Financial Supplement to the Kindred Annual Report Year ended BANKING With Purpose
Management s Responsibility for Financial Reporting The accompanying financial statements of Kindred Credit Union Limited are the responsibility of Management and have been approved by the Board of Directors. The financial statements have been prepared by Management in accordance with International Financial Reporting Standards. When required, Management has used reasonable and informed judgments and estimates in order to ensure that the financial statements are presented fairly and accurately in all material respects. To meet its responsibility for the integrity and fairness of the financial statements, Management has designed and maintains accounting processes and systems of internal controls to provide reasonable assurance regarding the accuracy of financial records and to establish reliable data for the preparation of financial statements, and the necessary safeguarding of Credit Union assets. The Board of Directors is responsible for ensuring that Management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out this responsibility through its regular review of financial results and operations, and through the Board appointed Audit and Risk Committee. The Audit and Risk Committee has the responsibility of meeting with management and external auditors to discuss internal controls over the financial reporting process, matters arising from periodic audits, and other financial reporting issues. The Audit and Risk Committee regularly reports its findings to the Board for consideration. The financial statements have been audited on behalf of the membership by PricewaterhouseCoopers LLP, the external auditors, in accordance with International Financial Reporting Standards. PricewaterhouseCoopers LLP has full and free access to the Audit and Risk Committee. The Auditor s Report outlines the nature of their audit and expresses their opinion on the financial statements of the Credit Union. Brent Zorgdrager cpa, ca Chief Executive Officer John Klassen cpa, cma Chief, Finance and Compliance
Audit and Risk Committee Report The Audit and Risk Committee assists the Board of Directors in fulfilling its oversight responsibilities. It does this by reviewing the financial information and reporting processes, including the risks and controls related to those processes which management and the Board have established. The committee is comprised of four directors and has a mandate that includes all of the duties specified for an audit committee in the Credit Union and Caisses Populaires Act, 1994 (The Act) and the associated regulations. The Audit and Risk Committee met five times during 2016 to complete its responsibilities. Key activities included: Review the financial statements and results of the year end audit with the external auditor; Review the performance of the external auditor and their proposed engagement letter; Ensure that regulatory filings were submitted on time; Review the credit union s policies, procedures, and controls for legislative compliance; Review the disaster recovery and business continuity plans; Monitor the adherence of Directors, Officers, and employees with the credit union s policies and code of conduct; Review management s identification of the credit union s significant risks and ensure that enterprise risk management processes are in place to measure, monitor, manage and mitigate them; Approve the annual internal audit plan and review internal audit activities; Complete a self-assessment on the effectiveness of the Committee and take the necessary steps to ensure effectiveness. Based on its findings, the Audit and Risk Committee provides reports and makes recommendations to the Board of Directors or senior management, as appropriate. These recommendations are reviewed to ensure they are considered and appropriate action taken. The Audit and Risk Committee is pleased to report to the members of Kindred Credit Union that, pursuant to The Act and its regulations, it continues to meet the requirements of its mandate. The committee receives full cooperation and support from management, thus enabling it to play an effective role in improving the quality of financial reporting to its members, and enhancing the overall control environment at Kindred. In addition, there are no other matters that the Audit and Risk Committee believes should be reported to the members, nor are there any further matters that are required to be disclosed pursuant to The Act or its regulations. Respectfully submitted, Randy Shantz, Audit and Risk Committee Chair Committee: Susan Lofthouse, Susan Taves, John D. Wiebe
Kindred Credit Union Limited Financial Statements
February 24, 2017 Independent Auditor s Report To the Members of Kindred Credit Union Limited We have audited the accompanying financial statements of Kindred Credit Union Limited, which comprise the statement of financial position as at and the statements of comprehensive income, changes in members equity, and cash flows for the year then ended and the related notes, which comprise 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. 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 the 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 is sufficient and appropriate to provide a basis for our audit opinion. PwC refers to LLP, an Ontario limited liability partnership. PricewaterhouseCoopers LLP 95 King Street South, Suite 201, Waterloo, Ontario, Canada N2J 5A2 T: +1 519 570 5700, F: +1 519 570 5730 PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Kindred Credit Union Limited as at and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants
Statement of Financial Position As at (in thousands of dollars) 2016 2015 Assets Cash 12,702 9,926 Investments - liquidity reserve deposits (note 5) 62,985 58,016 Loans to members (note 6) 953,353 865,950 Income tax recoverable - 188 Derivative financial instrument assets (note 18) 1,737 3,071 Investments - other (note 5) 29,207 27,301 Property and equipment (note 7) 5,587 5,105 Deferred income tax asset (note 15) 734 654 Other assets 3,820 3,674 1,070,125 973,885 Approved by the Board of Directors Director Director The accompanying notes are an integral part of these financial statements.
