The Scarborough Hospital

Transcription

1 Financial statements of The Scarborough Hospital

2 Table of contents Independent Auditor s Report Statement of revenue and expenses... 3 Statement of changes in net assets... 4 Statement of remeasurement gains... 5 Statement of financial position... 6 Statement of cash flows

3 Deloitte LLP 5140 Yonge Street Suite 1700 Toronto ON M2N 6L7 Canada Tel: Fax: Independent Auditor s Report To the Board of Directors of The Scarborough Hospital We have audited the accompanying financial statements of The Scarborough Hospital, which comprise the statement of financial position as at, the statements of revenue and expenses, changes in net assets, remeasurement gains and cash flows for the year then ended, and 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 Canadian public sector accounting 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. Auditor s 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 financial statements. The procedures selected depend on the auditor s 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, the auditor considers 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 in our audit is sufficient and appropriate to provide a basis for our audit opinion.

4 Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of The Scarborough Hospital as at and the results of its operations, changes in its net assets, remeasurement gains and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Professional Accountants Licensed Public Accountants June 7, 2016 Page 2

5 Statement of revenue and expenses Year ended Revenue Ministry of Health and Long-Term Care and Cancer Care Ontario 334, ,763 Other Ministry Community Programs 6,208 6,786 Patient revenues 25,811 27,263 Recoveries and other income 18,308 15,415 Medical Mall office building 2,125 1,952 Amortization of deferred capital contributions 5,479 4, , ,001 Expenses Salaries and wages 205, ,009 Employee benefits 51,356 51,970 Medical and surgical supplies 27,049 26,752 Drugs 26,664 23,229 Supplies and other expenses 56,594 58,099 Other Ministry Community Programs 6,384 6,997 Medical Mall office building 1,074 1,194 Amortization - building and equipment 14,597 14,960 Bad debt expense 2,214 1,840 Interest on long term debt 1,153 1, , ,158 Excess of revenue over expenses Page 3

6 Statement of changes in net assets As at Invested in capital assets Invested in joint venture assets Unrestricted Total Total $ Net assets, beginning of year 59, (45,462) 14,713 13,870 Excess of (expenses over revenue) - revenue over expense (9,118) 3 9, Net change in net assets invested in capital assets 11,750 - (11,750) - - Net assets, end of year 62, (47,629) 15,181 14,713 Page 4

7 Statement of remeasurement gains As at Accumulated remeasurement gains, beginning of year 1,548 1,464 Unrealized gains attributable to Derivatives interest rate swap Accumulated remeasurement gains, end of year 1,976 1,548 Page 5

8 Statement of financial position As at Assets Current assets Cash and short term investments - 7,359 Accounts receivable (Note 3) 12,382 11,412 Inventories 2,460 2,319 Prepaid expenses 3,523 2,171 Current portion of long-term receivable (Note 4) ,053 23,964 Long-term receivable (Note 4) Investment in joint ventures (Note 5) Restricted cash (Note 6) 2,353 - Capital assets (Note 7) 176, , , ,052 Liabilities Current liabilities Bank indebtedness (Note 8) 3,587 - Short term indebtedness (Note 9) 1,500 1,500 Accounts payable and accrued liabilities (Note 10) 44,311 49,560 Current portion of long-term debt (Note 11) 3,716 3,429 Current portion of capital lease obligation (Note 12) 715 1,064 Deferred contributions 3,561 4,498 57,390 60,051 Legal defence fund (Note 15 B) 1, Long-term debt (Note 11) 12,240 14,103 Long-term capital lease obligation (Note 12) 833 1,547 Deferred capital contributions (Note 13) 96,541 96,139 Employee future benefits (Note 14) 10,637 10,196 Derivatives - interest rate swap (Note 19) 1,896 2, , ,791 Contingent liabilities and guarantees (Note 15) Net assets Invested in capital assets (Note 16) 62,269 59,637 Invested in joint ventures (Note 5) Unrestricted (47,629) (45,462) 15,181 14,713 Remeasurement gains 1,976 1, , ,052 Page 6

