Management Report of Fund Performance and Audited Financial Statements. Impression Plan

Transcription

1 Management Report of Fund Performance and Audited Financial Statements Impression Plan For the year ended December 31, 2011

2 Management Report of Fund Performance Management Report of Fund Performance Impression Plan This Annual Management Report of Fund Performance contains financial highlights but does not contain the complete annual financial statements of the investment fund. You may receive a copy of the annual financial statements at your request and at no cost by visiting our website at or SEDAR at or by calling our Customer Service Department at or by writing to us at 2005 Sheppard Ave. E., Suite 700 Toronto, Ontario M2J 5B4. Currently, the investments of the Impression Plan (the Plan ) are limited to specified government bonds, guaranteed investment certificates (including bank deposit notes), short term investments and corporate debt securities with an approved rating. None of these securities require the issuer thereof to call meetings of holders or otherwise carry a right to vote. Accordingly, the Plan s policies and procedures on how to vote on any matter for which the Plan receives, in its capacity as security holder, proxy materials for a meeting of security holders, are limited to exceptional circumstances where creditors of an issuer are given a right to vote in accordance with applicable laws. Topics Covered in this Report Management Discussion of Fund Performance Investment Objective and Strategy Risk Results of Operations Recent Developments Future Accounting Changes Related Party Transactions Financial Highlights Fees Management Fees Portfolio Advisory Fees Past Performance Year-by-Year Returns Annual Compound Returns Summary of Investment Portfolio Summary by Category Summary of Top Holdings 2

3 Management Discussion of Fund Performance Investment Objective and Strategy The investment objective of the Plan is to preserve capital while maximizing the long-term rate of return for investors, within guidelines set out in the Investment Policy Statement. The Plan consists of investment grade federal, provincial and corporate bonds, bank deposit notes and short term investments. The Heritage Educational Foundation (the Foundation ) has engaged Scotia Asset Management L.P. (a wholly owned subsidiary of Scotiabank, Scotia Asset ) to achieve its investment objective. Scotia Asset manages the Plan on a discretionary basis within set parameters established under the Prospectus and investment policy. The investment strategy focuses on achieving a superior rate of return by strategically positioning the portfolio on the yield curve and selecting optimal credit securities, within well-defined risk parameters. Risk The Prospectus outlines the investment risks associated with actively managed portions of the portfolio as well as the portfolio s suitability for investors. The key risks are interest rate risk, liquidity risk and credit risk. Refer to the audited financial statements for the year 2011 for an explanation on these risks. Results of Operations * Impression Plan For 2011, the Plan s rate of return was 9.54% (in 2010, the portfolio return was 6.62%). The rate of return of the Plan is influenced by the selection of maturity dates of investments that match the timeline of pay-out of subscribers contributions and educational assistance payments. Please refer to note 2 on investments in the audited financial statements for the year ended The asset mix of the Plan did not change materially from the previous period. At December 31, 2011, 100% of the Plan was invested in fixed income securities compared to 97.9% at December 31, saw another year where the Government of Canada yield curve continued to flatten over the year as short term yields remained fairly steady, but longer term yields fell. As the yield curve flattens, the differential between short term yields and long term yields decreases. The Canada yield curve is considerably flatter now than where it stood at the end of 2010 and at 2009 as we came out of the recession. The Plan had adopted a barbell strategy in 2009 (concentrating bond maturities in the 0-3 and 7-10 year areas of the yield curve), and this strategy continues to contribute to performance in Bond prices increase as yields decrease and because the portfolio was overweight at the longer end of the yield curve where yields were decreasing, this had an overall positive effect on the Plan. The Plan also executed sector allocation shifts during the year. In the early months of 2011, the Plan shifted from an overweight position in provincial holdings and an underweight position in federal bond holdings held at the end of 2010, to the opposite position. As anticipated, heading into the summer months, investors favoured the highest quality federal bonds and provincial credit spreads (the additional yield required for investors to hold issues other than Federal bonds) started to widen. Having enjoyed the gains in federal bonds, the portfolio then reversed these positions and reverted to being overweight in provincial bonds. As the autumn progressed, the fiscal worries of the Provinces diminished, their spreads tightened and this also benefited the portfolio. The portfolio s duration was kept relatively neutral, within +/-0.5 years, to the duration of the DEX Universe All Government Bond Index ( Index ) most of the year and was modestly shorter than that of the Index at the end of the year. Duration is a measure of the portfolio s sensitivity to interest rate changes and a shorter position may help to protect the portfolio during interest rate increases. 3 * This commentary was prepared in consultation with Scotia Asset Management L.P