Statement of Financial Position As at (in thousands of dollars) 2016 2015 Liabilities Deposits of members Members deposits (note 8) 918,735 858,720 Accrued interest payable 5,247 5,286 923,982 864,006 Liabilities to non-members Accounts payable and accrued charges (note 10) 9,006 5,216 Income tax payable 142 - Demand loan (note 9) 25,718 10,643 Mortgage securitization liabilities (note 19) 28,751 13,884 Deferred income tax liability (note 15) 148 144 63,765 29,887 Liabilities qualifying as regulatory capital Investment shares (note 11) 19,625 19,235 Owner shares (note 11) 17,360 17,577 Member shares (note 11) 447 432 Members Equity 37,432 37,244 1,025,179 931,137 Retained earnings 40,746 40,618 Accumulated other comprehensive income 4,200 2,130 Total members equity 44,946 42,748 1,070,125 973,885 The accompanying notes are an integral part of these financial statements.
Statement of Comprehensive Income For the year ended (in thousands of dollars) 2016 2015 Revenue Interest income 32,490 31,285 Investment income 837 953 33,327 32,238 Interest expense (income) Interest on members deposits 12,733 13,548 Patronage refund (note 14) 810 980 Interest on investment shares 473 355 Interest on external borrowings 425 288 Loss (gain) on derivative financial instruments (note 18b) 119 (2,729) Mortgage securitization cost of funds 359 98 14,919 12,540 Financial margin 18,408 19,698 Other revenue 4,622 4,423 Earnings before the undernoted 23,030 24,121 Operating expenses Personnel expenses 13,275 12,604 Administration expenses 5,456 4,566 Occupancy expenses 2,633 2,539 Insurance expenses 758 716 22,122 20,425 Earnings before provision for loan loss and charitable giving 908 3,696 (Provision for) recovery of loan losses (note 6) (412) 69 Charitable giving (348) (236) Earnings before income taxes 148 3,529 Provision for income taxes (note 15) (20) (610) Net earnings 128 2,919 Other comprehensive income, net of tax Items that may be reclassified subsequently to net income Net change in unrealizable gain (losses) on investments designated as available for sale (note 15c) 2,070 (640) Comprehensive income for the year 2,198 2,279 The accompanying notes are an integral part of these financial statements.
Statement of Changes in Members Equity For the year ended (in thousands of dollars) Retained earnings Accumulated other comprehensive income (loss) Total Balance - December 31, 2014 37,699 2,770 40,469 Net earnings 2,919-2,919 Other comprehensive income (loss), net of tax (note 15c) - (640) (640) Balance - December 31, 2015 40,618 2,130 42,748 Net earnings 128-128 Other comprehensive income (loss), net of tax (note 15c) - 2,070 2,070 Balance - 40,746 4,200 44,946 Accumulated other comprehensive income relates to gains and losses arising from changes in fair value of financial assets designated as available for sale, shown net of tax of 866 (2015-457). The accompanying notes are an integral part of these financial statements.
Statement of Cash Flows For the year ended (in thousands of dollars) 2016 2015 Cash provided by (used in) Operating activities Net earnings 128 2,919 Adjustments for Interest and investment income (33,327) (32,238) Interest expense 12,415 11,994 Provision for income taxes 20 610 Patronage refund 810 980 Provision for (recovery of) loan losses 412 (69) Amortization of property and equipment (note 7) 832 741 Loss on disposition of property and equipment - 1 Net change in unrealized gains on derivative instruments 1,334 (1,771) Other 3,717 (88) Changes in member activities (net) Change in loans to members (87,815) (49,407) Change in members deposits 59,786 45,409 Cash flows relating to interest and income taxes Interest received on loans to members 33,630 31,682 Interest paid on members deposits (12,454) (12,598) Income taxes paid (173) (827) (20,685) (2,662) Financing activities Increase (decrease) in demand loan 15,075 (2,687) Proceeds on mortgage securitization 14,727 13,884 Redemption of owner shares (note 11) (645) (555) Net increase in member shares (note 11) 15 14 29,172 10,656 Investing activities Purchase of investments (4,397) (7,982) Distributions received - - Purchase of property and equipment (note 7) (1,314) (924) (5,711) (8,906) Increase (decrease) in cash 2,776 (912) Cash - Beginning of year 9,926 10,838 Cash - End of year 12,702 9,926 The accompanying notes are an integral part of these financial statements.
