NORTHERN CREDIT UNION LIMITED

Transcription

1 Consolidated Financial Statements of NORTHERN 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 Northern Credit Union Limited We have audited the accompanying consolidated financial statements of Northern Credit Union Limited, which comprise the consolidated statement of financial position as at December 31, 2014, and the consolidated statements of income, comprehensive income (loss), changes in members equity and cash flows for the year ended December 31, 2014, 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 consolidated 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 Northern Credit Union Limited as at December 31, 2014 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants February 26, 2015 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.

3 Consolidated Statement of Financial Position December 31, 2014, with comparative information for 2013 Assets Cash and cash equivalents $ 21,934,700 $ 18,610,820 Investments (note 8) 56,791,514 54,911,153 Other assets (note 9) 1,550,845 1,482,556 Loans to members (notes 5 and 6) 711,717, ,385,636 Deferred income taxes (note 16) 222,600 Property and equipment (note 10) 18,665,365 18,146,774 Intangible assets (note 10) 1,684,223 1,916,063 Total assets $ 812,566,729 $ 767,453,002 Liabilities and Members Equity Members deposits (note 11) $ 683,237,189 $ 686,509,505 Accounts payable and accrued liabilities 7,082,447 4,378,607 Short-term borrowings (note 12) 8,000,000 10,000,000 Securitized liabilities (note 7) 43,098,353 14,892,461 Liabilities qualifying as regulatory capital: Share capital (note 13) 30,563,942 10,419,109 Deferred income taxes (note 16) 469,000 Total liabilities 771,981, ,668,682 Members equity: Contributed surplus 8,892,785 8,892,785 Retained earnings 31,300,298 30,234,167 Accumulated other comprehensive income 391,715 1,657,368 Total members equity 40,584,798 40,784,320 Commitments and contingencies (note 15) Total liabilities and members equity $ 812,566,729 $ 767,453,002 See accompanying notes to consolidated financial statements. 1

4 Consolidated Statement of Income, with comparative information for 2013 Revenue: Interest - residential mortgage loans $ 17,232,988 $ 16,992,328 - personal loans 7,859,457 6,403,608 - commercial loans 7,199,322 7,328,571 Investment income 794, ,514 33,086,036 31,384,021 Cost of financing: Interest - demand deposits 1,157, ,648 - term deposits 3,219,852 3,368,301 - registered savings plans 3,282,933 3,260,080 Distribution to members 612, ,246 Interest on external borrowings 815, ,434 9,087,775 7,994,709 Net interest income 23,998,261 23,389,312 Net impairment loss on loans (note 6) 1,468, ,380 Net interest income after provision for impaired loans 22,529,705 22,510,932 Non-interest revenue 9,377,634 8,821,797 31,907,339 31,332,729 Operating expenses: Salaries, wages and benefits 15,401,732 15,634,393 Board, delegate and committee 508, ,432 Data processing and clearing 1,136,545 1,006,269 General and administration 8,650,061 8,307,208 Insurance 854, ,174 Occupancy 2,236,331 2,092,298 Depreciation and amortization 2,008,712 1,990,018 30,796,636 30,432,792 Operating income 1,110, ,937 Unrealized gains: Unrealized gain on interest rate swaps 28, ,676 Unrealized gains on investments 140, ,604 Income before income taxes 1,280,082 1,466,217 Income taxes (note 16): Current 363, ,500 Deferred (recovery) (150,000) 333, , ,668 Net income $ 1,066,131 $ 967,549 See accompanying notes to consolidated financial statements. 2