4 Management Report of Fund Performance Recent Developments* Market volatility and the European Sovereign Debt crisis dominated investment themes in also saw the occurrence of many extraordinary events in the global market which shook investor confidence worldwide. The political uncertainty in the Middle East and the devastating earthquake and tsunami which rocked Japan chipped away at investor confidence. However, at the same time, North American markets were still on track for economic recovery. It was not until the summer months when the European debt crisis increased, particularly in Greece where an emergency bailout package was required, that the economic soft patch proved to be more stubborn. As a result of the uncertainty and weakening economic data, the Bank of Canada delayed raising the overnight lending rate. The Bank s key overnight rate remained at 1.0% for the year. European sovereign debt concerns remained at the forefront for the rest of the year and despite many meetings and summits by European leaders, little progress was made and this further eroded investor confidence. This side of the Atlantic saw its own sovereign debt crisis as the U.S. flirted briefly with technical default due to a political impasse. Ultimately, a bill to increase the debt ceiling was passed at the eleventh hour by the U.S. Congress. The aftermath of this technical default saw the U.S. credit rating downgraded one level to AA by Standard & Poor s. Moody s credit rating agency continues to rate U.S. Federal debt at AAA. Due to these extraordinary events during the year and Canada s relatively sound fiscal position, many investors have pursued Canadian Federal bonds, thereby pushing their yields through lows seen during the credit crisis of As the current economic situation is not as dire as the financial crisis in 2008, we feel this extremely low yield is an overreaction. We also believe that the trend of decreasing yields which started in the 1980s will end; yields simply do not have as much room to move down as they did in the 80s and 90s. As capital gains are a function of decreasing yields and we do not expect this trend to continue for long, we expect that future bond returns will come from the income associated with coupons. Future Accounting Changes The Canadian Accounting Standards Board has confirmed the ability to defer the adoption of International Financial Reporting Standards ( IFRS ) to fiscal periods beginning on or after January 1, 2014 for entities applying Accounting Guideline 18, Investment Companies. Management intends to have the Plan adopt IFRS for its fiscal year beginning January 1, Management has developed an IFRS changeover plan, which addresses key elements of the conversion to IFRS and includes identifying and assessing the impact of the significant differences between IFRS and Canadian GAAP that are expected to impact financial reporting. Based on Management s current evaluation of the differences between Canadian GAAP and IFRS, the adoption of IFRS is not expected to have a significant impact on the calculation of net assets. IFRS is expected to have an impact on the presentation of financial statement balances and result in additional disclosure in the accompanying notes. Management continues to monitor changes to IFRS. The current assessment and IFRS changeover plans may change if new standards are issued or if interpretations of existing standards are revised. Related Party Transactions The Plan is distributed by Heritage Education Funds Inc. (the Distributor ), a subsidiary controlled by Heritage Financial Group Limited (the Heritage Financial ). The Plan is sponsored by the Foundation, which is under common management with the Distributor and the beneficial shareholders of the Distributor constitute the Board members of the Foundation. * This commentary was prepared in consultation with Scotia Asset Management L.P 4