1 Reporting entity Kindred Credit Union Limited is incorporated under the Credit Union and Caisses Populaires Act 1994 ( The Act ) of Ontario and is a member of Central 1 Credit Union Limited (Central 1). The Credit Union was formerly known as Mennonite Savings and Credit Union (Ontario) Limited. The Credit Union officially changed its name to become known as Kindred Credit Union Limited on July 4, 2016. The Credit Union operates as one operating segment in the loans and deposit taking industry in Ontario. Products and services offered to its members include mortgages, personal, commercial and agricultural loans, chequing and savings accounts, term deposits, RRSPs, RRIFs, automated banking machines, debit and credit cards and internet banking. The Credit Union head office is located at 1265 Strasburg Rd., Kitchener, Ontario. The financial statements have been authorized for issue by the Board of Directors on February 23, 2017. 2 Basis of presentation These financial statements have been prepared in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (the IASB). These financial statements were prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets and derivative financial instruments measured at fair value. The financial statements values are presented in Canadian dollars () which is the functional and presentation currency of the Credit Union. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Credit Union s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. Management believes that the underlying assumptions are appropriate and that the Credit Union s financial statements therefore present its financial position and performance fairly. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are the fair value of financial instruments and the member loan loss provisions. These areas are further disclosed in note 4. 3 Significant accounting policies a) Allowance for impaired loans The Credit Union maintains allowances for doubtful loans that reduce the carrying value of loans identified as impaired to their estimated realizable amounts. A loan is considered impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan and that event or events has an impact on the estimated future cash flows of the (1)
loan that can be reliably estimated. The criteria that the Credit Union uses to determine that there is objective evidence of an impairment include delinquency in contractual payments of principal or interest, financial difficulties experienced by the borrower, breach of loan covenants or conditions, initiation of bankruptcy proceedings or deterioration in the value of collateral. Estimated realizable amounts are determined by estimating the fair value of security underlying the loans, and by discounting the expected future cash flows at the financial asset s original effective interest rate. For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar credit risk characteristics (on the basis of the Credit Union s grading process that considers characteristics of each loan portfolio, industry, past-due status, historical write-off experience and other relevant factors). These characteristics are relevant to the estimation of future cash flows for groups of such loans by being indicative of the member s ability to pay all amounts due according to the contractual terms of the loans being evaluated. Future cash flows in a group of loans that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the loans in the Credit Union and historical loss experience for loans with similar credit risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Credit Union to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related allowance for doubtful loans. Such loans are written off after all the appropriate approvals have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the statement of comprehensive income in the provision for loan losses. b) Interest income and expense Interest income and expense is recognized in the statement of comprehensive income for loans and receivables and other financial liabilities using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or liability and allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts the expected future cash payments or receipts through the expected life of the financial instrument to its fair value at inception. The application of this method has the effect of recognizing interest income and expense on the instrument in proportion to the amount outstanding over the period to maturity or repayment. (2)
c) Fees In calculating the effective interest, the Credit Union estimates cash flows (using projections based on its experience of members' behaviour) considering all contractual terms of the financial instruments but excluding future credit losses. Fees, including those for early redemptions, are included in the calculation to the extent that they can be measured and in the opinion of management, are considered to be significant, to the effective interest rate. Where it is not possible or practical to otherwise estimate reliably the cash flows or the expected life of a financial instrument, effective interest is calculated using the payments or receipts specified in the contract, and the full contractual term. Interest income on impaired loans continues to be recorded until the loan is determined to be uncollectible and is written off. Unless included in the effective interest calculation, fees are recognized on an accrual basis as the service is provided and are reported in