9 Statement of cash flows As at Operating activities Excess of revenue over expenses Payment of employee future benefits (603) (566) Items not affecting cash Amortization of capital assets 14,597 14,960 Amortization of deferred capital contributions (5,479) (4,822) Employee future benefit expense 1,044 1,114 Joint venture income (3) 3 Market value adjustment - derivative Legal defence provision 1, ,588 12,047 Changes in non-cash working items (Note 20) (8,649) 7,098 2,939 19,145 Financing activities Receipt of long-term debt 1,595 1,926 Repayment of long-term debt (3,171) (3,439) Receipt of long-term receivable Increase (decrease) in derivative liability (428) (84) Legal defence claims fund (2,353) - (3,711) (953) Capital activities Acquisition of capital assets (14,992) (21,011) Receipt of deferred capital contributions 5,881 10,480 Repayment of capital lease (1,063) (1,025) (10,174) (11,556) Net change in cash (10,946) 6,636 Cash, beginning of year 7, (Bank indebtedness) cash, end of year (3,587) 7,359 Page 7

10 1. Description of business Upon approval by the Health Services Restructuring Commission and the Ministry of Health and Long-Term Care ( Ministry ), The Scarborough Hospital (the Hospital ) was formed on September 8, 1999 through the amalgamation under subsection 113(3) of the Corporations Act (Ontario) of the Scarborough General Hospital and the Salvation Army Scarborough Grace Hospital. The Hospital is a multi-location acute care community general hospital. It is classified as a registered charity under the Income Tax Act (Canada) and, as such, is not subject to income tax provided certain disbursement requirements are met. The financial statements do not include the assets, liabilities and operations of The Scarborough Hospital Foundation (the Foundation ). Revenues generated by the Foundation may be donated to the Hospital upon approval by its board. The Hospital signed a Hospital Service Accountability Agreement with the Central East Local Health Integration Network ( LHIN ) which included a balanced total margin target. Any excess of expenses over revenue is the responsibility of the Hospital and must be funded from other sources, including capital funds. 2. Summary of significant accounting policies Financial statement presentation The financial statements have been prepared in accordance with Canadian public sector accounting standards for government not-for-profit organizations, using the deferral method of reporting contributions. Description of funds Funds invested in capital assets represent the net book value of the Hospital s capital assets, less any related debt and unamortized capital grants. Unrestricted funds represent the excess of revenue over expenses (expenses over revenue) accumulated from the ongoing operations of the Hospital since its inception. Revenue recognition Under the Health Insurance Act and Regulations thereto, the Corporation is primarily funded by the Province of Ontario. Operating grants are recorded as revenue in the year to which they relate. Operating contributions are recognized as revenue when received or receivable if the amounts to be received can be reasonably estimated and collection is reasonably assured. Capital contributions externally restricted for the purchase of capital assets are deferred and amortized into revenue on a straight-line basis at a rate corresponding with the amortization rate of the related capital assets. Revenue from other agencies, patients, special programs and other sources is recognized when the service is provided. To the extent which the Ministry or LHIN funding has been received with the stipulated requirement that the Hospital provide specific services and these services have not yet been provided, the funding is deferred until such time as the services are performed and the monies spent. In the event that the services are not performed in accordance with the funding requirements, the funds received in excess of monies spent could be recovered by the Ministry or LHIN. Investment income is recorded as revenue in the statement of revenue and expenses. Page 8