5 Financial Highlights Financial Highlights (with comparative numbers) Statement of Net Assets Total Assets Net Assets % Change in Net Assets Statement of Changes in Net Assets Educational Assistance Payments Redemptions $ 553, , % $ 46,239 15, $ 491, , % $ 48, ,094 $ 562, , % $ 17,194 56,860 $ 553, , % $ 23, ,565 $ 600, , % $ 14,091 32,792 Statement of Operations Net Investment Income $ 47,221 $ 35,300 $ 29,533 $ 38,110 $ 26,809 Other Total number of Units in Plan % Change in Total Number of Units 50, % 46, % 54, % Impression Plan Management fees, which have been waived for the year ended December 31, 2011, are intended to be paid to the Plan s Sponsor and in turn paid to the Distributor. The Foundation has entered into an Investment Management Agreement (the Agreement ) with Yorkville Asset Management Inc. ( Yorkville ), whereby Yorkville has been appointed as a Portfolio Manager for the Plan. Yorkville is controlled by Heritage Financial and is an affiliate of the Distributor. One of the directors of the Foundation is also a director and officer of Yorkville; however, this individual is not involved in any investment decisions made in respect of the Plan. The decision to enter into this Agreement with Yorkville was referred to the Independent Review Committee (the IRC ) of the Plan for its review in accordance with National Instrument , Independent Review Committee for Investment Funds ( NI ) and the IRC approved the Agreement subject to certain conditions. This arrangement is periodically reviewed by the IRC under the provisions of NI As at December 31, 2011 (a) none of the Plan s assets had been deposited with Yorkville; and (b) there were no amounts paid or payable to Yorkville. The following table shows selected key financial information of the Impression Plan and its financial performance for the past five years. This information is derived from the Plan s audited financial statements for the fiscal years ended December , % 55, % Fee Management Fees An annualized management fee of 1.95% is charged against the aggregate market value of each Impression Account. The fee is inclusive of all administrative, trustee and portfolio advisory fees. The fee is collected monthly in arrears by the Trustee and paid to the Foundation. This fee may be waived or reduced at the discretion of the Foundation. The management fee has been waived for the year ended December 31, 2011 and only the portfolio advisory fee has been charged. Portfolio Advisory Fees An annual advisory fee of $293 for portfolio advisory services was paid to Scotia Asset Management L.P., for the year ended December 31, Scotia Asset Management L.P. provides advisory and discretionary managed account services with respect to purchasing, selling and otherwise dealing in securities and other investments of the Plan. The advisory fee is calculated on the market value of portfolio holdings at the end of each quarter based on a graduated fee schedule and paid on a quarterly basis. 5

6 Management Report of Fund Performance Past Performance Past performance of the Plan is set out in the following chart and the compound returns table. Investment returns have been calculated using market values and time-weighted cash flows during the periods. The performance information shown: assumes that all of the income, interest earned and capital gains distributions are reinvested in the Plan; and is adjusted for the cash flows for advisory fees payments. Past returns of the Plan do not necessarily indicate how it will perform in the future. Year-by-Year Returns The following bar chart illustrates the Plan s annual performance in each of the past seven years to December 31, The Impression Plan commenced operations June 30, % 10.00% 9.54% 8.00% 6.58% 7.16% 6.62% 6.00% 5.06% 4.69% 5.39% 4.00% 3.42% 2.00% 0.00% Annual Compound Returns The following table illustrates the Plan s annual compounded returns for the periods shown ended December 31, Year 3 Years 5 Years Since Inception Impression Plan DEX Universe All Government Bond Index * 9.54% 10.20% 7.17% 6.03% 6.67% 6.03% 6.04% 6.21% * The DEX Universe Government Bond Index is designed to be a broad measure of the Canadian government fixed income market. It represents three main borrower categories: bonds issued by the Government of Canada (including Crown Corporations), Provincial bonds (including provincially guaranteed securities) and Municipal bonds. 6