the statement of comprehensive income as other revenue. d) Financial assets and liabilities In accordance with IAS 39, all financial assets and liabilities including derivative financial instruments are recognized in the statement of financial position and measured in accordance with their assigned category. Under this standard, all financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the financial instrument has been classified as fair value through profit or loss, loans and receivables, available for sale or financial liabilities. Management determines the classification of financial assets and liabilities at initial recognition and the classifications made for each financial instrument are indicated in the notes. A description of the categories follows: (i) Financial assets and liabilities at fair value through profit or loss A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the short-term. Derivatives are also included in this category unless they are designated as hedges. The Credit Union uses derivatives in the form of interest rate swaps to manage risks related to interest rate fluctuations and index linked purchase option agreements to offset the exposure to various indices associated with index linked deposits. Transaction costs are expensed in the statement of comprehensive income. All derivatives that have been classified as fair value through profit or loss are included on the statement of financial position as derivative financial instrument assets and liabilities. Gains and losses on re-measurement to fair value of derivatives are included in loss (gain) on derivative financial instruments. (3)
(ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable repayment dates, usually with interest, that are not debt securities or instruments classified as fair value through profit or loss on initial recognition. Loans and receivables are initially recognized at fair value plus/minus, where appropriate, direct and incremental transaction costs. They are subsequently valued at amortized cost using the effective interest method. Cash, loans to members, liquidity reserve deposits, and loans to Mennonite Economic Development Associates of Canada (MEDA) are classified as loans and receivables. (iii) Available for sale Available for sale assets are non-derivative financial assets that are designated as available for sale or are not categorized into any of the other categories described above. They are initially recognized at fair value including, where appropriate, direct and incremental transaction costs. They are subsequently held at fair value with gains and losses arising from changes in fair value being recognized in other comprehensive income. Equity instruments including shares in Central 1, Oikocredit and CUCO Cooperative Association, and the investment in Qtrade Canada Inc. are classified as available for sale. Investments classified as available for sale which do not have a quoted market price in an active market and whose fair value cannot be reliably measured, are measured at cost. Objective evidence of impairment exists if there has been a significant or prolonged decline in the fair value of the investment below its cost or if there is a significant adverse change in the market, economic or legal investment in which the issuer operates. In the case of impairment, the impairment loss is reported as a reduction in the carrying value of the investment and recognized in the statement of comprehensive income. (iv) Other liabilities Other liabilities are non-derivative financial liabilities that are initially recognized at fair value and are subsequently measured at amortized cost using the effective interest method. Members deposits, accrued interest payable, accounts payable and accrued charges, demand loan, mortgage securitization liabilities, and liabilities qualifying as regulatory capital (investment, owner and membership shares) are classified as other liabilities. e) Comprehensive income IAS 1 requires that a complete set of financial statements include a statement of other comprehensive income (OCI). For the Credit Union, OCI represents the change in members equity during the year that is attributable to unrealized gains and losses on financial assets classified as available for sale and remeasurements of the present value of the post-employment obligation. (4)
Consequently, the changes in these items during the year are recognized in the statement of comprehensive income, while the cumulative changes in OCI are included in accumulated other comprehensive income (AOCI), net of taxes, which is presented as part of members equity on the statement of financial position. f) Sale of receivables The Credit Union periodically sells assets, such as agricultural loans, to other financial institutions to manage its portfolio diversification risk. These transactions satisfy the requirements for derecognition under IFRS and accordingly the agricultural loans sold are removed from the statement of financial position. In these instances the contractual rights to receive the cash flows from the assets and substantially all the risks and rewards associated with the assets are transferred to the purchasing institution. A nominal administration fee, which is recorded as income when received, is paid to the Credit Union each month. g) Mortgage securitizations As part of an ongoing program to manage liquidity, capital and interest rate risk, the Credit Union enters into mortgage securitization transactions. These