SUDBURY CREDIT UNION LIMITED

Transcription

1 Financial Statements of

2 KPMG LLP Telephone (705) Chartered Accountants Fax (705) Claridge Executive Centre In Watts (1-800) Pine Street, PO Box 700 Internet Sudbury ON P3E 4R6 INDEPENDENT AUDITORS REPORT To the Members of Sudbury Credit Union Limited We have audited the accompanying financial statements of Sudbury Credit Union Limited, which comprise the statement of financial position as at December 31, 2012 and the statements of income, changes in members equity and cash flows for the year ended December 31, 2012, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements present fairly, in all material respects, the financial position of Sudbury Credit Union Limited as at December 31, 2012 and its financial performance and its cash flows for the year ended December 31, 2012 in accordance with International Financial Reporting Standards. Chartered Accountants, Licensed Public Accountants February 25, 2013 Sudbury, Canada KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

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5 Statement of Changes in Members' Equity, with comparative figures for 2011 Contributed surplus: Balance, beginning of year $ 1,109,784 - Acquisition of Community Savings & Credit Union Limited - 1,109,784 Amalgamation with Northridge Savings and Credit Union Limited (note 20) 4,374,871 - Balance, end of year 5,484,655 1,109,784 Retained earnings: Balance, beginning of year 12,784,914 11,843,284 Net earnings 2,020, ,630 Balance, end of year 14,805,692 12,784,914 Members' equity, end of year $ 20,290,347 13,894,698 See accompanying notes to financial statements. 3

6 Statement of Cash Flows, with comparative figures for 2011 Cash flows from operating activities: Net income $ 2,020, ,630 Adjustments for: Change in non-cash items: Net interest income (7,194,214) (7,291,299) Provision for impaired loans 128, ,872 Provision for income tax 408, ,924 Depreciation of property and equipment 216, ,919 (4,419,973) (4,885,954) Changes in other assets: Changes in other asssets (391,196) 279,463 Changes in accounts payable and accrued liabilties 5,594 (267,040) (385,602) 12,423 Changes in member activities (net): Changes in member loans (5,938,075) (1,712,389) Changes in member deposits 7,371,311 9,080,189 1,433,236 7,367,800 Cash flows related to interest, dividends and income taxes: Interest received on member loans 10,402,670 10,532,748 Interest received on investments 941, ,665 Interest paid on member deposits (3,871,715) (3,916,732) Income taxes recovered (paid) 23,653 (548,771) 7,496,588 6,950,910 4,124,249 9,445,179 Cash flows from financing activities: Redemption of membership shares (9,800) (8,220) Redemption of Class A patronage shares (8,491) (8,662) Redemption of Class B investment shares (14,383) (106,270) (32,674) (123,152) Cash flows from investing activities: Purchase of investments (8,762,177) (4,635,742) Additions to property and equipment (75,619) (101,749) Cash resources on acquisition of Company Savings & Credit Union Limited - 5,653,561 Cash resources on acquisition of Northridge Savings and Credit Union Limited (note 20) 5,969,512 - (2,868,284) 916,070 Net increase in cash and cash equivalents 1,223,291 10,238,097 Cash and cash equivalents, beginning of year 13,899,024 3,660,927 Cash and cash equivalents, end of year $ 15,122,315 13,899,024 See accompanying notes to financial statements. 4