7 Impression Plan Summary of Investment Portfolio Portfolio by Category Sectors % of Market Value 28.4% 4.0% 3.0% Provincial Bonds 64.6% Federal Bonds 28.4% Corporate Bonds 4.0% Bank Deposits / GICs 3.0% 64.6% The holdings of the Plan as at December 31, 2011 are indicated below. This summary of investment portfolio may change due to ongoing portfolio transactions. Investment % of Plan s Portfolio Assets Canada Housing Trust Floating Rate Note 1.41%, 15-Sep % Ontario Province CDA 6.50%, 8-Mar % Ontario Province Debentures 4.00%, 2-Jun % Quebec Province Debentures 4.25%, 1-Dec % Hydro Quebec Debentures 11.00%, 15-Aug % Canada Housing Trust Bond 3.35%, 15-Dec % Quebec Province CDA 6.0%, 1-Oct % British Columbia Province 5.70%, 18-Jun % Quebec Province Medium Term Note Series B %, 1-Dec % Alberta Capital Finance Authority Debentures 4.65%, 15-Jun % Municipal Finance Authority Debentures 4.60%, 23-Apr % Toronto Dominion Bank 4.78%, 14-Dec % Royal Bank of Canada Covered Bond 3.77%, 30-Mar % Toronto City Debentures 4.95%, 27-Jun % Manitoba Province Debentures 4.70%, 22-Sept % Royal Bank of Canada Tier 2A 5.95%, 18-Jun % Holdings as % of Plan s Portfolio Assets % 7

8 Audited Financial Statements Management s Responsibility For Financial Reporting The accompanying financial statements of the Heritage Plans (the Plans ) have been prepared by the management and approved by the Board of Directors of the Heritage Educational Foundation. Management is responsible for the information and representations contained in these financial statements. The Board of Directors is responsible for reviewing and approving the financial statements and overseeing management s performance of its financial reporting responsibilities. The Heritage Educational Foundation, through Heritage Education Funds Inc. (the Distributor ), a subsidary controlled by Heritage Financial Group Limited owned by the senior management team of the Distributor, administers the Plans. The Distributor maintains appropriate processes to ensure that relevant and reliable financial information is produced. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include certain amounts that are based on estimates and judgements. The significant accounting policies, which management believes are appropriate for the Plans, are described in Note 1 to the financial statements. KMPG LLP are the external auditors of the Plans. They have audited the financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the planholders their opinion on the financial statements. Their report is set out below. Toronto, Canada February 16, 2012 Scott McIndless Chairman Onofrio Loduca Chief Executive Officer and Treasurer Independent Auditors Report To the Board of Directors of Heritage Educational Foundation We have audited the accompanying financial statements of Impression Plan, which comprise the statements of net assets as at December 31, 2011 and 2010, the statement of investment portfolio as at December 31, 2011, the statements of operations, changes in net assets and cash flows for the years ended December 31, 2011 and 2010, 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 Canadian generally accepted accounting principles, 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 audits. We conducted our audits 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 in our audits 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 Impression Plan as at December 31, 2011 and 2010, its investments as at December 31, 2011, and its results of operations, its changes in net assets and its cash flows for the years ended December 31, 2011 and 2010 in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants February 16, 2012 Toronto, Canada 8

9 Impression Plan Impression Plan Statements of Net Assets Assets December 31, 2011 and Cash Investments, at fair value (note 2) Due from Foundation Accrued interest $ 6, ,509 8,750 3,384 $ 15, ,934 4,052 Net assets $ 553,820 $ 491,972 Net assets represented by: Unitholders equity $ 553,820 $ 491,972 Number of units outstanding (note 3) 50,850 46,370 Net asset per unit $ $ See accompanying notes to financial statements. On behalf of the Board of the Heritage Educational Foundation Scott McIndless Director Onofrio Loduca Director Impression Plan Statements of Operations Years ended December 31, 2011 and Investment income: Interest and other $ 16,280 $ 17,074 Realized gains 16,752 7,224 Unrealized gains 14,482 11,292 Portfolio advisory fees (293) (290) Increase in net assets from operations $ 47,221 $ 35,300 Increase in net assets from operations per unit $ 0.93 $ 0.76 See accompanying notes to financial statements. Impression Plan Statements of Changes in Net Assets Years ended December 31, 2011 and Net assets, beginning of year $ 491,972 $ 562,620 Increase in net assets: Subscribers contributions Government grants 67,575 8,522 73,191 9,475 76,097 82,666 Decrease in net assets: Educational Assistance Payments Redemptions (46,239) (15,231) (48,520) (140,094) (61,470) (188,614) Increase (decrease) in net assets 14,627 (105,948) Increase in net assets from operations 47,221 35,300 Net assets, end of year $ 553,820 $ 491,972 See accompanying notes to financial statements. 9