11 2. Summary of significant accounting policies (continued) Financial instruments All financial instruments reported on the Statement of financial position for the year ended are measured as follows: Cash and short term investments Fair value Bank indebtedness Fair value Short-term indebtedness Amortized cost Accounts receivable Amortized cost Long-term receivable Amortized cost Accounts payable and accrued liabilities Amortized cost Long-term debt Amortized cost Derivatives Interest rate swap Fair value Contributed services Due to the difficulty in determining their fair value, contributed services are not recognized in the financial statements. Investment in joint ventures The investment in joint venture is accounted for using the modified equity method. Capital assets Capital assets are recorded at cost and amortized on a straight-line basis over their estimated useful lives using the following rates: Buildings and building improvements years Furniture and equipment 5-20 years Computer equipment 3-5 years Construction in progress Construction in progress represents expenditures incurred for projects currently underway. Upon completion, the relating construction in progress will be transferred to the appropriate capital asset category and amortization will commence. Capital contributions Building and equipment grants received by the Hospital are deferred and amortized on a straightline basis at a rate corresponding to the amortization rate for the related building or equipment purchased. Employee benefit plans The Hospital is an employer member of the Healthcare of Ontario Pension Plan, which is a multi-employer, defined benefit pension plan. The Hospital has adopted defined contribution plan accounting principles for this Plan because insufficient information is available to apply defined benefit plan accounting principles. The Hospital accrues its obligations for employee benefit plans. The cost of non-pension post-retirement and post-employment benefits earned by employees is actuarially determined using the projected benefit method prorated on service and management s best estimate of retirement ages of employees and expected heath care costs. Actuarial gains or losses are amortized over the average remaining service period of the active employees. The average remaining service period for active employees is 13 years. Future cost escalation affects the amount of employee future benefits. The accrued benefit obligation related to employee benefits is discounted using current interest rates based on the Hospital s cost of borrowing. Page 9

12 2. Summary of significant accounting policies (continued) Employee benefit plans (continued) Adjustments arising from plan amendments are recognized in the year that the plan amendments occur. Actuarial gains or losses are amortized over the average remaining service period of the active employees. Use of estimates The preparation of financial statements in accordance with Canadian public sector accounting standards requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the statement of financial position date and the reported amounts of revenues and expenses for the year then ended. Actual results may differ from such estimates. In particular, the amount of revenue recognized from the Ministry and the LHIN requires some estimation. The Hospital has entered into accountability agreements that set out the rights and obligations of the parties in respect of funding provided to the Hospital by the Ministry and the LHIN. The accountability agreements set out certain performance standards and obligations that establish acceptable results for the Hospital s performance in a number of areas. If the Hospital does not meet its performance standards or obligations, the Ministry and the LHIN have the right to adjust funding received. Neither the Ministry nor the LHIN are required to communicate certain funding adjustments until after submission of year end data. Since this data is not submitted until after the completion of the financial statements, the amount of the Ministry/LHIN funding received during a year may be increased or decreased subsequent to year end. The amount of revenue recognized in these financial statements represents management s best estimates of amounts that have been earned during the year. Other accounts that include significant estimates are accounts receivable, useful lives of capital assets, accounts payable and accrued liabilities, legal defense provision, employee future benefits and derivatives. 3. Accounts receivable Ministry of Health and Long-Term Care 3,964 3,441 Patients accounts 7,364 5,884 Other 3,607 4,024 14,935 13,349 Less: allowance for doubtful accounts 2,553 1,937 12,382 11, Long-term receivable During fiscal 2013, the Hospital paid a total refundable membership of $2,580 to Plexxus to finance its transitional cash requirements in fiscal years 2012 and 2013 as it proceeded with the implementation of the Integrated Technology Solution (ITS) project. Accrued interest of $58 during the year ( $58) is included in the balance. Plexxus has been refunding the membership fee in four annual installments $703 (includes $58 interest) commencing on April 1, 2013 and concluding on April 1, The Hospital received the third installment of $703 ( $703) during the year. Page 10