transactions allow for the packaging of insured mortgage loan receivables into mortgage backed securities (MBS) and for the subsequent sale of these MBS to unrelated third parties. Securitization transactions are derecognized only when the contractual rights to receive the cash flows from these assets have ceased to exist or substantially all the risks and rewards of the loans have been transferred. If the criteria for derecognition has not been met, the securitization is reflected as a financing transaction and the related liability is initially recorded at fair value and subsequently measured at amortized cost, using the effective interest rate method. Costs related to the issuance of MBS are amortized over the life of the issue and are included in interest expense. h) Property and equipment Property and equipment is stated at cost less accumulated amortization. Amortization is provided on the straight-line method over the expected useful life of the assets as follows: Assets Buildings Leasehold improvements Furniture and fixtures, and computer equipment Useful life 40 years Term of lease 3-10 years Land is not subject to amortization and is carried at cost. Impairment reviews are performed when there are indicators that the net recoverable amount of an asset may be less than its carrying value. The net recoverable amount is determined as the higher of an (5)
asset s fair value less cost to sell and value in use. An impairment loss is recognized in the statement of comprehensive income when there is objective evidence that a loss event has occurred which has impaired future cash flows of an asset. In the event that the value of previously impaired assets recovers, the previously recognized impairment loss is recovered in the statement of comprehensive income at that time. An item of property and equipment is derecognized upon disposal or when no further economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of comprehensive income in the period the asset is derecognized. i) Derivative financial instruments Derivative financial instruments are contracts that require or provide the opportunity to exchange cash flows or payments determined by applying certain rates, indices or changes therein to notional contract amounts. The Credit Union uses derivative financial instruments, primarily interest rate swaps, in order to manage interest rate risk exposure. The Credit Union's policy is not to utilize derivative financial instruments for speculative purposes. Derivative financial instruments are carried at fair value and are reported in the statement of financial position as derivative financial instrument assets, where they have a positive fair value, and as derivative financial instrument liabilities, where they have a negative fair value. Changes in the fair value of the derivative instruments are recognized in the statement of comprehensive income as net unrealized loss (gain) on derivative financial instruments. The Credit Union does not apply hedge accounting on its derivative portfolio. j) Member entitlements Member shares, owner shares and investment shares have certain characteristics which require them to be classified as liabilities on the statement of financial position. Accordingly, any dividends authorized on these shares are recorded as interest expense. k) Foreign currency Assets and liabilities denominated in foreign currency are translated to Canadian dollars at exchange rates in effect at the statement of financial position date. Revenues and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in other revenue in the statement of comprehensive income. l) Income taxes The Credit Union uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those (6)
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. Deferred income tax assets are recognized to the extent that realization is considered more likely than not. m) Employee benefit plan The Credit Union accrues its obligations under the post-retirement benefit plan and the related costs and has adopted the following policies: n) Leases The cost of the benefits earned by employees is actuarially determined using the projected benefit method pro-rated on service and management s best estimate of expected future costs, discount rate and retirement ages of employees; The average remaining service period of the active employees covered by the benefit plan is 10.0 years. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recorded in other comprehensive income with an immediate allocation to retained earnings. Pastservice costs are recognized immediately in income. The Credit Union leases commercial property. The Credit Union, as a lessee, has determined, based on an evaluation of the terms and conditions of the arrangements, that it does not obtain any of the significant risks and rewards of ownership of these properties and therefore accounts for them as operating leases. Payments made under operating leases are charged as an expense in the statement of comprehensive income on a straight line basis over the period of the lease. o) Standards not yet effective Accounting standards that have been issued but are not yet effective are listed below. The Credit Union will undertake a thorough assessment of the new requirements to determine the implications of these standards. IFRS 9, Financial Instruments, first issued in November 2009 with final version released in July 2014 by the IASB, brings together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39. IFRS 9 introduces a principles-based approach to the classification of financial assets based on an entity s business model and the nature of the cash flows of the asset. All financial assets, including hybrid contracts, are measured at fair value through profit or loss, fair value through OCI or amortized cost. For financial liabilities, IFRS 9 includes the requirements for classification and measurement previously included in IAS 39. IFRS 9 also introduces an expected loss impairment model for all financial assets not at fair value through profit or loss. The model has (7)