10 Audited Financial Statements Impression Plan Statements of Cash Flows Years ended December 31, 2011 and Cash provided by (used in): Operating activities: Increase in net assets from operations Items not involving cash: Unrealized gains Realized gains Change in non-cash operating items: Decrease in accrued interest Increase in due from Foundation Financing activities: Subscribers contributions, net Government grants received Payment of Educational Assistance Programs and redemptions Investing activities: Purchase of investments Proceeds from sale of investments $ 47,221 (14,482) (16,752) 668 (8,750) $ 35,300 (11,292) (7,224) 1,951 7,905 18,735 67,575 8,522 73,191 9,475 (61,470) (188,614) 14,627 (105,948) (1,230,500) 1,198,159 (888,863) 988,369 (32,341) 99,506 Increase (decrease) in cash (9,809) 12,293 Cash, beginning of year 15,986 3,693 Cash, end of year $ 6,177 $ 15,986 Supplemental cash flow information: Interest received $ 16,948 $ 19,025 See accompanying notes to financial statements. Impression Plan Statement of Investment Portfolio December 31, 2011 Coupon Maturity Face Amortized Fair Description rate date value cost value Government - federal: Canada Housing Trust bond 1.41% 09/15/15 $125,000 $125,313 $125,089 Canada Housing Trust bond 3.35% 12/15/20 25,000 24,523 27,021 Government - provincial: Alberta Capital Finance Authority 4.65% 06/15/17 15,000 15,198 17,166 Province of Manitoba debentures 4.25% 03/05/18 5,000 4,978 5,621 Municipal Finance Authority 4.60% 04/23/18 15,000 14,963 16,969 City of Toronto debentures 4.95% 06/27/18 10,000 9,980 11,478 Québec Province notes 4.50% 12/01/18 20,000 22,125 22,728 Hydro Québec debentures 11.00% 08/15/20 20,000 27,928 32,567 Province of Ontario debentures 4.00% 06/02/21 50,000 52,018 54,942 Province of Québec notes 4.25% 12/01/21 35,000 36,361 38,917 Province of Ontario CDA 6.50% 03/08/29 65,000 84,173 92,305 Province of British Columbia debentures 5.70% 06/18/29 20,000 23,372 26,492 Québec Province CDA 6.00% 10/01/29 20,000 24,942 26,842 Bank deposit notes/guaranteed investment certificates: Royal Bank of Canada covered bond 3.77% 03/30/18 15,000 14,999 15,967 Corporate bonds: Royal Bank of Canada Tier 2A 5.95% 06/18/14 5,000 4,814 5,399 Toronto Dominion Bank 4.78% 12/14/16 15,000 14,532 16,006 $ 460,000 $ 500,219 $ 535, See accompanying notes to financial statements.