13 5. Investment in joint ventures In 1997 the Hospital, (through its predecessor organizations) together with North York General Hospital formed an incorporated joint venture for the purpose of providing non-emergency laboratory services to the hospitals. In fiscal 2008, Michael Garron Hospital (formerly Toronto East General Hospital joined the joint venture. The joint venture is equally owned through common shares by the three hospitals as at the reporting date. The Hospital owns one third of the common shares as at the reporting date and contributed 44% of the joint venture revenues. There are no significant differences between the accounting policies of the Hospital and those of the joint venture. The investment represents the investment in common shares of the joint venture using the modified equity method and non-voting preferred shares in the amount of $166. In the event of the liquidation, dissolution or winding up of the joint venture, the holders of the Class A preferred shares are entitled to receive from the assets of the joint venture, a sum equivalent to all Class A preferred shares held, before any amount to be paid to other parties. During 2011, the Hospital entered into a joint venture agreement with Professional Respiratory Home Care Service Corp. to form Scarborough ProResp Inc. The investment represents $260 Class A preferred shares and 50% of the equity interest in the form of 50 Class A common shares. The investment represents the investment in commons shares of the joint venture using the modified equity method and non-voting preferred shares in the amount of $260. The Hospital has a Management Services Agreement with Scarborough ProResp Inc. to provide supervisory and management services in return for a management fee. During the year management fees of $139 ( $139) were included in the statement of revenue and expenses as other income. The following discloses the Hospital s share of the following financial statement elements: 2016 Shared Hospital Laboratories ProResp Shareholder s equity Revenues 1, Expenses 1, Dividends paid 73 Cash flow from operating (21) 115 Cash flow from investing (8) (10) Cash flow from financing (1) (59) 2015 Shared Hospital Laboratories ProResp Shareholder s equity Revenues 1, Expenses 1, Dividends paid - 72 Cash flow from operating (104) 144 Cash flow from investing (1) (38) Cash flow from financing (1) (72) Page 11

14 6. Restricted Cash Effective January 1, 2015, the Hospital entered into an agreement with Health Care Insurance Reciprocal of Canada ( HIROC ) whereby the cost of investigating and defending any litigation claims would be borne by the Hospital. To fund the expected payments, the Hospital transferred funds to an operating account managed by HIROC Management Ltd. as the Hospital s appointed agent. The cash balance of $2,353 at ( $nil) is restricted for these payments. 7. Capital assets Cost Accumulated amortization Net book value Net book value Land Buildings and building improvements 256, , , ,318 Furniture and equipment 173, ,626 13,701 14,678 Computer equipment 36,125 31,016 5,109 5,828 Construction in progress 4,604-4,604 5, , , , , Bank indebtedness The Hospital has an operating line of credit with its financial institution to assist in managing the day to day cash flows of the Hospital. As of the available line of credit was $30,000 ( $30,000). As of, the Hospital has drawn $3,587 ( $nil). The line of credit bears interest at a rate of prime less 0.25% and is payable on demand. 9. Short term indebtedness The Hospital has a credit facility with the Foundation. Amounts borrowed from the Foundation are due on demand and bear interest at prime less 0.50%. As of, $1,500 ( $1,500) has been borrowed. 10. Accounts payable and accrued liabilities Trade payables 16,807 22,695 Salaries and benefits 25,410 24,753 Accrued liabilities 2,050 1,652 Others ,311 49,560 Page 12

15 11. Long-term debt The non-revolving term loan facility, originally entered into in February 2009 for $14,000, relates to the construction of the West Wing. This facility is repayable in 120 monthly payments through January It bears a floating interest rate based on variable banker s acceptance rates, which ranged from 0.743% to 0.988% ( % to 1.30%) during the year. Effective October 2, 2006, an interest rate swap modified the floating interest rate on the loan to a fixed rate of 7.96%. The non-revolving term loan facility, originally entered into in May 2005 for $5,000, relates to the construction of the Head Start component of the West Wing. This facility was repayable in 120 monthly payments through May It bears a floating interest rate based on variable banker s acceptance rates, which ranged from 0.868% to 0.986% ( % to 1.30%) during the year. Effective October 2, 2006, an interest rate swap modified the floating interest rate on the loan to a fixed rate of 6.707%. The loan was fully repaid at The non-revolving 10-year demand loan facility, originally entered into in April 2003 for $7,000, relates to the purchase of the Medical Mall office building. This facility is repayable in 300 monthly payments through April It bears a floating interest rate based on variable banker s acceptance rates, which ranged from 0.743% to 0.988% ( % to 1.30%) during the year. Effective April 1, 2003, an interest rate swap modified the floating interest rate on the loan to a fixed rate of 6.66%. The Hospital or the financial institution may elect to terminate the facility on April 1, 2018 or April 1, The non-revolving demand loan facility, originally entered into in March 2012 for $3,563, relates to the purchase of CT scan equipment. This facility is repayable in 60 monthly payments through March It bears a fixed interest rate of 3.40%. In fiscal 2014, the Hospital entered into a capital energy agreement with Ameresco Canada Inc. and Manulife to commence work on capital and energy measures at the Hospital. The terms of the agreement require the Hospital to obtain a loan which bears fixed interest of 4.75% and is repayable in monthly payments commencing June 2015 through May CIBC - non-revolving term loan facility (West Wing) 5,146 6,703 CIBC - non-revolving term loan facility (West Wing Head Start) CIBC - non-revolving demand loan facility (Medical Mall office building) 4,619 4,868 CIBC - non-revolving demand loan facility (CT scan equipment) 765 1,503 Manulife - Energy Savings Agreement 5,426 4,344 15,956 17,532 Less: current portion 3,716 3,429 12,240 14,103 Principal payments required in each of the next five fiscal years and beyond are as follows: $ , , , Thereafter 5,491 15,956 Page 13

