Consolidated financial statements of Westoba Credit Union Limited
Management s Responsibility... 3 Independent Auditor s Report... 4 Consolidated statement of financial position... 5 Consolidated statement of income and comprehensive income... 6 Consolidated statement of changes in members equity... 7 Consolidated statement of cash flows... 8... 9 32
Management s Responsibility To the Members of Westoba Credit Union Limited Management is responsible for the preparation and presentation of the accompanying consolidated financial statements, including responsibility for significant accounting judgments and estimates in accordance with International Financial Reporting Standards and ensuring that all information in the annual report is consistent with the consolidated statements. This responsibility includes selecting appropriate accounting principles and methods, and making decisions affecting the measurement of transactions in which objective judgment is required. In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for the preparation of the consolidated financial statements. The Board of Directors is composed entirely of Directors who are neither management nor employees of the Credit Union. The Board is responsible for overseeing management in the performance of its financial reporting responsibilities, and for approving the financial information included in the annual report. The Board fulfills these responsibilities by reviewing the financial information prepared by management and discussing relevant matters with management and external accountants. The Board is also responsible for recommending the appointment of the Credit Union s external auditor. Deloitte LLP, an independent firm of Chartered Professional Accountants, is appointed by the Board to audit the consolidated financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Board and management to discuss their audit findings. Chief Executor Officer Date 3
Deloitte LLP 360 Main Street Suite 2300 Winnipeg MB R3C 3Z3 Canada Independent Auditor's Report Tel: 1-204-942-0051 Fax: 1-204-947-9390 www.deloitte.ca To the Members of Westoba Credit Union Limited We have audited the accompanying consolidated financial statements of Westoba Credit Union Limited, which comprise the consolidated statement of financial position as at, and the consolidated statement of income and comprehensive income, consolidated statement of changes in members equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated 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 consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Westoba 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. Other Matter The consolidated statement of financial position as at December 31, 2016 and the consolidated statement of income and comprehensive income, consolidated statement of changes in members equity and consolidated statement of cash flows for the year then ended were audited by another auditor who issued an unmodified opinion on March 1, 2017. Chartered Professional Accountants February 28, 2018 Winnipeg, Manitoba 4
Westoba Credit Union Consolidated statement of financial position As at Notes Assets Cash and cash equivalents 27,914,046 24,774,945 Accounts receivable 920,295 1,393,094 Investments 5 156,114,885 201,102,961 Derivatives 6 948,544 10,312 Member loans receivable 7 1,069,330,151 1,023,441,928 Prepaid expenses and deposits 1,414,187 1,040,997 Property and equipment 8 25,761,896 26,544,666 Goodwill 9 868,310 868,310 Investment property 2,145,990 1,283,272,314 1,281,323,203 Liabilities Member deposits 11 1,191,497,252 1,192,992,010 Current income tax payable 13 137,458 208,897 Accounts payable 7,469,660 6,789,981 Deferred income tax liabilities 13 192,628 41,000 1,199,296,998 1,200,031,888 Members equity Member shares 14 14,485,305 15,117,522 Retained earnings 69,490,011 66,173,793 83,975,316 81,291,315 1,283,272,314 1,281,323,203 The accompanying notes are an integral part of the consolidated financial statements. Approved by the Board, Director, Director 5
