Contents Page Management's Responsibility Independent Auditors' Report Consolidated Financial Statements Consolidated Statement of Financial Position.

Transcription

1 Consolidated Financial Statements December 31, 2015

2 Contents Page Management's Responsibility Independent Auditors' Report Consolidated Financial Statements Consolidated Statement of Financial Position... 1 Consolidated Statement of Comprehensive Income... 2 Consolidated Statement of Changes in Members Equity... 3 Consolidated Statement of Cash Flows

3 Management's Responsibility To the Members of Heritage Credit Union: Management is responsible for the preparation and presentation of the accompanying consolidated financial statements, including responsibility for significant accounting judgments and estimates in accordance with International Financial Reporting Standards. This responsibility includes selecting appropriate accounting principles and methods, and making decisions affecting the measurement of transactions in which objective judgment is required. In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of consolidated financial statements. The Board of Directors and Audit Committee are composed primarily of Directors who are neither management nor employees of the Credit Union. The Board is responsible for overseeing management in the performance of its financial reporting responsibilities, and for approving the financial information included in the annual report. The Board fulfils these responsibilities by reviewing the financial information prepared by management and discussing relevant matters with management and external auditors. The Committee is also responsible for recommending the appointment of the Credit Union's external auditors. MNP LLP is appointed by the shareholders to audit the consolidated financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Committee and management to discuss their audit findings. March 30, 2016 CEO

4 Independent Auditors Report To the Members of Heritage Credit Union: We have audited the accompanying consolidated financial statements of Heritage Credit Union, which comprise the consolidated statement of financial position as at December 31, 2015 and the consolidated statements of comprehensive income, changes in members' equity and cash flows for the year then ended, and 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 the auditors 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, the auditor considers 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 financial position of Heritage Credit Union as at December 31, 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Kelowna, British Columbia March 30, 2016 Chartered Professional Accountants Dickson Avenue, Kelowna, British Columbia, V1Y 9X1, Phone: (250) , 1 (877)

5 Consolidated Statement of Financial Position As at December 31, 2015 Assets Cash resources (Note 5) 125,172 1,190,124 Income taxes recoverable 14,452 34,914 Receivables and other assets 574, ,494 Investments (Note 6) 23,381,036 27,195,622 Member loans receivable (Note 7) 123,170, ,673,712 Property and equipment (Note 8) 1,551,493 1,489,406 Intangible assets (Note 9) 1,871,575 1,871, ,688, ,051,991 Liabilities Member deposits (Note 10) 132,877, ,520,905 Payables and accruals 524, ,669 Derivatives - 24,349 Borrowings (Note 11) 3,348,080 1,567,463 Deferred tax liability (Note 12) 83,119 30,391 Membership shares (Note 13) 1,809,541 1,829, ,642, ,778,373 Commitments (Note 19), (Note 22) Members' equity Retained earnings 11,740,106 11,005,690 Accumulated other comprehensive loss - (27,341) Non-controlling interest 306, ,269 Approved on behalf of the Board 12,046,709 11,273, ,688, ,051,991 Director Director The accompanying notes are an integral part of these financial statements 1

6 Consolidated Statement of Comprehensive Income Financial income Member loans 4,612,585 4,612,182 Cash resources and investments 390, ,782 5,003,406 5,041,964 Financial expense Member deposits 1,397,291 1,647,066 Borrowings 228, ,249 Membership share dividends 54,063 55,276 1,680,155 1,895,591 Gross financial margin 3,323,251 3,146,373 Provision for credit losses (Note 7) 60,368 43,899 3,262,883 3,102,474 Other income (Note 16) 3,235,588 3,297,392 Operating margin 6,498,471 6,399,866 Operating expenses (Note 17) 5,628,915 5,539,465 Income before income taxes 869, ,401 Provision for income taxes (Note 12) Current 71,079 72,958 Deferred 52,727 34, , ,765 Net income 745, ,636 Other comprehensive income, net of tax Items that will be reclassified subsequently to profit or loss Unrealized gain on derivatives, net of tax of $nil ( $7,596) - 42,710 Realized gain on derivatives, net of tax of $4,863 ( $nil) 27,341 - Total comprehensive income for the year 773, ,346 Total comprehensive income attributable to: Members of the Credit Union 761, ,101 Non-controlling interest 11,334 17, , ,346 The accompanying notes are an integral part of these financial statements 2