three stages: (1) on initial recognition, 12-month expected credit losses are recognized in profit or loss and a loss allowance is established; (2) if credit risk increases significantly and the resulting credit risk is not considered to be low, full lifetime expected credit losses are recognized; and (3) when a financial asset is considered credit-impaired, interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather than its gross carrying amount. Finally, IFRS 9 introduces a new hedge accounting model that aligns the accounting for hedge relationships more closely with an entity s risk management activities. The standard is effective for annual periods beginning on or after January 1, 2018. IFRS 15, Revenue from Contracts with Customers, was issued in May 2014, which establishes principles for reporting about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. The standard provides a single, principles based five-step model for revenue recognition to be applied to all contracts with customers. The standard is effective for annual periods beginning on or after January 1, 2018. IFRS 16, Leases was issued in January 2016, which will replace IAS 17, Leases. The new standard will be mandatorily effective for fiscal years beginning on or after January 1, 2019. Earlier application is permitted. Under the new standard, all leases will be on the balance sheet of lessees except those that meet limited exception criteria. As the Credit Union has significant contractual obligations in the form of operating leases (note 16) under the existing standard, there will be a material increase to both assets and liabilities upon adoption of the new standard and material changes to the timing of recognition of expenses associated with the lease arrangements. 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 the statement of 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. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. 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, fair value multipliers 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. (8)
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 20. 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. 5 Investments 2016 2015 Shares in Central 1 a) 6,747 6,407 Liquidity reserve deposit b) 62,985 58,016 CUCO Co-op Class B investment shares c) 1,582 1,788 Qtrade Canada Inc. d) 17,023 14,580 Oikocredit shares e) 3,355 4,026 Loans to MEDA f) 500 500 a) Shares in Central 1 92,192 85,317 As a condition of maintaining membership in Central 1, the Credit Union is required to hold an investment in Central 1 shares as determined by the Central 1 Board of Directors from time to time. Central 1 Class A shares are subject to an annual rebalancing mechanism based on credit union asset growth and are issued and redeemable at par value. There is no separately quoted market value for these shares; however, fair value is determined to be equivalent to the par value due to the fact that transactions occur at par value on a regular and recurring basis. The Credit Union s holding of Central 1 Class A shares increased by 339,871 to 3,828,512 during 2016 as a combination of Central 1 capital calls and rebalancing. (9)
Central 1 Class E shares are issued with a par value however are redeemable at 2,918,500 at the option of Central 1. There is no separately quoted market value for these shares and the fair value cannot be measured reliably as the timing of redemption of these shares cannot be determined. Therefore, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed. Class E shares are therefore recorded at cost of 2,918,500. The Credit Union is not intending to dispose of any Central 1 shares as the services supplied by Central 1 are relevant to the day to day activities of the Credit Union. b) Liquidity reserve deposit The Credit Union is required to maintain a liquidity reserve deposit with Central 1 equal to 6.00% of the Credit Union s total assets. The amount of the required liquidity reserve deposit is determined monthly based on the amount of total assets in the previous month s financial statements. The deposit bears interest at fixed and variable rates set by Central 1 which averaged approximately 0.79% (2015-0.96%), at year-end. Liquidity reserve deposits are consistent with a lending contract whereby cash flows are advanced to Central 1 with a commitment to repay the Credit Union at a specified rate of interest according to preset maturity dates. c) CUCO Co-op Class B investment shares (formerly ABCP 2008 Limited Partnership investment) As a pre-condition of Credit Union Central of British Columbia (CUCBC) acquiring Credit Union Central of Ontario (CUCO), CUCO was required to divest itself of investments in certain third party asset-backed commercial paper (ABCP). As a result, at a special general meeting held May 31, 2008, members of CUCO approved a resolution to create a limited