5 Consolidated Statements of Comprehensive Income (Loss), with comparative information for 2013 Net income $ 1,066,131 $ 967,549 Other comprehensive income, net of income taxes: Items that are or may be reclassified to profit or loss: Net change in fair value of available-for-sale financial assets, net of tax of $3,700 ( $18,962) (10,553) 44,245 Items that will never be reclassified to profit or loss: Defined benefit plan actuarial (losses) gain net of income tax of $537,900 ( $929,850) (1,255,100) 2,169,650 Comprehensive (loss) income $ (199,522) $ 3,181,444 Consolidated Statement of Changes in Members Equity, with comparative information for 2013 Contributed surplus: Balance, beginning of year $ 8,892,785 $ 8,243,485 Acquisition of O.N.R. Employees (North Bay) Credit Union Limited 649,300 Balance, end of year 8,892,785 8,892,785 Retained earnings: Balance, beginning of year 30,234,167 29,266,618 Net income 1,066, ,549 Balance, end of year 31,300,298 30,234,167 Accumulated other comprehensive income (loss): Representing the fair value reserve Balance, beginning of year 1,657,368 (556,527) Net change in fair value of available-for-sale financial assets, net of tax (10,553) 44,245 Defined benefit plan actuarial (losses) gains, net of tax (1,255,100) 2,169,650 Balance, end of year 391,715 1,657,368 Members equity, end of year $ 40,584,798 $ 40,784,320 See accompanying notes to consolidated financial statements. 3

6 Consolidated Statement of Cash Flows, with comparative information for 2013 Cash flows from operating activities: Net income $ 1,066,131 $ 967,549 Adjustments for: Change in non-cash items: Net interest income (23,998,261) (23,389,312) Provision for impaired loans 1,468, ,380 Provision for income tax 213, ,668 Depreciation and amortization 2,008,712 1,990,018 Unrealized loss on interest rate swaps (28,566) (123,676) Unrealized gains on investments (140,813) (442,604) Gain on disposal of property and equipment (2,210) (441,616) (19,412,500) (20,062,593) Changes in other assets: Changes in other assets (39,724) 5,229 Changes in accounts payable and accrued liabilities 898,606 2,644, ,882 2,650,228 Changes in member activities (net): Changes in member loans (40,736,560) (49,874,603) Changes in member deposits (2,743,903) 23,335,626 (43,480,463) (26,538,977) Cash flows related to interest, dividends and income taxes: Interest received on member loans 32,365,008 30,650,701 Interest received on investments 883, ,095 Interest paid on member deposits (8,329,193) (7,853,709) Interest paid on external borrowings (815,174) (169,434) Dividends paid (612,635) (259,246) Income taxes paid (363,951) (874,828) 23,128,002 22,270,579 (38,906,079) (21,680,763) Cash flows from financing activities: Redemption of membership shares 8,399 19,362 Redemption of Class A patronage shares (80,284) (62,796) Issuance of Class B investment shares 20,216, ,781 Proceeds from Central 1 Credit Union loan 28,205,892 14,892,461 46,352,437 15,060,808 Cash flows from investing activities: Proceeds from disposal of property and equipment 750,000 (Purchase of) proceeds from sale of investments (1,829,226) 3,434,503 Additions to intangible assets (231,840) (238,819) Additions to property and equipment (2,061,412) (1,918,629) Net cash inflow from purchase of O.N.R. Employee (North Bay) Credit Union Limited 1,493,070 (4,122,479) 3,520,125 Net increase (decrease) in cash and cash equivalents 3,323,880 (3,099,830) Cash and cash equivalents, beginning of year 18,610,820 21,710,650 Cash and cash equivalents, end of year $ 21,934,700 $ 18,610,820 See accompanying notes to consolidated financial statements. 4

7 1. Reporting entity: Northern Credit Union Limited (the Credit Union ), was incorporated under the laws of Ontario and operates in compliance with the Credit Union Caisse Populaires Act of Ontario (the Act ). The Credit Union is a member of the Deposit Insurance Corporation of Ontario ( DICO ) and of the Central 1 Credit Union. The Credit Union is domiciled in Canada. The address of the Credit Union s registered office is 280 McNabb Street, Sault Ste. Marie, Ontario. The Credit Union is primarily involved in corporate and retail banking. 2. Basis of preparation: (a) Statement of compliance: These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). These consolidated financial statements have been authorized for issue by the Board of Directors on February 26, (b) Basis of measurement: The consolidated financial statements have been prepared on the historical cost basis except for the following: derivative financial instruments are measured at fair value non-derivative financial instruments at fair value through profit or loss are measured at fair value available for sale financial assets are measured at fair value the liability for defined benefit obligation is recognized as the present value of the defined benefit obligations less the total of the plan assets. (c) Functional and presentation currency: The Credit Union s functional and presentation currency is the Canadian dollar. The financial statements are presented in Canadian dollars. (d) Use of estimates and judgments: The preparation of consolidated financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Credit Union s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4 below. 5