11 Impression Plan Impression Plan Notes to Financial Statements Years ended December 31, 2011 and 2010 The Impression Plan (the Plan ) was established on June 20, 2003 by the Heritage Educational Foundation (the Foundation ), a not-for-profit corporation incorporated under the laws of Canada without share capital. The Foundation was incorporated and organized on December 1, The Plan provides a savings vehicle for parents, grandparents and others ( Subscriber or Subscribers ) to save for a designated child s (the Beneficiary ) post-secondary education. The Plan is distributed by Heritage Education Funds Inc. (the Distributor ), a subsidiary controlled by Heritage Financial Group Limited ( Heritage Financial ). The Foundation and the Distributor are under common management, and the beneficial shareholders of the Distributor constitute the Board members of the Foundation. The Subscriber enters into an Education Savings Plan contract (the Contract ) with the Foundation in accordance with the prospectus, pursuant to which the Subscriber subscribes for units in the Plan. Unless otherwise defined herein, all capitalized terms have the meanings given to them in the Contract and the Prospectus dated August 9, 2011 (the Prospectus ). 1. Significant accounting policies: These financial statements are prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). The preparation of financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets during the years. Actual results may differ from those estimates. (a) Investments: Investments in bonds, bank deposit notes, guaranteed investment certificates ( GICs ) and short-term investments are carried at fair values based on closing bid prices. Investment transactions are recorded on a settlement date basis. Realized gains or losses and changes in unrealized gains or losses are recognized in the statements of operations in the year when such gains or losses occur. (b) Interest and other income: Interest income is recorded on an accrual basis and includes amortization of any premiums or discounts on the purchase of the investments using the effective interest rate method. (c) Subscribers contributions: Subscribers contributions reflect all amounts received from the Subscribers and do not include any amounts receivable on subscribed units. (d) Government contributions: Canada Education Savings Grant ( CESG ) contributions represent the amount of federal government grants received by the Plan pursuant to the CESG program. The amount of grant received under the program is 20% of annual contributions made into a Registered Education Savings Plan ( RESP ) and has an annual maximum of $500 per eligible Beneficiary who is under 18 years of age. An additional CESG amount may be available based on the family net income of the Beneficiary and provides for an enhanced grant of 40% of annual contributions for Beneficiaries *This amount is indexed each year based on the rate of inflation 11

12 Audited Financial Statements Impression Plan Notes to Financial Statements Years ended December 31, 2011 and Significant accounting policies (continued): (d) Government contributions (continued): whose annual family net income does not exceed $41,544* and 30% of annual contributions for Beneficiaries whose annual family net income is between $41,544* and $83,088*. The cumulative lifetime maximum of all CESG is $7,200 per eligible Beneficiary. CESG contributions received by the Plan with respect to a Beneficiary are invested by the Plan and will ultimately be paid out to the Beneficiary in increments if the Beneficiary becomes entitled to receive Educational Assistance Payments ( EAP ). The Government of Canada will provide a Canada Learning Bond ( CLB ) in the amount of $500 for any child born after December 31, 2003 who also qualifies for the National Child Benefit Supplement ( NCBS ), together with $25 to help cover the cost of opening an RESP. In each subsequent year that the child remains eligible for the NCBS until the year the child turns 15 years of age, the Government of Canada will contribute an additional $100 towards CLB, on an annual basis. The total CLB available for a Beneficiary can amount to $2,000. For the residents of Alberta, the provincial government has established Alberta Centennial Education Savings Grant of $500 which is paid into an RESP for every child born in Alberta on or after January 1, Additional grants of $100 will be paid into the RESPs of eligible Beneficiaries when they turn 8, 11 and 14 in year 2005 or later and (i) are attending school at that time, (ii) they have a parent or guardian who is a resident of Alberta and (iii) have met minimum contribution levels required by the Government of Alberta. For the residents of Québec, the provincial government provides the Québec Education Savings Incentive (the QESI ), which will be paid in the form of a refundable tax credit. This tax credit will apply to contributions made on or after February 21, 2007 into an RESP, where a child named as a Beneficiary is a resident of Québec. The basic credit is 10% of the net annual contribution to a maximum of $250 per eligible Beneficiary. Families with income of less than $78,121* may qualify up to 10% of the first $500 in RESP contributions to a maximum of $50 in QESI. The total lifetime maximum is $3,600 per eligible Beneficiary. Under various circumstances, including the case where a Beneficiary does not become eligible for receipt of EAP, the government grants and incentives must be repaid to the applicable government. After maturity, if a Beneficiary does not enrol in a qualifying post-secondary education program, the Plan is required to repay the grant which is preferable to that Beneficiary, back to the government. Earnings on such grants may be withdrawn as Accumulated Income Payments or rolled over into a registered retirement savings plan in accordance with the provisions of the Income Tax Act (Canada). (e) Future accounting changes: The Canadian Accounting Standards Board has confirmed the ability to defer the adoption of International Financial Reporting Standards ( IFRS ) to fiscal periods beginning on or after January 1, 2014 for entities applying Accounting Guideline 18, Investment Companies. Management intends to have the Plan adopt IFRS for its fiscal year beginning January 1, *This amount is indexed each year based on the rate of inflation