16 12. Obligations under capital leases In December 2011, the Hospital entered into a capital lease agreement for MRI equipment with Macquarie Equipment Finance Ltd. for $3,518 payable quarterly. The agreement expires September 2016 and provides an option to purchase the equipment from the Lessor at the expiration of the Base Term by payment to the Lessor of $1.00. The applicable rate used by the Lessor in pricing the lease is 3.40%. In November 2013, the Hospital entered into a capital lease agreement for endoscope equipment with Olympus Canada Inc. Medical Systems Group for $1,343 payable monthly. The agreement expires October 2019 and provides an option to purchase the equipment from the Lessor at the expiration of the Base Term by payment to the Lessor of $131. The applicable rate used by Lessor in pricing the lease is 5.0%. In March 2013, the Hospital entered into a capital lease agreement for SAN and Meditech server with Macquarie Equipment Finance Ltd. for $602 payable monthly. The agreement expires February 2018 and provides an option to purchase the equipment from the Lessor at the expiration of the Base Term by payment to the Lessor of $1.00. The applicable rate used by Lessor in pricing the lease is 3.89%. The future minimum lease payments required under the capital lease agreements are as follows: Total minimum lease payments 1,548 Less: current portion 715 Long-term portion 833 $ Principal payments due in the next 4 years are as follows: $ , Deferred capital contributions Balance, beginning of year 96,139 90,481 Capital contributions received during the year 5,881 10,480 Amortization for the year (5,479) (4,822) Balance, end of year 96,541 96,139 Page 14

17 14. Employee future benefits The Hospital provides certain post-employment benefits to some of its employees. The most recent actuarial valuation for the Hospital was performed March 31, At March 31, the Hospital s liability associated with the benefit plan is as follows: Accrued benefit liability, beginning of year 10,196 9,648 Current service cost Interest cost Amortization of actuarial gains Benefits paid (603) (566) 10,637 10,196 Accrued benefit liability, end of year 11,098 11,091 Unamortized actuarial gains (461) (895) 10,637 10,196 The significant actuarial assumptions adopted in estimating the Hospital s accrued benefit obligations are as follows: % % Discount rate to determine accrued benefit obligation 3.0% 4.0% Extended healthcare cost escalations, decreasing by 0.25% per annum to an ultimate rate of 4.75% thereafter 7.5% 7.5% Expected average remaining service life of employees Included in the statement of revenue and expenses is an amount of $1,044 ( $1,114) regarding employee future benefits. This amount is comprised of: Current service costs Amortization of actuarial gains Interest on obligation ,044 1,114 Page 15

