COMMUNITY FIRST CREDIT UNION LIMITED

Transcription

1 Consolidated Financial Statements of COMMUNITY FIRST CREDIT UNION LIMITED

2 KPMG LLP Telephone (705) Chartered Accountants Fax (705) Elgin Street, PO Box 578 Internet Sault Ste. Marie ON P6A 5M6 INDEPENDENT AUDITORS REPORT To the Members of Community First Credit Union Limited We have audited the accompanying consolidated financial statements of Community First Credit Union Limited, which comprise the consolidated statement of financial position as at December 31, 2013 and the consolidated statements of income and comprehensive income, changes in members equity and cash flows for the year ended December 31, 2013, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Community First Credit Union Limited as at December 31, 2013 and its consolidated financial performance and its consolidated cash flows for the year ended December 31, 2013 in accordance with International Financial Reporting Standards. Other Matter The consolidated financial statements of Community First Credit Union Limited as at and for the year ended December 31, 2012 were audited by another auditor who expressed an unmodified opinion on those statements on March 15, Chartered Professional Accountants, Licensed Public Accountants February 25, 2014 Sault Ste. Marie, Canada KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

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4 Consolidated Statement of Income, with comparative figures for (note 15) Interest revenue: Interest - personal loans $ 2,426,901 $ 2,628,290 - personal mortgage loans 6,501,261 6,379,501 - business loans and mortgages 4,662,601 4,554,551 Investment income 419, ,039 14,009,837 14,023,381 Cost of financing: Interest - members deposits (notes 14 and 7(a)) 4,562,845 5,223,086 - borrowing 324, ,242 4,886,976 5,525,328 Net interest income 9,122,861 8,498,053 Impairment losses on member loans (note 9) 422, ,643 Net interest income after provision for impairment 8,700,290 8,104,410 Other revenue 2,978,170 3,116,893 11,678,460 11,221,303 Operating expenses: Depreciation of property and equipment 792, ,724 Amortization of intangibles 186, ,171 Automated networks 1,233,232 1,130,151 General and administration 1,609,074 1,707,127 Insurance 430, ,885 Loan costs 97,132 93,179 Occupancy 804, ,197 Salaries, wages and benefits 6,083,951 5,821,284 11,236,986 10,867,718 Income before income taxes 441, ,585 Income taxes (note 23): Current (recovery) 42,834 (54,421) Future 21,786 47,034 64,620 (7,387) Net income for the year $ 376,854 $ 360,972 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statement of Comprehensive Income and Changes in Members Equity, with comparative figures for (note 15) Net income $ 376,854 $ 360,972 Other comprehensive income, net of income taxes: Items that are or may be reclassified to profit or loss: Change in fair value of available-for-sale financial assets, net of taxes of $13,166 ( $74,743) 71, ,469 Items that will never be reclassified to profit or loss: Defined benefit plan actuarial gain (losses) net of income tax of $473,773 ( $247,741) 2,582,827 (1,235,559) Comprehensive income (loss) $ 3,031,456 $ (467,118) (note 15) Contributed surplus: Balance, beginning and end of year $ 1,315,305 $ 1,315,305 Investment shares: Balance, beginning of year 3,671,153 3,724,585 Redemption of shares (53,548) (53,432) Balance, end of year 3,617,605 3,671,153 Retained earnings: Balance, beginning of year 11,361,531 14,357,543 IAS 19 Pension adjustment (note 15) (3,274,290) Net income 376, ,972 Distribution to members (97,433) (82,694) Balance, end of year 11,640,952 11,361,531 Accumulated other comprehensive income (loss): Representing the fair value reserve Balance, beginning of year (432,608) 395,482 Net change in fair value of available-for-sale financial assets, net of tax 71, ,469 Defined benefit plan actuarial gain (losses), net of tax 2,582,827 (1,235,559) Balance, end of year 2,221,994 (432,608) Members equity, end of year $ 18,795,856 $ 15,915,381 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statement of Cash Flows, with comparative figures for (note 15) Cash flows from operating activities: Net income $ 376,854 $ 360,972 Adjustments for: Change in non-cash items: Net interest income (9,122,861) (8,498,053) Provision for impaired loans 422, ,643 Provision for income tax 64,620 47,034 Depreciation of property and equipment 792, ,724 Amortization of intangibles 186, ,171 Net change in derivative financial instruments 20,663 (60,972) (7,259,760) (6,826,481) Changes in other assets: Decrease in prepaids and other assets 24, ,861 Increase in pension liability (165,342) (186,275) Changes in accounts payable and accrued liabilities (87,212) (330,215) (227,869) (308,629) Changes in member activities (net): Changes in member loans (19,772,148) (5,592,083) Changes in member deposits 6,582,168 16,656,796 (13,189,980) 11,064,713 Cash flows related to interest, dividends and income taxes: Interest received on member loans 13,750,109 13,767,705 Interest received on investments 419, ,039 Interest paid on member deposits (4,506,195) (5,685,612) Distributions to members (97,433) (82,694) Taxes paid 188,728 Interest paid on external borrowings (324,131) (302,242) 9,430,152 8,158,196 (11,247,457) 12,087,799 Cash flows from financing activities: Purchase of liquidity reserves, net (1,279,448) (2,041) Member capital accounts, net (55,610) (55,535) Proceeds from (repayments of) term loans, net 5,900,000 (9,500,000) 4,564,942 (9,557,576) Cash flows from investing activities: Distributions received from CUCO Co-op 468, ,975 Proceeds on redemption (purchase) of Central 1 shares (8,643) 23,929 Purchases of intangibles (45,840) (29,511) Additions to property and equipment (579,133) (392,619) (165,541) (133,226) Net (decrease) increase in cash and cash equivalents (6,848,056) 2,396,997 Cash and cash equivalents, beginning of year 12,152,050 9,755,053 Cash and cash equivalents, end of year $ 5,303,994 $ 12,152,050 See accompanying notes to consolidated financial statements. 4