8 3. Significant accounting policies: The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Basis of consolidation: The consolidated financial statements include the financial statements of the wholly-owned subsidiary company, Ontario Limited. The financial statements have been prepared using uniform accounting policies for like transactions and other events in similar circumstances. All material intercompany transactions and balances have been eliminated. (b) Loans receivable from members: Loans are initially measured at fair value plus incremental direct transaction costs less loan fees received and subsequently remeasured at their amortized cost using the effective interest method. Loans receivable from members are reported net of an allowance for credit losses. (i) Loan interest: Interest income from loans is recorded on the effective yield basis. Accrued but uncollected interest is provided for when loans are determined to be impaired. (ii) Provision for credit losses: The Credit Union maintains a provision for credit losses, which, in management s opinion, is considered adequate to provide for credit-related losses. The Credit Union considers evidence of impairment for loans receivable at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. 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 judgment 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. 6

9 3. Significant accounting policies (continued): (c) Interest income and expense: Interest income and expense are recognized in the consolidated statement of income using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to its fair value at inception. The effective interest rate is established on initial recognition of the financial asset or liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received and transaction costs and discounts or premiums that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. (d) Non-interest revenue: Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. Net income from other financial instruments designated at fair value through profit or loss relates to non-trading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and financial assets and liabilities so designated, and includes all realized and unrealized fair value changes, interest, dividends and foreign exchange differences. Dividend income is recognized when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividends are reflected as a component of net trading income, net income from other financial instruments at fair value through profit or loss or other operating income based on the underlying classification of the equity investment. (e) Cash and cash equivalents: Cash and cash equivalents includes cash on hand, current accounts, cheques and other items in transit. Given their short term nature, the carrying value of cash and cash equivalents equals fair value. 7

10 3. Significant accounting policies (continued): (f) Financial instruments - non-derivative financial instruments: The Credit Union initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Credit Union becomes a party to the contractual provisions of the instrument. The Credit Union derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Credit Union is recognized as a separate asset or liability. The Credit Union has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and availablefor-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 consolidated statement of income. There are regulatory restrictions imposed by the Financial Services Commission of Ontario on the use of this designation including that loan financial assets are precluded from being designated at FVTPL and that the fair value designated financial instruments are managed on a fair value basis. 8

11 3. Significant accounting policies (continued): (f) Financial instruments non-derivative financial instruments (continued): Offsetting: Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Credit Union has the legal right to set off the recognized amounts and it intends either to settle on a net basis or to realized the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions such as the Credit Union s trading activities. Held to maturity: Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments and a fixed maturity, other than loans and receivables, that the Credit Union has the positive intention and ability to hold to maturity. These financial assets are initially recognized at fair value including direct and incremental transaction costs. They are subsequently accounted for at amortized cost using the effective interest rate method. Available for sale: Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. The Credit Union s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(b) (ii)), are recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit or loss. Loans and receivables: Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. 9

12 3. Significant accounting policies (continued): (f) Financial instruments non-derivative financial instruments (continued): 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. (g) Financial instruments - derivative financial instruments: Derivative financial instruments are financial contracts that require or provide an option to exchange cash flows or payments determined by applying certain rates, indices or changes therein to notional contract amounts. The Credit Union periodically enters into derivative contracts to manage financial risks associated with movements in interest rates and other financial indices such as interest rate swaps and equity swap agreements. The Credit Union s policy is not to utilize derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recorded on the consolidated statement of financial position at fair value, including those derivatives that are embedded in financial or non-financial contracts that are closely related to the host contracts. Changes in the fair value of those derivative instruments are recognized in net income for the year. The Credit Union does not apply hedge accounting on its derivative portfolio. (h) Financial instruments - derecognition: For securitization transactions initiated prior to the date of transition to IFRS, in accordance with pre-changeover Canadian GAAP, the loan securitizations were treated as a sale, provided that control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been received in exchange. Gains on these transactions were reported as non-interest revenue. The amount of these gains are based on the present value of expected future cash flows using management s best estimates and key assumptions such as prepayment rates, excess spread, credit (losses) and discount rates. The Credit Union has a contractual obligation to service the loans on behalf of the transferee. For securitization transactions initiated after the date of transition to IFRS, loans are derecognized only when the contractual rights to receive the cash flows from these assets have ceased to exist or substantially all the risks and rewards of the loans have been transferred. If the criteria for derecognition has not been met, the securitization is reflected as a financing transaction and the related liability is initially recorded at fair value and subsequently measured at amortized costs, using the effective interest rate method. 10