18 15. Contingent liabilities and guarantees A. Due to the nature of its operations, the Hospital is periodically subject to lawsuits in which the Hospital is a defendant, as well as grievances filed by its various unions. Management accrues liabilities for claims against the Hospital when a liability is likely to be incurred and the amount of the claim can be reasonably estimated. B. On July 1, 1987, a group of health care organizations ( subscribers ) formed HIROC. HIROC is registered as a Reciprocal pursuant to provincial Insurance Acts, which permit persons to exchange with other persons reciprocal contracts of indemnity insurance. HIROC facilitates the provision of liability insurance coverage to health care organizations in the provinces of Ontario, Manitoba, Saskatchewan and Newfoundland. Subscribers pay annual premiums, which are actuarially determined, and are subject to assessment for losses in excess of such premiums, if any, experienced by the group of subscribers for the years in which they were a subscriber. No such assessments have been made to. Effective January 1, 2015, the Hospital entered into an agreement with HIROC to provide indemnity insurance, however, the cost of investigating and defending any ligation claims would be borne by the Hospital. The Hospital has appointed HIROC Management Limited (HML) to act as agent for the Hospital for such claims defence costs in accordance with an Agency Agreement. To fund the expected payments, the Hospital transferred funds to an operating account managed by HIROC Management Ltd. as the Hospital s appointed agent. Costs associated with claims arising prior to January 1, 2015 will be borne by HIROC. Costs of defending claims that arise subsequent to January 1, 2015 are based on claims defence costs incurred by HIROC in the past. The provision at is $1,567 ( $431) and the related claims defence expense of $1,357 is included in the statement of revenue and expenses. C. In the normal course of business, the Hospital enters into agreements that meet the definition of a guarantee. The Hospital s primary guarantees are as follows: a) The Hospital has provided indemnities under lease agreements for the use of various operating facilities. Under the terms of these agreements the Hospital agrees to indemnify the counterparties for various items including, but not limited to, all liabilities, losses, suits, and damages arising during, on or after the term of the agreement. The maximum amount of any potential future payment cannot be reasonably estimated. b) Indemnity has been provided to all directors and or officers of the Hospital for various items including, but not limited to, all costs to settle suits or actions due to association with the Hospital, subject to certain restrictions. The Hospital has purchased errors and omissions insurance to mitigate the cost of any potential future suits or actions. The term of the indemnification is not explicitly defined, but is limited to the period over which the indemnified party served as a director or officer of the Hospital. The maximum amount of any potential future payment cannot be reasonably estimated. c) The Hospital has entered into agreements that include indemnities in favour of third parties. These indemnification agreements may require the Hospital to compensate counterparties for losses incurred by the counterparties as a result of breaches in representation and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnities are not explicitly defined and the maximum amount of any potential reimbursement cannot be reasonably estimated. Historically, the Hospital has not made any significant payments under such or similar indemnification agreements and, therefore, no amount has been accrued in the statement of financial position with respect to these agreements. Page 16

19 16. Net assets invested in capital assets Capital assets (Note 6) 176, ,919 Adjusted for amounts financed by Long-term debt (Note 11) (15,956) (17,532) Deferred capital contributions (Note 13) (96,541) (96,139) Obligations under capital lease (Note 12) (1,548) (2,611) 62,269 59, Pension plan Substantially all of the employees of the Hospital are members of the Healthcare of Ontario Pension Plan ( the Plan ), a multi-employer defined benefit plan. Contributions to the Plan made during the year by the Hospital on behalf of its employees amounted to $14,911 ( $14,682) and are included in the statement of revenue and expenses. 18. Related party transactions During the year, contributions were received from The Scarborough Hospital Foundation ( the Foundation ) in the amount of $ 5,304 ( $5,361). At, $106 ( $347) was due from the Foundation and included in accounts receivable. The Hospital also has related party transactions with joint ventures as disclosed in Note 5. The Hospital is a member of Plexxus, Booth Centennial Healthcare Linen Services, and Hospital Diagnostic Imaging Repository Services, who provide various services to the Hospital at market value. 19. Financial instruments and risk management Risk management The Hospital, through its financial assets, including financial instruments and liabilities has exposure to credit risk and interest rate risk. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the value of debt held by the Hospital. The Hospital has mitigated this risk by entering into interest rate swaps. Credit risk The Hospital s principal financial assets are short term investments and accounts receivable which are subject to credit risk. The carrying amounts of financial assets on the statement of financial position represent the Hospital s maximum credit exposure at the statement of financial position date. The Hospital s credit risk is primarily attributable to its patient receivables. The amounts disclosed in the statement of financial position are net of allowance for doubtful accounts, estimated by the management of the Hospital based on previous experience and its assessment of the current economic environment. The credit risk on short-term investments is limited because the counterparties are banks with high credit-ratings assigned by national credit-rating agencies. Page 17