7 1. Reporting entity: Community First Credit Union Limited (the Credit Union ), is incorporated under the Credit Unions and Caisses Populaires Act of Ontario (the Act ) and is a member of the Central 1 Credit Union Limited ( Central 1 ). The Credit Union s Bond of Association includes all persons resident or employed in Ontario. The Credit Union currently operates two branches in the City of Sault Ste. Marie and one branch in the City of Timmins. The Credit Union s head office is located at 289 Bay Street Sault Ste. Marie, Ontario. These financial statements have been authorized for issue by the Board of Directors on February 25, Basis of preparation: These consolidated financial statements of the Credit Union are the representations of management and have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). These consolidated financial statements were prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets and derivative financial instruments measured at fair value. The Credit Union s functional and presentation currency is the Canadian dollar. (a) Statement of compliance: These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). (b) Basis of consolidation: These financial statements include all the accounts of the Credit Union and its wholly-owned subsidiary; Community First Holdings Inc. (CFHI) which is inactive. 5

8 2. Basis of preparation (continued): (c) Basis of measurement: The 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. (d) Functional and presentation currency: The Credit Union s functional and presentation currency is the Canadian dollar. The financial statements are presented in Canadian dollars. (e) Use of estimates and judgments: The preparation of 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 financial statements are disclosed in note Significant accounting policies: The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Loans receivable from members: All member loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been classified as loans and receivables. Member loans are initially measured at fair value. Loan costs which include title costs, mortgage cash-back incentives and appraisal fees are deferred and amortized over the average remaining term of the related loans, being four years. Member loans are subsequently measured at amortized cost, using the effective interest rate method, less any impairment losses. Loans considered uncollectible are written off. Loans to members are reported at their recoverable amount representing the aggregate amount of principal, less any allowance or provision for impaired loans, plus accrued interest. Interest is accounted for on the accrual basis for all loans. 6

9 3. Significant accounting policies (continued): (a) Loans receivable from members (continued): (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. 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. (b) Interest income and expense: Interest income and expense are recognized in the 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. 7

10 3. Significant accounting policies (continued): (c) 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. 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. (d) Cash and cash equivalents: Cash and cash equivalents include cash on hand, current accounts, short-term deposits with other financial institutions, cheques and other items in transit. Given their short-term nature, the carrying value of cash and cash equivalents equals fair value. (e) 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. 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 a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. 8

11 3. Significant accounting policies (continued): (e) Financial instruments non-derivative financial instruments (continued): 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. 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 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 realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, 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): (e) 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 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(a) (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. 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. (f) 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 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 statement of financial position at fair value, including those derivatives that are embedded in financial or non-financial contracts that are closely related to the host contracts. Changes in the fair value of those derivative instruments are recognized in net earnings for the year. The Credit Union does not apply hedge accounting on its derivative portfolio. 10