13 3. Significant accounting policies (continued): (i) Other assets: Included in other assets are costs incurred in equity swap agreement hedge premiums and prepaid software maintenance costs. Hedge premiums are recorded as expense using the effective interest rate method over the term of the agreement. (j) Intangible assets: Computer software that is not an integral part of other property and equipment is accounted for as intangible assets. Computer software is stated at cost less accumulated amortization and is presented as part of property and equipment on the consolidated statement of financial position. Amortization of computer software is calculated by applying the straight-line method at rates based on estimated useful lives between 3 and 10 years. (k) Property and equipment: Property and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements Parking areas Furniture, office and computer equipment Automated banking machines Leasehold improvements 5 to 50 years 3 to 50 years 3 to 20 years 5 to 10 years 5 to 15 years Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. (l) Impairment of non-financial assets: Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset s cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. The Credit Union has 26 cash-generating units. Impairment charges are included in net income. 11

14 3. Significant accounting policies (continued): (m) 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. 12

15 3. Significant accounting policies (continued): (n) Foreign currency translation: The consolidated financial statements are presented in Canadian dollars, which is the Credit Union s presentation and functional currency. Assets and liabilities denominated in foreign currencies, primarily US dollars, are translated into Canadian dollars at rates prevailing at the year-end date. Income and expenses are translated at the exchanges rates in effect on the date of the transactions. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments are recognized in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. (o) Employee retirement benefits: i) Defined benefit plans: 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. 13

16 3. Significant accounting policies (continued): (o) Employee retirement benefits (continued): i) Defined benefit plans (continued): 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 personnel expenses 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. ii) Defined contribution plans: The Credit Union also has defined contribution plans providing pension benefits for eligible employees not included in the defined benefit plan. A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value. 14

17 3. Significant accounting policies (continued): (p) Leased assets: Leases in terms of which the Credit Union assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and, except for investment property, the leased assets are not recognized in the Credit Union s statement of financial position. Investment property held under an operating lease is recognized in the Credit Union s statement of financial position at its fair value. (q) Provisions: A provision is recognized if, as a result of a past event, the Credit Union has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as financing cost. (r) New standards and interpretations not yet effective: i) Amendments to IAS 32, Offsetting Financial Assets and Liabilities: The amendments to IAS 32 clarify the allowable circumstances for an entity to present a financial asset and liability as a net balance ( offsetting ). The amendments also describe when a settlement mechanism provides for net settlement or gross settlement that is equivalent to net settlement. The Company intends to adopt the amendments to IAS 32 in its financial statements for the fiscal year beginning January 1, 2015 with the amendments applied retrospectively. The Company does not expect the amendments to have a material impact on the financial statements. ii) IFRS 15 Revenue from Contracts with Customers: On May 28, 2014 the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard is effective for annual periods beginning on or after January 1, Earlier application is permitted. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue Barter Transactions Involving Advertising Services. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. 15

18 3. Significant accounting policies (continued): (r) New standards and interpretations not yet effective (continued): iii) IFRS 15 Revenue from Contracts with Customers (continued): The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. The Credit Union intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, The extent of the impact of adoption of the standard has not yet been determined. iv) IFRS 9 Financial Instruments ( IFRS 9 (2014)): The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new expected credit loss model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. 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). 16

