securitized on the consolidated balance sheet and are carried at amortized cost. Securitized assets and liabilities are periodically reviewed for impairment or increased obligation with any impairment or increased obligation charged to net income. In certain cases, the Company has a continuing involvement in the securitized assets that is quite limited. Such loans are securitized and sold and the Company retains rights to the excess spread and servicing responsibilities for the assets sold, with very little exposure to variable cash flows. The Company accounts for its continuing involvement as retained interests and servicing liabilities on the consolidated balance sheet in other assets and other liabilities. Gains or losses on these transactions are recorded in securitization income and are dependent in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests, based on their relative fair value at the date of transfer and net of transaction costs. During the life of the securitization, as cash is received, the retained interest and the servicing liability are amortized and recognized in securitization income. Retained interests and servicing liabilities are revalued quarterly to assess for impairment or for increased obligation. In certain circumstances, the Company sells its retained interest arising from securitization transactions. When this sale results in the Company transferring substantially all of the risks and rewards of ownership associated with the underlying mortgages, the mortgages are derecognized and a resulting gain or loss is recorded. These gains or losses are recorded in securitization income and are dependent in part on the previous carrying amount of the financial assets involved in the transfer Derivative Financial Instruments and Hedge Accounting Derivative Financial Instruments Derivative instruments are recorded on the consolidated balance sheet at fair value, including those derivatives that are embedded in financial or non-financial contracts that are not closely related to the host contracts. Changes in the fair values of derivative instruments are recorded in unrealized and 43

13 Concentra Financial Services Association Page 8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) realized gains (losses) on derivatives, with the exception of derivative instruments designated in effective cash flow hedges which are recorded in OCI. The Company enters into derivative transactions to hedge interest rate and foreign currency risks, and for economic and asset/liability management purposes. Hedge accounting may be applied when appropriate. The Company does not have a trading program for derivatives. The Company also enters into derivative transactions on an intermediary basis on behalf of its clients. Economic and asset/liability management derivatives are used to manage interest rate and currency exposure on the Company s balance sheet, but do not meet the specific criteria to qualify as hedge derivatives. These derivatives include contracts that reposition the Company s overall interest rate and foreign exchange risk profile and are reported on the balance sheet at their fair value Hedges IAS 39 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies. The Company uses derivatives in hedging strategies to manage its exposures to interest rate and foreign currency risks. When derivatives are used to manage exposures, the Company determines for each derivative whether hedge accounting can be applied. Hedge accounting may be applied where a derivative is highly effective in offsetting either changes in the fair value or cash flows attributable to the risk being hedged, both at inception and over the life of the underlying asset or liability. The hedging relationship is required to be documented at inception detailing the hedging relationship and the particular risk management objective and strategy for undertaking the hedge transaction. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments have been highly effective in offsetting changes in the fair value or cash flows of the hedged items. Note 5 sets out the details of the fair values of derivatives used for hedging purposes. Cash flow hedge In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of income taxes, is recorded in OCI while the ineffective portion is recorded in unrealized and realized gains (losses) on derivatives. All components of each derivative s change in fair value have been included in the assessment of cash flow hedge effectiveness. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued and the amounts previously recorded in OCI are reclassified to net interest income during the periods when the variability in the cash flows of the hedged item affects net interest income. When a forecast transaction is no longer expected to occur, the amounts previously recorded in OCI are immediately reclassified to the statement of income and are recorded as unrealized and realized gains (losses) on derivatives Fee for Service Fee for service revenues except for estate administration fees are recognized over the period in which the related service is rendered. Estate administration fees are recognized as income when the Company has rendered all services and is entitled to collect the fee Cash Resources Cash resources consist of cash and short-term securities that are due on demand or had short periods to maturity at date of acquisition, are highly liquid and readily convertible to known amounts of cash, are subject to insignificant risk of change in fair value, and are used to manage short-term cash commitments Leases Leases are accounted for in accordance with IAS 17 and IFRIC 4. They are divided into finance leases and operating leases. (a) As Lessor When assets are held subject to a finance lease, the present value of the lease payments is recognized as a receivable. The difference between the gross receivable and the present value of the receivable is 44