13 3. Significant accounting policies (continued): (g) Loan securitizations: The Credit Union periodically securitizes residential mortgage loans by selling them to Central 1. Central 1 then resells the loans to independent special purpose entities or trusts that issue securities to investors. For securitization transactions initiated prior to the date of transition to IFRS, in accordance with pre-changeover Canadian GAAP, 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 other income on the statement of income. 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. Revenue from servicing mortgages is recorded as the services are provided. 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. (h) Transfer of receivables: The Credit Union occasionally sells receivables such as personal mortgage loans to other financial institutions to manage its liquidity risk. In these instances the credit risk is transferred to the purchasing institution, while the Credit Union continues to administer the receivables. As such, the mortgage loans are removed from the statement of financial position since control of the assets has been transferred. A nominal administration fee is paid to the Credit Union each month, which is recorded as income when received. The sale price of receivables is determined at fair market value, which may give rise to either a gain or loss on sale. This gain or loss is recognized at the time of the sale and recorded as Non-interest income on the statement of income. 11

14 3. Significant accounting policies (continued): (i) Property and equipment: Property and equipment are initially recorded at cost and subsequently measured at cost less accumulated depreciation and any accumulated impairment (losses), with the exception of land which is not depreciated. Depreciation is recognized in net income and is provided on a straight-line basis and annual rates as follows: Buildings 2.5% - 10% Leasehold improvements 5% - 10% Furniture and equipment 10% - 20% Computer equipment and software 20% - 33% Automated teller machines 10% - 20% Additions to property and equipment which are not in use as at the year-end date are not depreciated until the period in which they are considered to be in use. Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. (j) Intangible assets: Intangible assets reflect costs associated with branding related to Community First s name change launch, merger costs associated with the Timmins amalgamation and the fair value of core deposits acquired and costs associated with the development of the banking system. Management considers these costs to provide current and future benefits for the membership. When the Credit Union enters into a business combination, any intangible assets acquired through amalgamation are recorded at their fair value as determined at that time. These intangible assets which have a limited life are amortized to income over the period during which the assets are anticipated to provide economic benefit. Intangible assets are initially recorded at cost and subsequently measured at cost less accumulated amortization and any accumulated impairment (losses). The banking system is being amortized on a straight-line basis at a rate of 10%. Other intangible assets are being amortized on a straight-line basis for a period not exceeding five years. 12

15 3. Significant accounting policies (continued): (k) 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. When 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 three cash-generating units. Impairment charges are included in income. (l) 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. 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. 13

16 3. Significant accounting policies (continued): (m) Member deposits: All member deposits are initially measured at fair value, net of any transaction costs directly attributable to the issuance of the instrument. Member deposits are subsequently measured at amortized cost, using the effective interest rate method. (n) Foreign currency translation: The 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 exchange 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. (o) Employee retirement benefits: The Credit Union maintains two defined benefit pension plans and two defined contribution plans, which cover all employees: i) Defined benefit plans: The management plan is contributory and the non-management plan is non-contributory. Under the Credit Union s defined benefit plans, the amount of pension benefit that an employee will receive on retirement is dependent on one or more factors such as age, years of service and compensation. The legal obligation for any benefit remains with the Credit Union. In June 2011, IAS 19 Employee Benefits (IAS 19) was amended. Under the amended standard, actuarial gains and losses will no longer be deferred or recognized in net income, but will be recognized immediately in other comprehensive income. Past service costs will be recognized in the period of a plan amendment and annual expense for a funded plan will include net interest expense or income using the discount rate applied to the net defined benefit asset or liability. The amendments also require enhanced disclosures for define benefit plans. The Credit Union adopted this standard on a retrospective basis on January 1, As a result of the adoption of this standard there is a new component of OCI and accumulated OCI for changes in the liability for defined pension plans. 14

17 3. Significant accounting policies (continued): (o) Employee retirement benefits (continued): i) Defined benefit plans (continued): The Credit Union s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Credit Union, the recognized asset is limited to 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. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in OCI. The Credit Union determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in salaries, wages and benefits in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit or loss. The Credit Union recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. 15