partnership, ABCP 2008 Limited Partnership (ABCP LP), to acquire these investments. The funding which ABCP LP required in order to purchase these investments from CUCO was provided by member Credit Unions of CUCO which were obligated to provide their proportionate share of the funding in exchange for ownership units of ABCP LP. As at July 1, 2008, the Credit Union had an investment of 4,069,626 in ABCP LP units designated as available for sale. Since the acquisition of the ABCP LP units the Credit Union has received distributions totalling 4,102,590 (2015-3,861,882). These distributions have been recorded as a return of the initial capital invested. Further, as a result of ongoing valuations the fair value of the investment has increased by a total of 1,614,700 (2015-1,579,882). On June 18, 2011 credit unions voted to approve a restructuring of CUCO as a regulated financial institution under the Credit Unions and Caisses Popularies Act and its continuance as a cooperative under the Canada Cooperatives Act under the name CUCO Co-operative Association (CUCO Co-op). Also approved on June 18, 2011 was a motion to purchase the investment portfolio and certain other assets and liabilities of ABCP LP. As a result, on August 31, 2011 the ABCP LP assets were sold to CUCO Co-op in exchange for Class B investment shares. (10)
On September 2, 2011, ABCP LP distributed to each credit union such Credit Union s proportionate share of CUCO Co-op Class B investment shares and ABCP LP was subsequently dissolved. There was no change to the proportionate share of the Credit Union s underlying ABCP assets now owned by CUCO Co-op as a result of this transaction. The Credit Union maintains its proportionate share of voting rights in CUCO Co-op, through its holding of membership shares obtained in the restructuring. d) Qtrade Canada Inc. On April 1, 2010 the Credit Union entered into a transaction with Qtrade Canada Inc. (QCI). According to the terms of the transaction agreement the Credit Union exchanged all of its shares in Meritas Financial Inc. (MFI), a 65.7% owned subsidiary company, for 1,546,166 shares in QCI valued at 14,419,646. Under IFRS this available for sale investment must be carried at fair value. As at the Credit Union s shares in QCI are valued at 17,023,287 (2015-14,580,345). The cumulative components of the Credit Union s investment in QCI from prior to the MFI/QCI transaction date (April 1, 2010) to present are as follows: Net book value of MFI shares at transaction date (April 1, 2010) 1,207 Gain recognized on QCI / MFI transaction 13,213 Unrealized fair value gain on QCI 2,603 15,816 fair value 17,023 (11)
e) Oikocredit shares Oikocredit, Ecumenical Development Cooperative Society U.A. (Oikocredit) provides financial services and supports organizations internationally to improve the quality of life of low-income people and communities. Oikocredit mobilizes the capital needed to carry out its mission by issuing shares to its member organizations. The Credit Union supports this work through a program of matching specially branded Credit Union member owned term deposits with Credit Union owned investments in Oikocredit shares. The Credit Union s holding of these shares was 3,354,788 at (2015-4,026,217). Oikocredit shares are classified as available for sale. Fair value is determined to be equivalent to par value due to the fact that share issue and redemption transactions occur at par value on a regular and recurring basis. f) Loans to MEDA MEDA is an international economic development organization whose mission is to create business solutions to poverty. The Credit Union supports this work through the provision of fixed term promissory notes to the organization. Loans to MEDA, in the amount of 500,000 (2015-500,000), have been classified as loans and receivables. (12)
6 Loans to members a) An analysis of the Credit Union s loan portfolio and related allowance for impaired loans is as follows: Gross amount Allowance 2016 Carrying amount Residential 313,991 (70) 313,921 Personal 9,768 (83) 9,685 Agricultural 482,486 (100) 482,386 Commercial 148,046 (685) 147,361 954,291 (938) 953,353 Gross amount Allowance 2015 Carrying amount Residential 294,892 (89) 294,803 Personal 11,585 (93) 11,492 Agricultural 426,280 (251) 426,029 Commercial 133,843 (217) 133,626 866,600 (650) 865,950 The Credit Union has an agreement in place to sell loans to Farm Credit Canada (FCC). The Credit Union continues to service all of these loans as an agent for FCC. Cumulatively, the balance of loans that continue to be serviced by the Credit Union on behalf of FCC is approximately 4,953,620 (2015-13,087,043). During the year, the Credit Union sold nil (2015 - nil) of agricultural loans to FCC. The Credit Union is holding security in the form of member deposits in the estimated amount of 4,677,045 (2015-5,864,163) for loans to members. (13)
b) Impaired loans An analysis of impaired loans and the related allowance for impaired loans is as follows: Gross impaired loans Collective provision 2016 Individual specific provision Residential 1,170 (55) (15) Personal 144 (7) (76) Agricultural 2,144 (100) - Commercial 2,749 (129) (556) 6,207 (291) (647) Gross impaired loans Collective provision 2015 Individual specific provision Residential 1,479 (89) - Personal 113 (7) (86) Agricultural 2,937 (176) (75) Commercial 317 (19) (198) 4,846 (291) (359) The Credit Union is holding security against the impaired loans in the estimated amounts of 73,000 (2015-21,500) for personal loans, 1,259,000 (2015-1,800,000) for residential mortgages, 3,265,000 (2015-4,458,200) for agricultural loans, and 2,242,000 (2015-390,000) for commercial loans. (14)