7 1. Reporting entity: Sudbury Credit Union Limited (the Credit Union ), was incorporated on October 9, 1951 and operates in compliance with the Credit Union and Caisses Populaires Act of Ontario (the Act ) and is a member of the Central 1 Credit Union. The Credit Union s Member deposits are insured by the Deposit Insurance Corporation of Ontario ( DICO ) under a mandatory program, the expense for which amounted to $216,164 in 2012 ( $199,152). The Credit Union provides financial services and products to its members through eight branches in the Greater Sudbury area. The Credit Union head office is located at 1 Gribble Street, Sudbury, Ontario. 2. Basis of preparation: (a) Statement of compliance: These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). These financial statements have been authorized for issue by the Board of Directors on February 25, (b) Basis of measurement: The financial statements have been prepared on the historical cost basis except for the following: derivative financial instruments are measured at fair value non-derivative financial instruments at fair value through profit or loss are measured at fair value available for sale financial assets are measured at fair value the liability for defined benefit obligation is recognized as the present value of the defined benefit obligations less the total of the plan assets, plus unrecognized actuarial gains, less unrecognized past service cost and unrecognized actuarial losses. (c) Functional and presentation currency: The Credit Union s functional and presentation currency is the Canadian dollar. The financial statements are presented in Canadian dollars. 5

8 2. Basis of preparation (continued): (d) Use of estimates and judgments: The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgement in applying the Credit Union s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note Significant accounting policies: The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Loans receivable from members: Loans are initially measured at fair value plus incremental direct transaction costs less loan fees and subsequently remeasured at their amortized cost (net of an allowance for credit losses) using the effective interest rate method. (i) Loan interest: Interest income from loans is recorded on the effective yield basis except when there is reasonable doubt as to its collectibility or when interest is 90 days past due. Accrued but uncollected interest is provided for when loans are determined to be impaired. (ii) Provision for credit losses: The Credit Union maintains a provision for credit losses, which, in management s opinion, is considered adequate to provide for credit-related losses. The Credit Union considers evidence of impairment for loans receivable at both a specific asset and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment the Credit Union uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. 6

9 3. Significant accounting policies (continued): (ii) Provision for credit losses (continued): An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. (b) Interest income and expense: Interest income and expense are recognized in the statement of income using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability to its fair value at inception. The effective interest rate is established on initial recognition of the financial asset or liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received and transaction costs and discounts or premiums that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. (c) Non-interest revenue: Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. Net income from other financial instruments at fair value through profit or loss relates to nontrading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and financial assets and liabilities designated at fair value through profit or loss, and includes all realized and unrealized fair value changes, interest, dividends and foreign exchange differences. Dividend income is recognized when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividends are reflected as a component of net trading income, net income from other financial instruments at fair value through profit or loss or other operating income based on the underlying classification of the equity investment. 7

10 3. Significant accounting policies (continued): (d) Cash and cash equivalents: Cash and cash equivalents include cash on hand, current accounts, short-term deposits with other financial institutions, cheques and other items in transit. Given their short-term nature, the carrying value of cash and cash equivalents equals fair value. (e) Financial instruments - non-derivative financial instruments: The Credit Union initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at which the Credit Union becomes a party to the contractual provisions of the instrument. The Credit Union derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Credit Union is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Credit Union has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Credit Union has the following non-derivative financial assets: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. Non-derivative financial instruments comprise cash and cash equivalents, investments, loans to members, members deposits, accounts payable and accrued liabilities and liabilities qualifying as regulatory capital. Fair value through profit and loss: Financial assets and liabilities designated as fair value through profit and loss ( FVTPL ) are financial instruments either classified as held for trading ( HFT ) or are managed and evaluated on a fair value basis in accordance with a documented risk management strategy. HFT financial assets and liabilities are acquired or incurred principally for resale, generally within a short period of time. 8

11 3. Significant accounting policies (continued): (e) Financial instruments - non-derivative financial instruments (continued): FVTPL financial assets and liabilities are measured at fair value at each reporting date. Gains and losses realized on disposal together with dividends and interest earned on these instruments are reported in interest and investment income. Unrealized gains and losses from market fluctuations are reported separately in the statement of income. There are regulatory restrictions imposed by the Financial Services Commission of Ontario on the use of this designation including that loan financial assets are precluded from being designated at FVTPL and that the fair value designated financial instruments are managed on a fair value basis. Offsetting: Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Credit Union has the legal right to set off the recognized amounts and it intends either to settle on a net basis or to realized the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as the Credit Union s trading activities. Held to maturity: Held to maturity financial assets are non-derivative financial assets with fixed or determinable payments and a fixed maturity, other than loans and receivables that the Credit Union has the positive intention and ability to hold to maturity. These financial assets are initially recognized at fair value including direct and incremental transaction costs. They are subsequently accounted for at amortized cost using the effective interest rate method. Available for sale: Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. The Credit Union s investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(a) (ii)), are recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit 9