20 19. Financial instruments and risk management (continued) Fair value Fair value represents the amount that would be exchanged in an arm s length transaction between willing parties who are under no compulsion to act and is best evidenced by a quoted market price, if one exists. The Hospital s fair values are management s estimates and are generally determined using market conditions at a specific point in time and may not reflect future fair values. The determinations are subjective in nature, involving uncertainties and the exercise of significant judgment. The fair value of short term indebtedness, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturity. The fair value of short-term investments is based on cost plus accrued interest which approximates fair value due to their short term maturity. The fair value of long term debt approximates its carrying value due to interest rate swaps which have been entered on each debt instrument that account for the change in market values relative to the fixed rates. Fair value of derivative financial instruments The Hospital has entered into three derivative financial instrument transactions. Descriptions of the current derivative financial instruments are as follow: A. A non-revolving term loan facility for the construction of the West Wing in the amount of $14,000 was originally obtained in February The notional value of this loan is $5,146 at ( $6,703). The Hospital entered into an interest rate swap arrangement to modify the rate of the loan from a variable banker s acceptance rate ranging from 0.743% to 0.988% ( % to 1.30%) to a fixed rate of 7.96%. The start date of the interest rate swap was January 2, 2009 with a maturity date of January 2, The fair value of the interest rate swap at is $497 ( $867). B. A non-revolving demand loan facility for the financing of the Medical Mall office building in the amount of $7,000 was originally obtained in April The notional value of this loan is $4,619 at ( $4,868). The Hospital has entered into an interest rate swap arrangement to modify the rate of the loan from a variable banker s acceptance rate ranging from 0.743% to 0.988% ( % to 1.30%) to a fixed rate of 6.66%. The start date of the interest rate swap was April 1, 2003 with a maturity date of April 3, The fair value of the interest rate swap is $1,399 at ( $1,456). The Hospital also had the option to reduce the notional amount of the loan by $150 commencing April 1, 2004 and annually thereafter. The Hospital sold the option on November 10, 2011 and received proceeds of $530 which were recorded in the statement of remeasurement gains. The Hospital or the financial institution may elect to terminate the facility on April 1, 2018 or April 1, C. During the year, $428 in derivative gain ( $84 gain) was included in the statement of remeasurement gains. Page 18

21 19. Financial instruments and risk management (continued) Fair value hierarchy The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. The following table presents the financial instruments recorded at fair value in the Statement of financial position, classified using the fair value hierarchy described above: Financial liabilities at fair value as at Level 1 Level 2 Level 3 Total Derivatives interest rate swap - 1,896-1, Level 1 Level 2 Level 3 Total Derivatives interest rate swap - 2,324-2,324 There have been no movements between levels for the year ended. Page 19

22 20. Changes in non-cash working capital items Accounts receivable (970) 1,169 Inventories (141) 886 Prepaid expenses (1,352) 94 Accounts payable and accrued liabilities (5,249) 7,178 Deferred contributions (937) (2,229) (8,649) 7, Integration of The Scarborough Hospital On April 26, 2016, the Minister of Health and Long-Term Care, supported the implementation of all recommendations from the final report of the Scarborough/West Durham Expert Panel related to hospital governance, service delivery and planning to give patients better access to care in the community. The Expert Panel recommended the creation of an integrated hospital system under one corporation and one Board of Directors to oversee the three Scarborough hospital sites; specifically the General and Birchmount sites of The Scarborough Hospital and the Centenary site of Rouge Valley Health System, and the development of a single master plan. To oversee the integration efforts, the Minister appointed a special advisor to the Minister to work with the three hospitals affected by the announcement; The Scarborough Hospital, Rouge Valley Health System, and Lakeridge Health for a period that will not exceed one year and ending no later than June 30, Comparative figures Certain comparative numbers have been reclassified to conform to the current year presentation. Page 20