19 3. Significant accounting policies (continued): (r) New standards and interpretations not yet effective (continued): v) Annual Improvements to IFRS ( ) and ( ) cycles: On December 12, 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; however, the amendments to IFRS 2 and IFRS 3 refer to grant dates and dates of acquisition, respectively, on or after July 1, 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; Definition of related party in IAS 24 Related Party Disclosures; and Special transitional requirements have been set for amendments to IFRS 2, IAS 16, IAS 38 and IAS 40. 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. vi) Annual Improvements to IFRS ( ) cycle: On September 25, 2014 the IASB issued narrow-scope amendments to a total of four standards as part of its annual improvements process. The amendments will apply for annual periods beginning on or after January 1, Earlier application is permitted, in which case, the related consequential amendments to other IFRSs would also apply. Each of the amendments has its own specific transition requirements. Amendments were made to clarify the following in their respective standards: Changes in method for disposal under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations; Continuing involvement for servicing contracts and offsetting disclosures in condensed interim financial statements under IFRS 7 Financial Instruments: Disclosures; Discount rate in a regional market sharing the same currency under IAS 19 Employee Benefits 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. 17

20 4. Critical accounting estimates and judgments: The Credit Union makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only; or in the period of the change and future periods, if the change affects both. Fair value of financial instruments: The Credit Union determines the fair value of financial instruments that are not quoted in an active market, using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realized immediately. The methods, and assumptions applied, and the valuation techniques used, for financial instruments that are not quoted in an active market are disclosed in note 18. Member loan loss provision: In determining whether an impairment loss should be recorded in the statement of comprehensive income, the Credit Union makes judgment on whether objective evidence of impairment exists individually for financial assets that are individually significant. Where this does not exist, the Credit Union uses its judgment to group member loans with similar credit risk characteristics to allow a collective assessment of the group to determine any impairment loss. In determining the collective loan loss provision management uses estimates based on historical loss experience for assets with similar credit risk characteristics and objective evidence of impairment. Further details on the estimates used to determine the allowance for impaired loans collective provision are provided in note 6. Income taxes: The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit by the tax authorities based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. 18

21 5. Loans to members: 2014 Principal and Allowance for interest impaired loans Net Residential mortgage loans $ 446,149,799 $ 37,470 $ 446,112,329 Personal loans 130,972,417 2,002, ,969,727 Commercial loans 137,433, , ,635,426 $ 714,555,618 $ 2,838,136 $ 711,717, Principal and Allowance for interest impaired loans Net Residential mortgage loans $ 430,634,326 $ 86,272 $ 430,548,054 Personal loans 110,207,123 1,541, ,665,533 Commercial loans 134,219,359 1,047, ,172,049 $ 675,060,808 $ 2,675,172 $ 672,385,636 Commercial loans consist of the following loan types: Commercial $ 116,465,964 $ 117,625,089 Syndicated 18,353,228 13,635,094 Institutional 2,422,976 2,602,903 Unincorporated associations 191, ,273 Allowance for impaired loans (797,976) (1,047,310) $ 136,635,426 $ 133,172,049 19

22 5. Loans to members (continued): Certain Residential Mortgage Loans are securitized and have been legally transferred to other entities for funding purposes. These loans are administered by the Credit Union and recognized on the consolidated statement of financial position to the extent of the Credit Union s continuing involvement. A summary of the carrying values of loans is as follows: Loans held by the Credit Union $ 714,555,618 $ 675,057,078 Loans transferred to Central 1 4,480,046 $ 714,555,618 $ 679,537,124 The following summarizes the Credit Union s loan portfolio by the contractual repricing or maturity date, whichever is earlier: Principal Average Principal Average Balance Yield Balance Yield Floating $ 156,878, % $ 155,610, % Within 1 year 160,237, % 137,217, % Over 1 year 397,440, % 382,232, % 714,555, % 675,060, % Allowance for impaired loans 2,838,136 2,675,172 $ 711,717,482 $ 672,385,636 20