12 3. Significant accounting policies (continued): (e) Financial instruments - non-derivative financial instruments (continued): Loans and receivables: Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables. Other liabilities: The Credit Union has designated all financial liabilities with the exception of derivatives as Other Liabilities. Financial liabilities designated as Other Liabilities are recorded at amortized cost. Interest incurred on these liabilities is included in interest expense. Transaction costs related to Other Liabilities are capitalized and then amortized over the life of the instrument using the effective interest method. (f) Financial instruments - derivative financial instruments: Derivative financial instruments are financial contracts that require or provide an option to exchange cash flows or payments determined by applying certain rates, indices or changes therein to notional contract amounts. The Credit Union periodically enters into derivative contracts to manage financial risks associated with movements in interest rates and other financial indices such as equity swap agreements. The Credit Union s policy is not to utilize derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recorded on the statement of financial position at fair value, including those derivatives that are embedded in financial or non-financial contracts that are closely related to the host contracts. Changes in the fair value of those derivative instruments are recognized in net earnings for the year. The Credit Union does not apply hedge accounting on its derivative portfolio. g) Other assets: Included in other assets are costs incurred in equity swap agreement hedge premiums. Hedge premiums are recorded as expense using the effective interest rate method over the term of the agreement. 10

13 3. Significant accounting policies (continued): (h) Property and equipment: Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets as follows: Buildings Furniture and equipment Terminals and automated banking machines Computer software and hardware Leasehold improvements 10 to 40 years 3 to 10 years 5 to 7 years 3 to 7 years Term of the lease Depreciation methods, useful lives and residual values are reviewed annually and adjusted if necessary. (i) Impairment of non-financial assets: Non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount, which is the higher of value in use and fair value less costs to sell, the asset is written down accordingly. When it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the asset s cash-generating unit, which is the lowest group of assets in which the asset belongs for which there are separately identifiable cash flows. The Credit Union has six cash-generating units. Impairment charges are included in income. (j) 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. 11

14 3. Significant accounting policies (continued): (j) Income taxes (continued): Recognition of deferred tax assets for unused tax (losses), tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The amount of the deferred tax asset or liability is measured at the amount expected to be recovered from or paid to the taxation authorities. This amount is determined using tax rates and tax laws that have been enacted or substantively enacted by the reporting date and are expected to apply when the liabilities / (assets) are settled / (recovered). Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. (k) Share capital: The membership shares, Class A patronage shares and Class B special shares are classified on the balance sheet as liabilities qualifying for regulatory capital. Any dividends on these shares are recorded as interest expense. (l) Foreign currency translation: The financial statements are presented in Canadian dollars, which is the Credit Union s presentation and functional currency. Assets and liabilities denominated in foreign currencies, primarily US dollars, are translated into Canadian dollars at rates prevailing at the year-end date. Income and expenses are translated at the 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. 12

15 3. Significant accounting policies (continued): (m) Employee retirement benefits: i) Defined benefit plans The Credit Union provides retirement benefits to certain management employees. These benefits include a registered pension plan. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Credit Union s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is the yield at the reporting date on AA credit-rated bonds that have maturity dates approximating the terms of the Credit Union s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Credit Union, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any plan in the Credit Union. An economic benefit is available to the Credit Union if it is realizable during the life of the plan, or on settlement of the plan liabilities. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in profit or loss. The Credit Union uses the corridor method to amortize actuarial gains or losses (such as changes in actuarial assumptions and experience gains or losses) over the average remaining service life of active employees. Under the corridor method, amortization is recorded only if the accumulated net actuarial gains or losses exceed 10% of the greater of the accrued benefit obligation and the value of the plan assets. The average remaining service period of the active employees covered by the defined benefit pension plans is 11.6 years. 13