18 3. Significant accounting policies (continued): (o) Employee retirement benefits (continued): ii) Defined contribution plans: (p) Provisions: Non-management or management employees who are hired on or after January 1, 2012 are only eligible for the Credit Union s defined contribution pension plan. Under the Credit Union s defined contribution pension plan, the amount of pension benefit that an employee will receive on retirement is dependent on the funds that have accumulated in the employee s account at the time of retirement. The Credit Union does not have any legal obligation regarding the level of benefits that will be received by the relevant employees. Non-management employee contributions are optional. The non-management employee may choose to contribute between 0% - 6% of the individual base earnings. The Credit Union employer contributions for the non-management employees ranges from 4% - 6% of the employee s base earnings with the level of the employer contribution dependent on the employee contribution. For management employees, the Credit Union matches employee contributions of 5% to 7% of the individual employee s base earnings. Employer contributions are immediately 100% vested. The amount contributed by the Credit Union to the defined contribution pension plan for 2013 was $33,610 ( $7,158). The contributions were made for current service and these have been recognized in net income. 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. (q) Share capital: i) Membership shares: As a requirement of membership, members must hold membership shares. Membership shares are classified on the statement of financial position as a liability as the shares are redeemable at the option of the member, either on demand or on withdrawal from membership. Membership shares would be classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. ii) Class A, Series 1 shares (formerly Class A investment shares): Class A, Series 1 shares are redeemable at the option of the member and are classified as member equity on the consolidated statement of financial position. In no case, shall total redemptions approved for holders of Class A, Series 1 shares in any fiscal year exceed an amount equal to 10% of the total Class A, Series 1 shares outstanding at the end of the previous fiscal year. 16

19 3. Significant accounting policies (continued): (q) Share capital (continued): iii) Class B, Series 1 shares: Class B, Series 1 Shares are classified on the consolidated statement of financial position as member equity as the shares are redeemable only under certain restrictions. In no case, shall total redemptions approved for holders of Class B, Series 1 shares in any fiscal year exceed an amount equal to 10% of the total Class B, Series 1 shares outstanding at the end of the previous fiscal year. iv) Distributions to members: Class A and B share dividends are recognized through retained earnings when declared. Membership share dividends are recognized in net income when declared. (r) New standards and interpretations not yet adopted: i. IFRS 9 Financial Instruments ( IFRS 9 ) replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement, on the classification and measurement of financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans and receivable. Financial assets will be classified into one of two categories on initial recognition: financial assets measured at amortized cost; or financial assets measured at fair value Gains and losses on remeasurement of financial assets measured at fair value will be recognized in net income, except that for an investment in an equity instrument which is not held-for-trading, IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in other comprehensive income (OCI). The election is available on an individual share-by-share basis. Amounts presented in OCI will not be reclassified to net income at a later date. Under IFRS 9, for financial liabilities measured at fair value under the fair value option, changes in fair value attributable to changes in credit risk will be recognized in OCI, with the remainder of the change recognized in profit or loss. However, if this requirement creates or enlarges an accounting mismatch in net income, the entire change in fair value will be recognized in net income. Amounts presented in OCI will not be reclassified to net income at a later date. IFRS 9 also requires derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument to be measured at fair value, whereas such derivative liabilities are measured at cost under IAS 39. IFRS 9 also includes the requirements of IAS 39 for the derecognition of financial assets and liabilities without change. The IASB has deferred the mandatory effective date of the existing chapters of IFRS 9 to fiscal years beginning on or after January 1, The early adoption of the standard is permitted. 17

20 3. Significant accounting policies (continued): (r) New standards and interpretations not yet effective (continued): ii. The Credit Union intends to adopt IFRS 9 in its financial statements for its fiscal year beginning on January 1, It is expected that IFRS 9, when initially applied, will have a significant impact on the Credit Union s financial statements. As well, the implementation and ability to elect options provided by the new standards may be influenced by the regulators (DICO). In December 2011, the IASB published Offsetting Financial Assets and Financial Liabilities. The effective date for the amendments to IAS 32 is annual periods beginning on or after January 1, These amendments are to be applied retrospectively. The amendments to IAS 32 clarify that an entity currently has a legally enforceable right to set-off if that right is: not contingent on a future event; and, enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties The amendments to IAS 32 also clarify when a settlement mechanism provides for net settlement or gross settlement that is equivalent to net settlement. The Credit Union intends to adopt the amendments to IAS 32 in its financial statements for the annual period beginning January 1, The extent of the impact of adoption of the amendments has not yet been determined. iii. In December 2013, the IASB issued narrow-scope amendments to a total of nine standards as part of its annual improvements process. The IASB uses the annual improvements process to make non-urgent but necessary amendments to IFRS. Most amendments will apply prospectively for annual periods beginning on or after July 1, 2014; earlier application is permitted, in which case, the related consequential amendments to other IFRSs would also apply. Amendments were made to clarify the following in their respective standards: Classification and measurement of contingent consideration; and scope exclusion for the formation of joint arrangements in IFRS 3 Business Combinations; Disclosures on the aggregation of operating segments in IFRS 8 Operating segments; Measurement of short-term receivables and payables; and scope of portfolio exception in IFRS 13 Fair Value Measurement; The Credit Union intends to adopt these 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. 18