13 Impression Plan Impression Plan Notes to Financial Statements Years ended December 31, 2011 and Significant accounting policies (continued): (e) Future accounting changes (continued): Management has developed an IFRS changeover plan, which addresses key elements of the conversion to IFRS and includes identifying and assessing the impact of the significant differences between IFRS and Canadian GAAP that are expected to impact financial reporting. Based on Management s current evaluation of the differences between Canadian GAAP and IFRS, the adoption of IFRS is not expected to have a significant impact on the calculation of net assets. IFRS is expected to have an impact on the presentation of financial statement balances and result in additional disclosure in the accompanying notes. Management continues to monitor changes to IFRS. The current assessment and IFRS changeover plans may change if new standards are issued or if interpretations of existing standards are revised. (f) Income taxes: The Plan is exempt from income taxes under Section of the Income Tax Act (Canada). 2. Investments: The face values, costs/amortized costs and fair values of investments by contractual maturity are as follows: Cost/ Cost/ Face amortized Fair Face amortized Fair Term to maturity value cost value Yield value cost value Yield Government of Canada and federally guaranteed bonds: Due in one to five years $ 125,000 $ 125,313 $ 125, % $ 115,000 $ 115,169 $ 115, % Due after five years 25,000 24,523 27, % 15,000 14,586 14, % Provincial and provincially guaranteed bonds: Due after five years 275, , , % 225, , , % Bank deposit notes/gics: Due between one to five years 30,000 29,991 30, % Due after five years 15,000 14,998 15, % 5,000 5,462 5, % Corporate bonds: Due between one to five years 20,000 19,346 21, % 5,000 4,739 5, % Due after five years 15,000 14,437 15, % Short-term investments 10,000 9,984 9, % $ 460,000 $ 500,219 $ 535,509 $ 420,000 $ 451,126 $ 471,934 A copy of the statement of portfolio transactions (unaudited) of the Plan is available to Subscribers upon request. 13