7 Consolidated Statement of Changes in Members Equity Retained earnings Accumulated other comprehensive loss Attributable to members of the Credit Union Noncontrolling interest Total equity Balance December 31, ,230,341 (70,051) 10,160, ,982 10,653,272 Net income 735, ,391 17, ,636 Unrealized gain on derivatives, net of tax - 42,710 42,710-42,710 Adjustment to non-controlling interest on acquisition 39,958-39,958 (214,958) (175,000) Balance December 31, ,005,690 (27,341) 10,978, ,269 11,273,618 Net income 734, ,416 11, ,750 Realized gain on derivatives, net of tax - 27,341 27,341-27,341 Balance December 31, ,740,106-11,740, ,603 12,046,709 The accompanying notes are an integral part of these financial statements 3

8 Consolidated Statement of Cash Flows Cash provided by (used for) the following activities Operating activities Net income 745, ,636 Depreciation 167, ,729 Provision for income taxes 123, ,765 Provision for credit losses 60,368 43,899 Financial income (5,003,406) (5,041,964) Financial expense 1,680,155 1,895,591 Income attributable to non-controlling interest (11,334) (17,245) Member loans written off, net of recoveries (49,818) (5,274) Investment in joint venture - equity pickup (432,080) (382,784) Dividend income from equity investment - 319,000 (2,718,661) (2,179,647) Changes in working capital accounts Receivables and other assets 22,272 (22,571) Income taxes paid (50,617) (96,771) Payables and accruals (281,380) 65,107 Interest received on member loans and investments 4,955,050 5,213,377 Interest paid on member deposits (1,732,554) (1,951,155) Non-controlling interest 11,334 (197,713) 205, ,627 Financing activities Proceeds from borrowings 1,780,617 1,567,463 Increase (decrease) in member deposits 4,408,658 (5,177,077) Decrease in membership shares (20,055) (23,722) 6,169,220 (3,633,336) Investing activities Increase in member loans receivable (11,456,440) (5,833,664) Purchases of property and equipment (229,044) (156,666) Purchases of intangible assets (798) (1,086) Decrease in other investments 4,246,666 78,140 Purchase of subsidiary - (175,000) (7,439,616) (6,088,276) Decrease in cash resources (1,064,952) (8,890,985) Cash resources, beginning of year 1,190,124 10,081,109 Cash resources, end of year 125,172 1,190,124 The accompanying notes are an integral part of these financial statements 4

9 1. Reporting entity Heritage Credit Union (the Credit Union ) is incorporated under the laws of British Columbia and is regulated under the Financial Institutions Act of British Columbia and is a member of Central 1 Credit Union Limited ("Central 1"). The Credit Union serves members principally in the West Kootenays. The address of the Credit Union s registered office is th Street, Castlegar, BC. Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ), issued by the International Accounting Standards Board. The consolidated financial statements have been prepared in accordance with all IFRS issued and in effect as at December 31, The consolidated financial statements for the year ended December 31, 2015 were approved and authorized for issue by the Board of Directors on March 30, Basis of measurement The consolidated financial statements have been prepared using the historical basis except for the revaluation of certain financial instruments. Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Credit Union s functional currency. 2. Standards and interpretations effective in the current period The accounting policies adopted are consistent with those of the previous financial year except as follows: Change in accounting policies The Credit Union adopted amendments to the following standards, effective January 1, Adoption of these amendments had no effect on the Credit Union's financial statements. IFRS 10 Consolidated financial statements IFRS 13 Fair value measurement IAS 16 Property, plant and equipment IAS 38 Intangible assets IAS 39 Financial instruments: recognition and measurement 3. Significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. Certain comparative amounts have been reclassified to conform to the current year s presentation. Basis of consolidation The Credit Union has consolidated the assets, liabilities, revenues and expenses of all subsidiaries after the elimination of intercompany transactions and balances. The consolidated financial statements include the accounts of the Credit Union, and its subsidiaries as follows: HG Insurance Agencies Ltd. 100% interest BC Ltd. 60% interest Working Ventures Insurance Solutions Ltd. 100% interest 5