21 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. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. 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 22. 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. 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 9. Income taxes: The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit 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 that the amount included in the tax liabilities. 19

22 4. Critical accounting estimates and judgments (continued): Useful lives of depreciable assets: Management reviews the useful lives of depreciable assets at each reporting date. At December 31, 2013, management assesses that the useful lives represent the expected utility of the assets to the Credit Union. The carrying amounts are analyzed in note 12. Actual results, however, may vary due to technical obsolescence, particularly for software and electronic equipment. Impairment: An impairment loss is recognized for the amount by which an asset s carrying amount exceeds its recoverable amount, which is the higher of fair value less cost to sell and value-in-use. To determine the value-in-use, management estimates expected future cash flows from each asset or cash generating unit and determines a suitable interest rate in order to calculate the present value of those cash flows. In most cases, determining the applicable discount rate involves estimating the appropriate adjustment to market risk and the appropriate adjustment to assetspecific risk factors. In the process of measuring expected future cash flows management makes assumptions about future operating results. These assumptions relate to future events and circumstances. 5. Cash and short-term investments: The Credit Union s cash in current accounts are held with Central 1: Cash and cash equivalents: Cash on hand $ 3,330,305 $ 2,620,493 Cash in current account 1,973,689 9,531,557 $ 5,303,994 $ 12,152,050 20

23 6. Investments: As a condition of maintaining membership in Central 1 in good standing, the Credit Union is required to maintain a liquidity reserve deposit equal to 6% of its total assets as at each preceding month end. The deposits bear interest at varying rates, dependent upon the term of the investment. The investments can be withdrawn only if there is a sufficient reduction in the Credit Union s total assets or upon withdrawal of membership from Central 1. The liquidity reserves mature at varying times between one month and three years. At maturity, these deposits are reinvested at market rates for various terms. The following tables provide information on the investments by type of security and issuer Central 1 Deposits: Liquidity reserve deposits $ 21,576,935 $ 20,303,940 Equity instruments: Central 1 Class A shares 1,182,660 1,174,017 Central 1 Class E shares 1,395,300 1,395,300 Concentra Financial, Class A, Series 1 2,352 2,352 Concentra Financial, Membership (1 share) CUCO Co-op Class B Investment Shares 1,269,693 1,649,374 Credential Securities Inc., subordinated debenture 5,000 5,000 Credential Securities, participating loan 30,000 30,000 The Co-operators Group Limited, preference shares 150, ,000 The Co-operators Group Limited, term certificates 151, ,140 Other investments 3,000 4,189,155 4,557,193 $ 25,766,090 $ 24,861,133 21

24 6. Investments (continued): (a) Central 1 Shares: Class A Shares: The shares in Central 1 are required as a condition of membership and are redeemable upon withdrawal of membership or at the discretion of the Board of Directors of Central 1. The Credit Union s allocation of Class A Central 1 shares is based on the assets of each credit union in proportion to the combined assets of the British Columbia credit union system and the assets of Central 1 s member credit unions in Ontario. This allocation is adjusted each June 30th to reflect changes in credit union assets. In addition, the member Credit Unions are subject to additional capital calls at the discretion of the Board of Directors. There is no separately quoted market value for these shares, however, fair value is determined to be equivalent to the par value due to the fact that transactions occur at par value on a regular and recurring basis. Class E Shares: Class E Central 1 shares are issued with a par value and are redeemable at the option of Central 1. There is no separately quoted market value for these shares and the fair value could not be measured reliably. Fair value cannot be measured reliably as the timing of redemption of these shares cannot be determined, therefore, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed. Therefore, they are recorded at cost. The Credit Union is not intending to dispose of any Central 1 shares as the services supplied by Central 1 are relevant to the day to day activities of the Credit Union. Dividends on these shares are at the discretion of the Board of Directors of Central 1. 22