14 Audited Financial Statements Impression Plan Notes to Financial Statements Years ended December 31, 2011 and Investments: (continued) The Plan uses a three-tier hierarchy for disclosing fair value based on inputs used to value the Plan s investments. The hierarchy of inputs is summarized below: (i) Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is one in which transactions for the assets occur with sufficient frequency and volume to provide pricing information on an ongoing basis. (ii) Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). (iii) Level 3: Input for the assets that are based on unobservable market data. Changes in valuation methods may result in transfers into or out of an investment s assigned level. The Plan s investments are classified as Level 2 as of December 31, The valuation methodology of Level 2 investments is described in note Valuation of units: The Plan s units are valued monthly to establish a Monthly Market Value. The Monthly Market Value is calculated by dividing net assets, less CESG deposits receivable, by the number of units in the Plan on the last business day of each month. 4. Management fee/related party: An annualized management fee of 1.95% is charged based on the aggregate market value of the Plan. The management fee is inclusive of administrative, trustee and portfolio advisory fees and is accrued monthly in arrears. At its discretion, the Foundation may waive any fees for any period. For the years ended December 31, 2011 and 2010, the Foundation has waived the administrative and the trustee fees. 5. Fair values: Investments are recorded at fair value. The fair values of bonds, bank deposit notes and GICs are based on closing bid prices. The fair values of cash, short-term investments and accrued interest approximate their carrying values due to the short-term nature of these financial instruments. 6. Related party transactions: The Foundation has entered into an Investment Management Agreement (the Agreement ) with Yorkville Asset Management Inc. ( Yorkville ), whereby Yorkville has been appointed as a Portfolio Manager for the Plan. Yorkville is controlled by Heritage Financial and is an affiliate of the Distributor. One of the directors of the Foundation is also a director and officer of Yorkville; however, this individual is not involved in any investment decisions made in respect of the Plan. The decision to enter into this Agreement with Yorkville was referred to the Independent Review Committee (the IRC ) of the Plan for its review in accordance with National Instrument , Independent Review Committee for Investment Funds ( NI ) and the IRC approved the Agreement subject to certain conditions. This arrangement is periodically reviewed by the IRC under the provisions of NI As at December 31, 2011 and 2010 (a) none of the Plan s assets had been deposited with Yorkville; and (b) there were no amounts paid or payable to Yorkville. 14

15 Impression Plan Impression Plan Notes to Financial Statements Years ended December 31, 2011 and Risk management: The investment objectives of the Plan are to preserve capital while maximizing the long-term rate of return for Subscribers. The Plan is affected by changes in economic environments and capital markets and, as a result, the Plan faces various risk factors in the course of its normal investment activities. These risk factors are primarily credit risk, liquidity risk and market risk. In order to proactively address these risks, management has engaged a third party portfolio advisor to assist in investing the Subscribers contributions and the investment income earned thereon. Management and the Portfolio Manager perform periodic reviews of the investment portfolio to comply with the stated investment objectives. (a) Credit risk: Credit risk is the risk of financial loss to the Plan if the issuer of debt fails to meet its contractual obligations. This risk is mitigated by the Plan s investment strategy of investing in those debt securities with an approved credit rating, as defined in Section 1.1 of NI and further detailed in the Risk Factors section of the Prospectus dated August 9, All of the Plan s investments are with Canadian issuers. The maximum credit risk exposure of the Plan is detailed in note 2. The entire investment portfolio is of investment grade with most rated as AAA or AA by Dominion Bond Rating Services Limited and the minimum rating is A. (b) Liquidity risk: Liquidity risk is the risk that the Plan will encounter difficulty in meeting the obligations associated with its financial liabilities. The Plan minimizes this risk by (i) maintaining sufficient cash and cash equivalents, (ii) selecting investments for the portfolio that are active in the market and can be readily sold, and (iii) ensuring cash will be available by the anticipated payout dates applicable to the Subscribers. (c) Market risk: Market risk is the risk that changes in market prices will affect the Plan s income or value of its investment holdings. The Plan s Portfolio Manager attempts to mitigate this risk by periodically reviewing market conditions and the performance of the portfolio and by making necessary changes to the portfolio in accordance with the Plan s investment objectives. Management has identified interest rate risk as a major risk factor related to the fixed income portfolio, and it is discussed in detail in the Risk Factors section of the Prospectus dated August 9, (d) Interest rate risk: Interest rate risk is the risk that changes in interest rates will affect the value of fixed income securities in the Plan s investment portfolio. A rise in interest rates may have a negative effect on the bid prices of fixed income securities, while a decrease in interest rates may have a positive effect on the bid prices of fixed income securities held by the Plan. At December 31, 2011, if interest rates had been 25 basis points lower or higher, with all other variables held constant and assuming a parallel yield curve shift, the net assets of the Plan would have been higher or lower, respectively, by $9,500 (2010 $8,500). In practice, actual trading results may differ from the above sensitivity analysis and the difference may be material. 8. Comparative figures: Certain comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year. 15

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