10 In addition the Credit Union has a 50% interest in a joint venture, Growth Financial Corp ("Growth"), with another credit union. The Credit Union accounts for this using the equity method whereby on initial recognition the investment is recorded at cost, and the carrying amount is adjusted to recognize its share of profit or loss of the joint venture after the date of acquisition. Growth has the following wholly owned subsidiaries: Kelowna Valley Insurance Agency Ltd. Creston Valley Insurance Agency Ltd. Whitlock Insurance Agency Ltd BC Ltd. Growth also holds a 49% interest in the following limited partnerships: South Okanagan Insurance Agency Limited Partnership Lakehead Insurance Agency Limited Partnership (dissolved subsequent to year end) Sturgeon Insurance Agency Limited Partnership (dissolved in the current year) Central Okanagan Insurance Agency Limited Partnership (dissolved subsequent to year end) Nootka Insurance Agency Limited Partnership The above limited partnerships are controlled entities of Growth, since Growth is exposed, and has rights, to variable returns from its involvement with the entities and has the ability to affect those returns through its power over the entities. Consolidated entities' balances and transactions, and any unrealized gains and losses or income and expenses arising from consolidated entities' transactions are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with investments in associates and joint ventures are eliminated to the extent of the Credit Union's interest in the entity. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Business combinations Acquisitions of subsidiaries are accounted for using the acquisition method. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, liabilities incurred and equity instruments issued by the Credit Union. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. Cash resources Cash consists of cash on hand, demand deposits and short-term highly liquid investments with original maturities of three months or less. Investments Central 1 deposits and shares Central 1 deposits are accounted for as loans and receivables at amortized cost, adjusted to recognize other than a temporary impairment in the underlying value. Other investments Investments which meet the definition of financial instruments are measured and recorded on a basis consistent with the appropriate financial instrument designation. Investments in equity investments that do not have a quoted market price in an active market are measured at cost. 6

11 Member loans receivable Loans are recognized at their amortized cost. Amortized cost is calculated as the loans principal amount, less any allowance for anticipated losses, plus accrued interest. Interest revenue is recorded on the accrual basis using the effective interest method. Loan administration fees are amortized over the term of the loan using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to the carrying amount of the financial asset. Impairment of financial assets For financial assets carried at amortized cost, the Credit Union first assesses individually whether objective evidence of impairment exists for financial assets that are significant, or collectively for financial assets that are not individually significant. If the Credit Union determines that no objective evidence of impairment exists for an individually assessed asset, it includes a financial asset in a group of financial assets with similar credit risk characteristics and collectively assessed them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows, excluding future expected impaired financial assets that have not yet been incurred. The carrying amount of the financial asset is reduced through the use of the provision for impaired financial assets and the amount of the impairment loss is recognized in the statement of comprehensive income. Financial assets, together with the associated provision for impairment are reported as a credit loss when there is no realistic prospect of future recovery and when the Credit Union is in possession of the loan. Interest income is accrued until the financial asset becomes a credit loss. The present value of the estimated future cash flows is discounted at the financial asset's original effective interest rate. The calculation of the present value of estimated future cash flows reflects the projected cash flows including provisions for impaired financial assets, prepayment losses, and costs to securitize and service financial assets. For the purpose of the collective evaluation of loan impairment, financial assets are grouped on the basis of the Credit Union s internal system that considers credit risk, characteristics such as asset type, industry, geographical location, collateral, delinquency status and other relevant economic factors. Future cash flows on the group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical credit loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical credit loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year such as changes in unemployment rates, inflation, borrowing rates, consumer fuel prices, vehicle auction values or other factors that are indicative of incurred losses in the group and their magnitude. 7

12 Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment. Property and equipment are recorded at cost. Depreciation is provided using the straight-line and declining balance method at rates intended to depreciate the cost of the assets over their estimated useful lives: Rate Buildings and renovations 20 and 40 years and 4% Automotive 30% Furniture and equipment 3-20 years and 20% Leasehold improvements 10 and 20 years Parking lot 10 years and 10% The useful lives of items of property and equipment are reviewed on an annual basis and the useful life is altered if estimates have changed significantly. Gains or losses on the disposal of property and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in net income. Intangible assets Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Credit Union's cash-generating units ("CGUs") expected to benefit from the synergies of the combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. Other intangible assets Intangible assets with a limited life are depreciated over their estimated useful lives. The useful lives of the intangible assets are reviewed on an annual basis and the useful life is altered if estimates have changed significantly. Gains or losses on the disposal of intangible assets are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in the statement of comprehensive income. The Credit Union's other intangible assets consist of computer software with an estimated life of 3-8 years. Pension plans The Credit Union participates in a multi-employer defined benefit plan. As sufficient information is not available to apply defined benefit accounting, the plans are accounted for using defined contribution accounting. The Credit Union also provides retirement benefits for a portion of its employees under a multi-employer defined contribution plan. In defined contribution plans, the Credit Union pays contributions to separate legal entities, and the risk of a change in value rests with the employee. Thus, the Credit Union has no further obligations once the fees are paid. Premiums for defined contribution plans are expensed when an employee has rendered his/her services. 8