16 3. Significant accounting policies (continued): (m) Employee retirement benefits (continued): ii) Defined contribution plans (n) Provisions: The Credit Union also has defined contribution plans providing pension benefits for all other employees. 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. A provision is recognized if, as a result of a past event, the Credit Union has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognized as finance cost. (o) New standards and interpretations not yet adopted: Certain new standards, amendments and interpretations have been published that are mandatory for the Credit Union s accounting periods beginning on or after January 1, 2013 or later periods that the Credit Union has decided not to early adopt. The standards, amendments and interpretations that will be relevant to the Credit Union are: i. IFRS 9 Financial Instruments ( IFRS 9 ) replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement, on the classification and measurement of financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans and receivable. Financial assets will be classified into one of two categories on initial recognition: Financial assets measured at amortized cost; or Financial assets measured at fair value. Gains and losses on remeasurement of financial assets measured at fair value will be recognized in net income, except that for an investment in an equity instrument which is not held-for-trading, IFRS 9 provides, on initial recognition, an irrevocable election to present all fair value changes from the investment in other comprehensive income (OCI). The election is available on an individual share-by-share basis. 14

17 3. Significant accounting policies (continued): (o) New standards and interpretations not yet adopted (continued): Amounts presented in OCI will not be reclassified to net income at a later date. Under IFRS 9, for financial liabilities measured at fair value under the fair value option, changes in fair value attributable to changes in credit risk will be recognized in OCI, with the remainder off the change recognized in profit or loss. However, if this requirement creates or enlarges an accounting mismatch in net income, the entire change in fair value will be recognized in net income. Amounts presented in OCI will not be reclassified to net income at a later date. IFRS 9 also requires derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument to be measured at fair value, whereas such derivative liabilities are measured at cost under IAS 39. IFRS 9 also includes the requirements of IAS 39 for the derecognition of financial assets and liabilities without change. The IASB has deferred the mandatory effective date of the existing chapters of IFRS 9 to fiscal years beginning on or after January 1, The early adoption of the standard is permitted. The Credit Union intends to adopt IFRS 9 in its financial statements for its fiscal year beginning on January 1, The extent of the impact of adoption of IFRS 13 has not yet been determined. As well, the implementation and ability to elect options provided by the new standards may be influenced by the regulators (DICO). ii. IFRS 13 Fair Value Measurement ( IFRS 13 ) replaces the fair value measurement guidance contained in individual IFRS s with a single source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also establishes a framework for measuring fair value and outlines disclosure requirement for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements and, for recurring fair value measurements that use significant unobservable inputs, the effect of the measurements on comprehensive income. IFRS 13 explains how to measure fair value when it is required or permitted by other IFRS s. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value. The changes are effective for fiscal years beginning on or after January 1, 2013 and the Credit Union intends to adopt IFRS 13 prospectively in its financial statements for the fiscal year beginning on January 1, The extent of the impact of adoption of IFRS 13 has not yet been determined. 15