14 Concentra Financial Services Association Page 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) recognized as unearned finance income. Lease income is recognized over the term of the lease using the net investment in the lease and the interest rate implicit in the lease, which reflects a constant periodic rate of return. The Company does not enter into operating leases as a lessor. (b) Lessee The leases entered into by the Company are operating leases as a significant portion of the risks and rewards are retained by another party, the lessor. The total payments made under operating leases are charged to non-interest expense in the consolidated statement of income on a straight-line basis over the period of the lease. The Company does not enter into finance leases as a lessee Premises, Equipment and Other Intangible Assets Premises and equipment are measured at cost less accumulated amortization and accumulated impairment losses. As no finite useful life for land can be determined, its carrying amount is not depreciated. Buildings, building components, building improvements and equipment are carried at acquisition cost less subsequent amortization and impairment losses. Amortization is recognized on a straight-line basis over the estimated useful life of the item of premises or equipment. The applicable amortization periods are as follows: Buildings 40 years Building components 20 years Building improvements 5 years Equipment 3 10 years Amortization methods, residual values and estimates of useful lives are reassessed at each financial year-end and adjusted if appropriate. Other intangible assets consist of acquired and internally developed software. Other intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. The useful lives of intangible assets are assessed to be finite. Amortization is recognized on a straightline basis over their estimated useful lives of 3-5 years Subordinated Debentures Transaction costs, premiums and discounts incurred in the issuance of subordinated debentures are amortized to interest expense using the effective interest method Income Tax 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 items recognized directly in equity or in other comprehensive income (loss). (a) Current income tax Income tax payable (receivable) is calculated on the basis of the applicable tax law in the respective jurisdiction and is recognized as an expense (income) for the period except to the extent that current tax related to items that are charged or credited in other comprehensive income (loss) or directly to equity. In these circumstances, current tax is charged or credited to other comprehensive income (loss) or to equity (for example, current tax on available-for-sale securities). Reduction of income taxes that arise from the distribution of dividends by the Company are recognized at the same time as the liability to pay the related dividend is recognized and are recorded directly in equity. 45

15 Concentra Financial Services Association Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of the consolidated balance sheet and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. The principal temporary differences arise from securities, securitized assets, loans to customers, amortization of premises and equipment, accrued expenses, effective interest method, and carryforward amounts. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. A deferred tax asset is recognized for deductible temporary differences relating to investments in subsidiaries to the extent that it is probable that the temporary differences will reverse in the foreseeable future and that future taxable profits will be available against which they can 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. Deferred tax related to fair value re-measurement of available-for-sale securities and cash flow hedges, which are recognized in other comprehensive income (loss), is also recognized in other comprehensive income (loss) and subsequently in the consolidated statement of income together with the deferred gain or loss. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but the Company intends to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously Employee Benefits (a) Pension benefits The Company has a defined contribution plan which is a post-employment benefit plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the plan does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when they are due in respect of service rendered before the end of the reporting period. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the reporting period in which the employees rendered the service are discounted to their present value at the reporting date. (b) Termination benefits Termination benefits are employee benefits provided when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts an offer of benefits in exchange for the termination of employment. The Company recognizes termination benefits at the earlier of the date when the Company can no longer withdraw the offer of those benefits and the date the Company recognizes costs for a restructuring that is within the scope of IAS 37 and involves the payment of termination benefits. Benefits falling due more than 12 months after the date of the consolidated balance sheet are discounted to present value Provisions A provision is recognized if, as a result of a past event, the Company 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. 46

16 Concentra Financial Services Association Page SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.19 Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Company has determined the Company executive leadership team as its chief operating decision-maker. All transactions between business segments are conducted on an arm s length basis, with intra-segment revenue and costs being eliminated. Income and expenses directly associated with each segment are included in determining business segment performance. In accordance with IFRS 8, the Company has the following lines of business: Financial Intermediation and Trust Operations. Financial Intermediation includes residential mortgage, commercial lending and commercial leasing activities, personal and corporate deposit products, securities and treasury services. Trust Operations consist of personal, corporate, and registered plans trust products and services. The Trust Operations line of business before the elimination of intercompany transactions and balances has total revenue of $6,128 ( $6,233), net income of $900 ( $904) and total assets of $13,396 ( $12,226). The Trust Operations business does not meet the quantitative thresholds within IFRS 8 to require separate disclosure Interest in Joint Operations The Company is party to a joint arrangement in which the Company along with its participating partners have combined efforts to issue a series of Commercial Mortgage Pass-Through Certificates. A joint arrangement is an arrangement in which two or more parties have joint control. Joint control exists only when decisions about the relevant activities require unanimous consent of the parties sharing the control of the arrangement. Joint arrangements are either classified as joint operations or joint arrangements depending on the contractual rights and obligations of each investor rather than the legal structure of the joint arrangement. When determining the classification of the joint arrangement the Company considered the terms and conditions of the underlying agreement to determine the Company s contractual rights and obligations under the arrangement. The Company s role in this arrangement is limited to the warehousing and/or contribution of certain commercial mortgages prior to the issuance of the pass through certificates in return for a proportionate share of the final net proceeds. During the warehousing period the Company retains all risks and rewards attributable to the commercial mortgages. Post issuance the Company has transferred the commercial mortgages to its joint operating partner and has no continuing involvement. As a result, the Company has concluded that the arrangement is joint operation and recognizes its share of the operation represented by (1) its assets and liabilities held/incurred jointly; and (2) its revenue and expenses incurred jointly arising from the joint operation Goodwill Goodwill represents the excess of the purchase price over the fair value of the Company s share of the net identifiable assets acquired in business combinations. Goodwill is allocated to cash-generating units or groups of cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Goodwill is tested for impairment annually, or whenever a trigger event has been observed, by comparing the present value of the expected future cash flows from a cash-generating unit with the carrying value of its net assets, including applicable goodwill carried at cost less previous accumulated impairment losses. Any goodwill impairment is charged to income in the period in which the impairment is identified. Impairment losses on goodwill are not reversed. 47