13 Impairment of non-financial assets At the end of each reporting period, the Credit Union reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Credit Union estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in net income. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in net income, with the exception of goodwill, which is not reversed in subsequent periods. Payables and accruals Payables and accruals are stated at amortized cost, which approximates fair value due to the short term nature of these liabilities. Member deposits Member deposits are initially recognized at fair value and are subsequently measured at amortized cost using the effective interest method. Member shares Shares are classified as liabilities or members' equity in accordance with their terms. Shares redeemable at the option of the member, either on demand or on withdrawal from membership, are classified as liabilities. Shares redeemable at the discretion of the Credit Union Board of Directors are classified as equity. Shares subject to regulatory restrictions are accounted for using the criteria set out in IFRIC 2 Members' Shares in Cooperative Entities and Similar Instruments. Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Credit Union and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Loan interest revenue Interest income is recognized on the consolidated statement of comprehensive income for all financial assets measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash flows through the expected life of the financial instrument back to the net carrying amount of the financial asset. The application of the method has the effect of recognizing revenue of the financial instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. Investment interest revenue Investment interest revenue is recognized on the accrual basis. Purchase premiums and discounts are amortized using the effective interest method over the term to maturity of the applicable investment. 9

14 Other income Insurance commissions and fees are recognized at the time the policy documents are issued by the insurance carrier. Rental income is recognized when earned and collection is believed to be reasonable assured. Revenue from the provision of other services to members is recognized when earned, specifically when amounts are fixed or can be determined and the ability to collect is reasonably assured. Income taxes Current tax and deferred tax are recognized in net income except to the extent that the tax is recognized either in other comprehensive income or directly in equity, or the tax arises from a business combination. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The calculation of current tax is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred taxes Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the assets are realized or the liabilities are settled. The calculation of deferred tax is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting year. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. 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 an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable income. 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. Foreign currency translation Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at the exchange rates prevailing at the transaction dates (spot exchange rates). Monetary assets and liabilities are retranslated at the exchange rates at the balance sheet date. Translation gains and losses are included in other income. Financial instruments All financial instruments are initially recognized on the consolidated statement of financial position at fair value at acquisition. Measurement in subsequent periods depends on whether the financial instrument has been classified as fair value through profit or loss, available-for-sale, held-to-maturity, loans and receivables, or other financial liabilities. During the year, there has been no reclassifications of financial instruments. Financial assets at fair value through profit or loss: The financial instruments classified as fair value through profit or loss are measured at fair value with unrealized gains and losses recognized in net income. The Credit Union's financial instruments classified as fair value through profit or loss include derivatives. Available-for-sale: Available-for-sale financial assets are measured at fair value with unrealized gains and losses recognized in other comprehensive income. The Credit Union's investments held with Central 1, Southern Interior Innovation Fund VCC, CUPP Services Ltd. and other investments in shares have been classified as available-for-sale. Loans and receivables: The financial assets classified as loans and receivables are initially measured at fair value, then subsequently carried at amortized cost. The Credit Union's financial instruments classified as loans and receivables include all member loans receivable, accrued interest, other receivables balances, cash resources and deposits with Central 1. 10