18 3. Significant accounting policies (continued): (o) New standards and interpretations not yet adopted (continued): iii. Amendments to IAS 1 Presentation of Financial Statements require that an entity separately disclose the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to net income. The change is effective for fiscal years beginning on or after July 1, 2012 and the Credit Union intends to adopt the amendments in its financial statements for the fiscal year beginning on January 1, The Credit Union does not expect the amendments to IAS 1 to have a material impact on the financial statements. iv. Amendments to IAS 19 Employee Benefits require the following: Recognition of actuarial gains and losses immediately in other comprehensive income. The corridor method will be eliminated and actuarial gains and losses are not transferred to net income Full recognition of past service costs immediately in net income Recognition of expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation Additional disclosures that explain the characteristics of the entity s defined benefit plans and risks associated with the plans, as well as disclosures that describe how defined benefit plans may affect the amount, timing and uncertainty of future cash flows, and details of any asset-liability match strategies used to manage risks. The amendments also impact termination benefits, which would now be recognized at the earlier of when the entity recognizes costs for a restructuring within the scope of IAS 37 Provisions, and when the entity can no longer withdraw the offer of the termination benefits. The changes are effective for fiscal years beginning on or after January 1, 2013 and the Credit Union intends to adopt the amendments in its financial statements for the fiscal year beginning on January 1, The extent of the impact of adoption of the amendments has not yet been determined. 16

19 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 16. 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 based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome that the amount included in the tax liabilities. 17

20 5. Loans to members: Principal and Allowance for 2012 Interest impaired loans Net Residential mortgage loans $ 175,286,569 66,727 $ 175,219,842 Personal loans 30,505, ,540 30,120,159 Commercial loans 58,283, ,740 58,051,116 $ 264,076, ,007 $ 263,391,117 Principal and Allowance for 2011 Interest impaired loans Net Residential mortgage loans $ 127,039, ,989 $ 126,846,776 Personal loans 16,804, ,046 16,556,214 Commercial loans 58,638,499 2,004,013 56,634,486 $ 202,482,524 2,445,048 $ 200,037,476 Commerical loans consist of the following loan types: Commercial $ 40,913,283 $ 36,004,094 Syndicated 17,370,573 22,634,405 Allowance for impaired loans (232,740) (2,004,013) $ 58,051,116 $ 56,634,486 18

21 5. Loans to members (continued): 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 $ 63,039, % $ 50,201, % Within 1 year 80,408, % 54,674, % Over 1 year 120,147, % 96,840, % 263,594, % 201,716, % Accrued interest 481, ,899 Provision for loan losses (685,007) (2,445,048) $ 263,391,117 $ 200,037,476 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 22.63% ( %) of the commercial loan portfolio. The Credit Union s commercial loan portfolio consists of the following industry sectors: Real Estate 40.8% 32.5% Hospitality 17.2% 19.3% Manufacturing 11.8% 12.2% Construction 8.9% 10.8% Retail 4.4% 4.5% Other 16.9% 20.7% 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. 19

22 5. Loans to members (continued): 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, fixed assets). Financial collateral includes cash and negotiable securities issued by governments and investment grade issuers. Guarantees are also accepted to reduce credit risk. It is not practical to value all collateral as at the balance sheet date due to the variety of assets and conditions. 6. Allowance for impaired loans: Details of the activity in the allowance for impaired loans are as follows: Residential Mortgage Loans Personal Commercial Loans Loans Total Total Balance, beginning of year $ 192, ,046 2,004,013 2,445,048 $ 1,470,272 Transfer from Community Savings ,356 Transfer from Northridge - 190, ,562 - Provision for impaired loans 40,174 (16,008) 103, , ,872 Recoveries 19,588 51,106 18,153 88,847 81,022 Loans written-off (186,024) (88,166) (1,893,399) (2,167,589) (113,474) Balance, end of year $ 66, , , ,007 $ 2,445,048 Details of the impaired loans, net of specific allowances are as follows: Residential Mortgage Loans Personal Commercial Loans Loans Total Total Impaired loans $ 783, , ,452 1,756,197 $ 3,995,506 Specific allowance 5, , , ,653 2,125,048 Net $ 777,734 49, ,712 1,480,544 $ 1,870,458 20