c) Allowance for impaired loans The following table analyzes changes in the Credit Union s allowance for impaired loans: Beginning balance Provision (expense) recovery Write-offs 2016 Ending balance Residential (89) 19 - (70) Personal (93) (19) 29 (83) Agricultural (251) 67 84 (100) Commercial (217) (479) 11 (685) (650) (412) 124 (938) Beginning balance Provision (expense) recovery Write-offs 2015 Ending balance Residential (214) 53 72 (89) Personal (107) (25) 39 (93) Agricultural (159) (91) (1) (251) Commercial (386) 132 37 (217) (866) 69 147 (650) (15)
d) Loan loss provisions The Credit Union has determined the likely impairment loss on loans which have not maintained loan repayments in accordance with the loans contract, or where there is other evidence of potential impairment such as industrial restructuring, job losses or economic circumstances. In identifying the impairment likely from these events the Credit Union estimates the potential impairment using the loan type, industry, type of loan security, the length of time the loans are past due and the historical loss experience. The circumstances may vary for each loan over time resulting in higher or lower impairment. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. For purposes of the collective provision, loans are classified into separate groups with similar risk characteristics, based on the type of product and type of security. The following table identifies the portion of the Credit Union's loan portfolio which is past due but not considered impaired. For each loan type and aging category, carrying value of the loan and the value of security held have been presented. Aged loans, past due, not impaired Days past due Carrying amount 2016 Security held Residential 30-60 225 278 61-80 271 300 91-120 - - >121 - - Personal 30-60 1-61-90 47 35 91-120 - - Agricultural 30-60 100 258 61-90 7-91-120 - - >121 300 477 Commercial 30-60 3-61-90 - - 954 1,348 (16)
e) The following table analyzes the Credit Union s loan portfolio by maturity date. Variable rates Fixed rates less than 1 year Fixed rates 1-5 years 2016 Total 2015 Total Total loans 338,343 179,827 436,121 954,291 866,600 Average effective yield 3.47% 3.67% 3.47% 3.51% 3.63% 7 Property and equipment The movements in property and equipment were as follows: Land Buildings Leasehold improvements Computer Furniture and fixtures Cost Balance on January 1, 2015 777 784 3,025 856 1,155 6,597 Additions - - 3 478 444 925 Disposals - - (11) (325) (4) (340) Total Balance on December 31, 2015 777 784 3,017 1,009 1,595 7,182 Additions - 563 25 209 517 1,314 Disposals - - (52) (209) (163) (424) Balance on 777 1,347 2,990 1,009 1,949 8,072 Accumulated amortization Balance on January 1, 2015-373 548 399 354 1,674 Amortization - 22 309 265 145 741 Disposals - - (11) (323) (4) (338) Balance on December 31, 2015-395 846 341 495 2,077 Depreciation expense - 26 301 299 206 832 Disposals - - (52) (209) (163) (424) Balance on - 421 1,095 431 538 2,485 Net book value December 31, 2015 777 389 2,171 668 1,100 5,105 777 926 1,895 578 1,411 5,587 Amortization expense of 831,738 (2015-740,721) is included in occupancy expense in the statement of comprehensive income. (17)
8 Members deposits The following table provides a breakdown and analysis of the Credit Union s member deposit portfolio by maturity date: Variable rates Fixed rates less than 1 year Fixed rates 1-5 years 2016 Total 2015 Total Chequing and savings accounts 317,970 - - 317,970 295,038 Term deposits - 166,309 174,163 340,472 317,303 RRSP and other registered plans 11,261 41,257 67,258 119,776 122,729 RRIF 1,969 15,951 42,948 60,868 54,306 Tax free savings accounts 13,975 27,587 38,087 79,649 69,344 Total 345,175 251,104 322,456 918,735 858,720 Average effective interest rates 0.45% 1.75% 2.12% 1.39% 1.48% Included in chequing and savings accounts is 368,625 (2015-443,421) related to the provision for patronage refunds. The balance of the provision for patronage refunds is included in liabilities qualifying as regulatory capital as described in note 11. Average effective interest rates are based on book values of deposits and contractual interest rates. All types of member deposits have been designated as other liabilities and are carried at amortized cost using the effective interest method. Concentra Trust Company of Canada acts as trustee in connection with Registered Plans. 9 Demand loan The Credit Union has access to a line of credit facility totalling 2,500,000 and U.S. 250,000 at Central 1. These facilities are included in demand loan facilities totalling 47,350,000 (2015-32,750,000) with other interest rates to be agreed upon when amounts are drawn. The facilities are secured by an assignment of loans to members and a general security agreement covering all assets of the Credit Union. At year-end, the Credit Union has drawn 9,718,312 under its line of credit facility (2015-4,643,306) and has borrowings of 16,000,000 under the demand loan facility (2015-6,000,000). The Credit Union also has access to a standby letter of credit line of 700,000 (2015-700,000) utilizing 530,705 (2015-671,992). In the ordinary course of business, the Credit Union is temporarily allowed to exceed the maximum line of credit facility due to timing of clearing outstanding deposits and cheques. (18)