15 Held-to-maturity: The financial assets classified as held-to-maturity are initially measured at fair value, then subsequently carried at amortized cost. The Credit Union's financial instruments classified as held-to-maturity include certain liquidity term deposits. Financial liabilities measured at amortized cost: Financial instruments classified as other financial liabilities include all member deposits, borrowings, non-equity membership shares, and payables and accruals. Other financial liabilities are initially measured at fair value, then subsequently carried at amortized cost. De-recognition of financial assets De-recognition of a financial asset occurs when: The Credit Union does not have rights to receive cash flows from the asset; The Credit Union has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through" arrangement; and either: The Credit Union has transferred substantially all the risks and rewards of the asset, or The Credit Union has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Credit Union has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred or retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent that the Credit Union s continuing involvement in the asset, in that case, the Credit Union also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Credit Union has retained. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amount is recognized in the consolidated statement of comprehensive income. Derivative financial instruments and hedging activities Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity instrument or index. In the ordinary course of business, the Credit Union enters into derivative transactions for asset/liability management. Derivatives are reported on the statement of financial position at their fair value. Hedges IAS 39 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies. Derivatives may be designated as hedges, provided that the Credit Union formally documents the hedging relationship at its inception by outlining the risk management strategy being implemented along with the details of both the hedged and hedging item. The documentation identifies the specific asset or liability being hedged, the risk that is being hedged, the type of derivative used, the intended term of the hedging relationship and the method recognizing the gains, losses, revenues and expenses associated with the items in the hedging relationship. The Credit Union must formally assess, at inception and over the term of the hedging relationship, whether the hedging relationship is effective in achieving offsetting changes in cash flow or fair value attributable to the risk being hedged. If it is determined that a derivative is not highly effective as a hedge, the Credit Union will discontinue the application of hedge accounting. Hedge accounting requires that gains, losses, revenues and expenses of a hedging item be recognized in the same period that the related gains, losses, revenues and expenses of the hedged item are recognized. Non-qualifying derivative financial instruments Derivative financial instruments that do not qualify for hedge accounting, or are not designated under IAS 39 as hedges, are carried at fair value. Changes in fair value are reported in current period earnings. Derivative financial instruments with negative fair value are reported as other liabilities while derivative financial instruments with positive fair value are considered other assets. 11

16 Cash flow hedge The Credit Union utilizes cash flow hedges as part of its risk management activities. In a cash flow hedge, the Credit Union mainly uses interest rate swaps to hedge exposure of the future cash flows related to a fixed or floating rate financial asset or liability. The effective portion of the changes in fair value of the hedging derivative, net of taxes, is recognized in accumulated other comprehensive income ( AOCI ), whereas the ineffective portion is recognized in the statement of comprehensive income. The amounts recognized in AOCI with respect to cash flow hedges are reclassified in the statement of comprehensive income in the period or periods during which the hedged item affects net income. When the derivative instrument no longer satisfies the conditions of effective hedging, hedge accounting ceases to be prospectively applied. The amounts previously recorded in AOCI are reclassified to net income in the period or periods during which the hedged item affects net income. Gains or losses on derivatives are reclassified immediately to net income when the hedged item is sold or early terminated. Fair value measurements The Credit Union classifies fair value measurements recognized in the consolidated statement of financial position using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Quoted prices (unadjusted) are available in active markets for identical assets or liabilities; Level 2: Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs in which there is little or no market data, which require the Credit Union to develop its own assumptions. Fair value measurements are classified in the fair value hierarchy based on the lowest level input that is significant to that fair value measurement. This assessment requires judgment, considering factors specific to an asset or a liability and may affect placement within the fair value hierarchy. Standards issued but not yet effective The Credit Union has not yet applied the following new standards, interpretations and amendments to standards that have been issued as at December 31, 2015 but are not yet effective. Unless otherwise stated, the Credit Union does not plan to early adopt any of these new or amended standards and interpretations. IFRS 9 Financial instruments The final version of IFRS 9 (2014) was issued in July 2014 as a complete standard including the requirements for classification and measurement of financial insturments, the new expected loss impairment model and the new hedge accounting model. IFRS 9 (2014) will repace IAS 39 Financial instruments: recognition and measurement. IFRS 9 (2014) is effective for reporting periods beinning on or after January 1, The Credit Union is currently assessing the impact of the standard on its financial statements. IFRS 15 Revenue from contracts with customers IFRS 15, issued in May 2014, specifies how and when entities recognize revenue, as well as requires more detailed and relevant disclosures. The standard will supersede all current standards dealing with revenue recognition, including IAS 11 Construction contracts, IAS 18 Revenue, IFRIC 13 Customer loyalty programmes, IFRIC 15 Agreements for the construction of real estate, IFRIC 18 Transfers of assets from customers and SIC-31 Revenue barter transactions involving advertising services. The standard provides a single, principles based five-step model to be applied to all contracts with customers, with certain exceptions. The five steps are: 1. Identify the contract(s) with the customer. 2. Identify the performance obligation(s) in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to each performance obligation in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. IFRS 15 is effective for annual periods beginning on or after January 1, The Credit Union is currently assessing the impact of this standard on its consolidated financial statements. 12