23 6. Allowance for impaired loans (continued): The following tables illustrate the credit quality of commercial loans: Rating % of Portfolio % of Portfolio Undoubted 0.16% 0.24% Superior 10.89% 16.48% Moderate 73.64% 70.91% Cautionary 14.45% 7.28% Unsatisfactory 0.86% 0.86% Unacceptable 0.00% 4.23% Refer to note 19 - Financial Risk Management for a detailed explanation of the credit risk rating process of both portfolios. Retail mortgage and personal loans are not scored. 7. Investments: Available for sale: Central 1 Credit Union Limited: Class A shares $ 1,106,357 $ 891,347 Class E shares 1,265,800 1,046,200 2,372,157 1,937,547 Fair value through profit and loss: CUCO Cooperative Association 1,496,736 1,072,236 Held to maturity: Central 1 bonds 11,000,000 10,000,000 Concentra Financial term deposit 5,000,000-16,000,000 10,000,000 Loans and receivables: Central 1 Liquidity reserve deposits 19,756,876 14,734,129 Other 2,815, ,617 Accrued interest 440, ,108 23,012,201 16,028,854 $ 42,881,094 $ 29,038,637 21

24 7. Investments (continued): The following summarizes the Credit Union s investments by the contractual repricing or maturity date, whichever is earlier: Principal Average Principal Average Balance Yield Balance Yield Within 1 year $ 19,450, % $ 5,604, % Over 1 year 19,106, % 19,729, % 38,556, % 25,334, % Non-rate sensitive 3,884,036 3,340,400 Accrued interest 440, ,108 $ 42,881,094 $ 29,038,637 a) Shares in Central 1: As a member of Central 1, the Credit Union is required to maintain an investment in Central 1 shares equal to its proportionate share of the level of capital required by Central 1. The Credit Union s Share of Central 1 capital requirement is based on asset size relative to other Class A members. Central 1 rebalances the investment annually. In 2011, as a result of the acquisition of Community Savings and Credit Union Limited, the Credit Union acquired 130,013 additional Central 1 Class A shares and 242,700 Central 1 Class E shares. In addition, in 2012, as a result of the amalgamation with Northridge Savings and Credit Union Limited, the Credit Union acquired 233,220 additional Central 1 Class A shares and 219,600 Central 1 Class E shares. As there is no separately quoted market value for these shares, the shares are recorded at cost. The Credit Union does not intend to dispose of any of the shares as the services supplied by Central 1 are relevant to the day to day activities of the Credit Union. b) CUCO Cooperative Association: As a result of the merger between Credit Union Central of Ontario Limited ("CUCO") and Credit Union Central of British Columbia ("CUCBC") to form Central 1 in 2008, member credit unions were required to invest in a limited partnership ("ABCP LP") in order to acquire thirdparty asset-backed commercial paper ("ABCP"). Members of CUCO were required to purchase units in the ABCP LP based on their proportionate asset size. The Credit Union was required to purchase 1,120,061 units in the ABCP LP. 22

25 7. Investments (continued): b) CUCO Cooperative Association (continued): On August 31, 2011, ABCP LP sold all of its assets to the CUCO Cooperative Association ( CUCO Co-op ) in exchange for CUCO Co-op Class B Investment Shares. Subsequently, on September 2, 2011, ABCP transferred to the Credit Union its proportionate share of CUCO Co-op Class B Investment Shares. As a result, the Credit Union received 380,841,827 Class B Shares. In addition, as a result of the amalgamation with Northridge Savings and Credit Union Limited, the Credit Union acquired 80,027,860 additional CUCO Co-op Class B Investment shares. The CUCO Cooperative Association is governed by a Board of Directors that was elected by Ontario member credit unions and each member records its proportionate share of net income or loss in the CUCO Cooperative Association as determined in accordance with IFRS. The fair value of these units is directly related to the ABCP investments held by the CUCO Co-op. As there is no active market for the underlying ABCP investments, fair value of the underlying ABCP investments are determined by CUCO Co-op s independent valuator, Edenbrook Hill Capital Ltd. In determining fair value of these notes, the CUCO Co-op used all available information, including interest rate, maturity dates and credit ratings of the borrowers. Estimated yields that a hypothetical investor would require in order to purchase the ABCP investments were developed and the net present value of the notes were then calculated using this information. The recorded amount is the best estimate by the valuator and could change significantly in the future. During the year a gain of $282,503 ( $89,413) was recorded as a result of changes in fair value of the investment and was included in unrealized gain (loss) on investments in the Statement of Income. c) Central 1 Liquidity reserve deposit: The Credit Union is a member of Central 1. As a condition of maintaining membership in Central 1 in good standing, the Credit Union is required to maintain on deposit an amount equal to 6% of its assets as at each calendar quarter end. The deposits bear interest at varying rates, dependent upon the term of the investment, and have been designated as Loans and Receivables. 23