23 6. Allowance for impaired loans: Details of the activity in the allowance for impaired loans are as follows: Residential Personal Commercial Mortgage Loans Loans Loans Total Total Balance, beginning of year $ 86,272 1,541,590 1,047,310 2,675,172 $ 2,480,462 Recoveries 145, , ,394 Loans written-off (204,288) (705,768) (540,965) (1,451,021) (792,064) Provision for impaired loans during the year 155,486 1,021, ,631 1,468, ,380 Balance, end of year $ 37,470 2,002, ,976 2,838,136 $ 2,675,172 For the year ended December 31, 2014, accrued interest of $124,343 was recorded on impaired loans ( $113,271). Details of the impaired loans, net of specific allowances are as follows: Residential Personal Commercial 2014 Mortgage Loans Loans Loans Total Impaired loans $ 8,275,048 3,140,455 6,036,248 17,451,751 Specific allowance 37,222 1,936, ,461 2,247,982 Net $ 8,237,826 1,204,156 5,761,787 15,203,769 Residential Personal Commercial 2013 Mortgage Loans Loans Loans Total Impaired loans $ 7,380,547 1,882,153 2,314,465 11,577,165 Specific allowance 76,822 1,428, ,180 2,311,892 Net $ 7,303, ,263 1,508,285 9,265,273 The Credit Union s commercial loan portfolio contains Member concentration risk, whereby a large amount of the loans are connected to certain individuals. Collectively, the largest five commercial Members by loan dollar value are associated with approximately 20% ( %) of the commercial loan portfolio. 21

24 6. Allowance for impaired loans (continued): The Credit Union s commercial loan portfolio consists of the following industry sectors: Hospitality 24% 23% Retail and Commercial Buildings 49% 44% Other 27% 33% Past due but not impaired loans: The Credit Union has the following loans that are past due but not impaired: 31 to 90 days past due $ 3,938,846 $ 4,538,619 Collateral: There are documented policies and procedures in place for the valuation of financial and nonfinancial collateral. The fair valuation exercise of non-financial collateral is performed if there has been a significant change in the terms and conditions of the loan and (or) the loan is considered impaired. For impaired loans, an assessment of the collateral is taken into consideration when estimating the net realizable amount of the loan. The amount and type of collateral and other credit enhancements required depend upon the Credit Union s assessment of counterparty credit quality and repayment capacity. The Credit Union complies with industry standards for collateral valuation, frequency of recalculation of the collateral requirements, documentation, registration and perfection procedures and monitoring. Non-financial assets accepted by the Credit Union as collateral include vehicles, residential real estate, real estate under development, commercial real estate and certain business assets (accounts receivable, inventory, property and equipment). Financial collateral includes cash and negotiable securities issued by governments and investment grade issuers. Guarantees and are also accepted to reduce credit risk. The Credit Union also uses credit insurance on mortgage loans to reduce the credit risk. The fair value of collateral held with respect to assets that are either past due greater than 30 days or impaired is $19,480,705 as at December 31, 2014 ( $11,242,971). 22

25 6. Allowance for impaired loans (continued): Credit risk: The following tables illustrate the credit quality of loans that are neither past due nor impaired: Credit quality of loans December 31, 2014 Retail Mortgage and Personal Loans Commercial Loans Rating % of Portfolio Rating % of Portfolio Undoubted 15% Undoubted 0% Superior 21% Superior 6% Satisfactory 63% Satisfactory 90% Watch List 1% Watch list 4% Credit quality of loans December 31, 2013 Retail Mortgage and Personal Loans Commercial Loans Rating % of Portfolio Rating % of Portfolio Undoubted 19% Undoubted 0% Superior 18% Superior 6% Satisfactory 62% Satisfactory 88% Watch List 1% Watch list 6% Refer to Note 21 Financial Risk Management for a detailed explanation of the credit risk rating process of both portfolios. 7. Securitized liabilities: As part of its program of liquidity, capital, and interest rate risk management, the Credit Union enters into arrangements to fund loan growth by selling residential mortgages to unrelated third parties. As part of these mortgage receivable transfers, the Credit Union retains mortgage servicing responsibilities but does not receive an explicit servicing fee for its servicing responsibilities. The Credit Union s retained interest in the mortgages sold also consists of their right to future cash flows arising from any excess of the mortgage cash flows over and above the contractual return due to the mortgage pool investors. The Credit Union s retained interests are subject to credit, prepayment, and interest rate risks on the securitized mortgages. The third parties, as holders of the securitized mortgages, have recourse only to a cash collateral account and cash flow from the securitized mortgages. The investors and the third parties have no recourse to the Credit Union s other assets. In accordance with the Credit Unions accounting policy the transferred financial assets continue either to be recognized in their entirety or to the extent of the continuing involvement, are derecognized in their entirety. 23