17 IAS 1 Presentation of Financial Statements Amendments to IAS 1, issued in December 2014, provide clarification on presentation and disclosure requirements and ensure entities are able to use judgment when preparing their financial statements. The amendments are summarized below: Materiality: Clarify that entities shall not aggregate or disaggregate information in a manner that obscures useful information; Clarify that materiality requirements apply to the statements of profit or loss and other comprehensive income, statement of financial position, statement of cash flows and statements of changes in equity, and to the notes; and Clarify when a standard requires a specific disclosure, the resulting information shall be assessed to determine whether it is material and consequently whether presentation or disclosure of that information is warranted. Presentation of statements of financial position and profit or loss and other comprehensive income: Clarification that the list of line items to be presented in these statements can be disaggregated and aggregated as relevant and additional guidance on subtotals in these statements; and Clarification that an entity s share of OCI of equity-accounted associates and joint ventures should be presented in aggregate as single line items based on whether or not it will be subsequently reclassified to profit or loss. Notes: Clarify that entities have flexibility as to the order in which they present the notes, but also emphasize that understandability and comparability should be considered by an entity when deciding that order; and Remove potentially unhelpful guidance in IAS 1 for identifying a significant accounting policy. The amendments only affect financial statement presentation and disclosure and are effective for annual periods beginning on or after January 1, The Credit Union expects to apply the standard for its financial statements dated December 31, IAS 27 (revised) Seperate financial statements Amendments to IAS 27 were issued in August 2014 to allow application of the equity method to account for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The amendments only affect financial statement presentation and disclosure and are effective for annual periods beginning on or after January 1, The Credit Union is currently assessing the impact of these amendments on its consolidated financial statements 4. Significant accounting judgements, estimates and assumptions As the precise determination of many assets and liabilities is dependent upon future events, the preparation of consolidated financial statements for a period necessarily involves the use of estimates and approximations which have been made using careful judgment. These estimates are based on management's best knowledge of current events and actions that the Credit Union may undertake in the future. Allowance for impaired loans The Credit Union reviews its individually significant loans at each reporting date to assess whether an impairment loss should be recognized. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Credit Union makes judgments about the borrower s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Members loans receivable that have been assessed individually and found not to be impaired and all individually insignificant loans are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The general provision assessment takes account of data from the loan portfolio such as credit quality, delinquency, historical performance and industry economic outlook. The impairment loss on member loans receivable is disclosed in more detail in Note 7. 13

18 Financial instruments not traded on active markets For financial instruments not traded in active markets, fair values are determined using valuation techniques such as the discounted cash flow model that rely on assumptions that are based on observable active markets or rates. Certain assumptions take into consideration liquidity risk, credit risk and volatility. 5. Cash resources Cash and current accounts 125, ,371 Term deposits and accrued interest maturing in three months or less - 500,753 Total 125,172 1,190,124 Under governing legislation, the Credit Union must maintain, for liquidity purposes, deposits with Central 1 of at least 8% of member deposits and Credit Union borrowings. At December 31, 2015, the Credit Union liquidity deposits exceed the minimum requirements by $2,479,967 ( $9,345,074). 6. Investments Term deposits and accrued interest maturing in greater than three months 16,694,571 20,591,817 Shares Central 1 Credit Union 548, ,309 Southern Interior Innovation Fund VCC 390, ,000 CUPP Services Ltd. 91,839 91,839 Other ,030,877 1,015,297 Investment in Joint Venture Investment including equity pickup 1,001, ,589 Advances to joint venture 4,653,919 5,018,919 5,655,588 5,588,508 Total 23,381,036 27,195,622 14

19 7. Member loans receivable Principal and allowance by loan type: 2015 Principal performing Principal impaired Allowance specific Allowance collective Net carrying value Residential mortgages 83,159, ,030-40,940 83,118,290 Commercial mortgages 20,768,632 1,681,851 26,230 13,552 20,728,850 Personal loans 18,403,940 40,863 14,006 42,937 18,346,997 Commercial loans 763, ,484 49,806 13, ,803 Accrued loan interest 277, ,012 Total 123,372,261 2,401,228 90, , ,170, Principal performing Principal impaired Allowance specific Allowance general Net carrying value Residential mortgages 72,288, ,103 27,000 48,048 72,550,888 Commercial mortgages 18,811, ,622 18,799,658 Personal loans 19,637,799 53,326 8,085 34,113 19,648,927 Commercial loans 465,227 45,241 45,241 16, ,577 Accrued loan interest 225, ,662 Total 111,428, ,670 80, , ,673,712 Loan allowance details: Balance, beginning of year 190, ,134 Provision for credit losses 60,368 43,899 Subtotal 251, ,033 Less: accounts written off, net of recoveries 49,818 5,274 Balance, end of year 201, ,759 15