26 8. Property and equipment: 2012 Accumulated Net book Cost depreciation value Land $ 985,167 - $ 985,167 Buildings 4,424,572 2,068,054 2,356,518 Leasehold improvements 590, ,492 66,811 Furniture and equipment 1,297,583 1,058, ,518 Automated banking machines 417, ,653 45,719 Computer software 123,729 73,690 50,039 $ 7,838,727 4,094,954 $ 3,743, Accumulated Net book Cost depreciation value Land $ 622,754 - $ 622,754 Buildings 2,649, ,658 1,664,660 Leasehold improvements 595, ,377 99,272 Furniture and equipment 1,124, , ,850 Automated banking machines 262, ,856 48,251 Computer software 674, ,495 69,811 $ 5,928,940 3,264,342 $ 2,664,598 Depreciation in respect of the above assets for the year amounts to $216,995 ( $237,919). 24

27 8. Property and equipment (continued): Reconciliations of the carrying amount for each class of fixed asset are summarized below Cost Cost beginning Transfer from amount, of year Additions Northridge Diposals end of year Land $ 622, ,413 - $ 985,167 Buildings 2,649,318 1,775,254-4,424,572 Leasehold improvements 595, , ,304 Furniture and equipment 1,124, , ,790 1,297,583 Automated banking machines 262, , ,372 Computer software 674, , ,729 $ 5,928,940 75,619 2,652, ,689 $ 7,838,727 Accumulated Accumulated amortization, amortization, beginning Transfer from amount, of year Northridge Diposals Depreciation end of year Land $ $ - Buildings 984,658 1,007,981-75,416 2,068,055 Leasehold improvements 496,377-5,345 32, ,492 Furniture and equipment 964, , ,790 55,730 1,058,065 Automated banking machines 213, ,157-28, ,653 Computer software 604, ,554 24,749 73,690 $ 3,264,342 1,432, , ,995 $ 4,094,955 25

28 9. Members' deposits: Non-interest bearing deposits $ 117,590,940 $ 79,779,206 Deposits with variable interest rates: Registered savings plans 20,938,668 15,251, ,529,608 95,030,352 Deposits with fixed interest rates: Term deposits 88,296,551 69,775,320 Registered savings plans 70,049,179 59,464, ,345, ,239,324 Accrued interest 1,348,117 1,262,219 $ 298,223,455 $ 225,531,895 The following summarizes the Credit Union s Members deposits by the contractual repricing or maturity date, whichever is earlier: Principal Average Principal Average Balance Yield Balance Yield Floating $ 20,938, % $ 15,251, % Within 1 year 90,403, % 51,610, % Over 1 year 67,941, % 77,628, % 179,284, % 144,490, % Non-rate sensitive 117,590,940 79,779,206 Accrued interest 1,348,117 1,262,219 $ 298,223,455 $ 225,531, Short-term borrowings with Central 1 Credit Union: The Credit Union has authorized credit facilities available with Central 1 in the aggregate amount of $4,939,000. These credit facilities are secured by a general security agreement and an assignment of book debts. At the end of the year, $Nil ( $Nil) was outstanding under this facility. 26