20 A loan is considered past due when a counterparty has not made a payment by the contractual due date. The table that follows presents the carrying value of loans at year end that are past due but not classified as impaired because they are either i) less than 90 days past due, or ii) fully secured and collection efforts are reasonably expected to result in repayment days days 90 days and greater 2015 Personal 2,923, ,200-3,425,840 Commercial 866, , ,815 1,958,005 Total 3,790,056 1,364, ,815 5,383, days days 90 days and greater 2014 Personal 2,731, , ,296 3,842,165 Commercial 934, ,221 2,179,409 3,274,534 Total 3,666, ,296 2,993,705 7,116,699 The principal collateral and other credit enhancements the Credit Union holds as security for loans include (i) insurance, mortgages over residential lots and properties, (ii) recourse to business assets such as real estate, equipment, inventory and accounts receivable, (iii) recourse to commercial real estate properties being financed, and (iv) recourse to liquid assets, guarantees and securities. Valuations of collateral are updated periodically depending on the nature of the collateral. The Credit Union has policies in place to monitor the existence of undesirable concentration in the collateral supporting its credit exposure. In management's estimation, the fair value of the collateral is sufficient to offset the risk of loss on the loans past due but not impaired. Loan portfolios and syndication The Credit Union has included in its member loans receivable, mortgage loan portfolios acquired in the normal course of operations. The portfolio acquired includes personal mortgage loans totalling $2,160,876 ( $2,866,648). The loans are administered by the vendor credit union who collects payments and remits on the Credit Union's behalf. Included in the Credit Union's loan portfolio are commercial syndicated loans that are reported on the Credit Union's financial records, but are administered by the lead lender on the Credit Union's behalf. The balance of syndicated loans as a participating lender is $992,868 ( $968,737). 16

21 8. Property, plant and equipment Land Buildings and renovations Furniture and equipment Leasehold improvements Parking lot Total Cost Balance at December 31, ,144 1,817,590 1,742, ,524 44,276 4,824,459 Additions - 7,822 99,019-49, ,666 Disposals - - (555,277) - - (555,277) Balance at December 31, ,144 1,825,412 1,286, ,524 94,101 4,425,848 Additions - 22, ,089 6,065 14, ,044 Balance at December 31, ,144 1,847,480 1,472, , ,923 4,654,892 Depreciation and impairment losses Balance at December 31, ,642 1,582, ,909 44,276 3,343,534 Additions - 58,386 69,960 17,846 1, ,185 Disposals - - (555,277) - - (555,277) Balance at December 31, ,028 1,097, ,755 46,269 2,936,442 Additions - 59,091 88,608 15,783 3, ,957 Balance at December 31, ,030,119 1,185, ,538 49,744 3,103,399 Net book value December 31, , , ,277 72,769 47,832 1,489,406 December 31, , , ,758 63,051 59,179 1,551,493 17

22 9. Intangible assets Computer software Goodwill Total Cost Balance at December 31, ,336 1,871,176 2,174,512 Additions 1,086-1,086 Balance at December 31, ,422 1,871,176 2,175,598 Additions Balance at December 31, ,220 1,871,176 2,176,396 Depreciation and impairment losses Balance at December 31, , ,336 Additions Balance at December 31, , ,879 Additions Balance at December 31, , ,821 Net book value At December 31, ,871,176 1,871,719 At December 31, ,871,176 1,871, Member deposits Demand 82,771,987 77,006,397 Term 25,699,439 27,671,430 Registered savings plans 17,257,714 17,571,166 Tax free savings 6,688,389 5,759,878 Accrued interest and dividends 459, , ,877, ,520, Borrowings The Credit Union has an authorized line of credit and term facility with Central 1 in the amount of $3,710,000 CDN ( $3,041,668 CDN) and $100,000 USD ( $100,000 USD). Subsequent to year-end a temporary increase of $3,000,000 CDN was obtained until June 30, This line of credit is secured by an assignment of loans to members, accounts receivable and a demand debenture in favour of Central 1 and is at a rate of 1.75%. As at December 31, 2015 there was $3,348,080 ( $1,567,463) owing on this line of credit. 18