Westoba Credit Union Consolidated statement of income and comprehensive income Year ended Notes Interest income Member loans 37,493,729 37,798,624 Investments 4,090,797 4,052,327 41,584,526 41,850,951 Interest expense 16,515,439 17,916,622 Net interest income 25,069,087 23,934,329 Operating expenses Administration 6,569,215 5,588,248 Amortization 1,650,325 1,572,175 Member security 1,042,974 1,043,058 Occupancy 1,828,711 1,806,274 Organizational 801,604 782,314 Personnel 15,132,953 14,749,732 27,025,782 25,541,801 (1,956,695) (1,607,472) Other income 12 6,712,416 6,704,983 Income before the following 4,755,721 5,097,511 Provision for impaired loans 7 480,000 714,203 Unrealized and realized gains (loss) on derivatives 804,346 (1,393) Loss on sale of investment property 847,052 112,140 (522,706) (827,736) Net income before income taxes 4,233,015 4,269,775 Income taxes Current 13 539,578 591,947 Deferred tax 13 151,628 141,000 691,206 732,947 Net income and comprehensive income 3,541,809 3,536,828 The accompanying notes are an integral part of the consolidated financial statements. 6
Westoba Credit Union Consolidated statement of changes in members equity Year ended Attributable to Member Retained memebrs of the Non-controlling Total Notes Shares earnings Credit Union interest Equity Balance December 31, 2015 15,556,925 63,095,855 78,652,780 145,022 78,797,802 Net income and comprehensive income 3,536,828 3,536,828 3,536,828 Disposal of subsidiary (202,592) (202,592) (145,022) (347,614) Issuance of member shares 314,745 314,745 314,745 Redemption of member shares (754,148) (754,148) (754,148) Dividend on preference shares, net of tax recovery (256,298) (256,298) (256,298) Balance December 31, 2016 15,117,522 66,173,793 81,291,315 81,291,315 Net income and comprehensive income 3,541,809 3,541,809 3,541,809 Issuance of member shares 14 271,968 271,968 271,968 Redemption of member shares 14 (904,185) (904,185) (904,185) Dividend on preference shares, net of tax recovery 15 (225,591) (225,591) (225,591) Balance 14,485,305 69,490,011 83,975,316 83,975,316 The accompanying notes are an integral part of the consolidated financial statements. 7
Westoba Credit Union Consolidated statement of cash flows Year ended Operating Activities Net income and comprehensive income 3,541,809 3,536,828 Adjustments for Amortization 1,650,325 1,534,163 Net interest income (25,069,087) (23,934,329) Deferred income tax expense 151,628 141,000 Loss on sale of investment property 847,052 112,140 Provisions for impaired loans 480,000 714,203 Unrealized gain on derivatives (938,232) (275,828) Current income tax expense 539,578 591,947 Interest received 41,741,857 42,002,816 Interest paid (18,360,044) (20,143,240) Income taxes paid (544,207) (523,153) 4,040,679 3,756,547 Net change in non-cash working capital balances related to operations Member loans receivable, net of repayments (45,319,391) 11,241,371 Member deposits, net of withdrawals (201,123) 1,853,705 Accounts receivable 472,799 138,752 Prepaid expenses and deposits (373,190) (118,316) Accounts payable 679,679 316,771 (44,741,226) 13,432,283 (40,700,547) 17,188,830 Investing activities Additions to property and equipment (867,555) (1,168,062) Proceeds on disposal of investment property 1,298,938 Investment purchases (136,694,117) 281,000 (180,414,441) Investment proceeds upon maturity 181,000,000 145,000,000 Proceeds on disposal of subsidiary 875,000 44,737,266 (35,426,503) Financing activities Issuance of members' shares, net of redemptions (632,217) (439,403) Dividend paid on preference shares (265,401) (298,368) (897,618) (737,771) Net increase (decrease) in cash and cash equivalents during the year 3,139,101 (18,975,444) Cash and cash equivalents, beginning of the year 24,774,945 43,750,389 Cash and cash equivalents, end of the year 27,914,046 24,774,945 The accompanying notes are an integral part of the consolidated financial statements. 8
1. Reporting entity information Westoba Credit Union Limited (the Credit Union ) was formed pursuant to the Credit Unions and Caisses Populaires Act of Manitoba. The Credit Union serves members in Brandon, Winnipeg and the surrounding communities. The consolidated financial statements of the Credit Union, as at and for the year ended December 31, 2017 are comprised of the Credit Union and two wholly owned subsidiaries, Westoba Financial Solutions Ltd. and Westoba Financial Services Limited. Westoba Financial Services Limited has one wholly owned subsidiary WestProtect Insurance Agency Ltd. Together, these entities are referred to as Westoba Credit Union Limited. The address of the Credit Union s registered office is 220 10th Street, Brandon, Manitoba, R7A 4E8. Basis of measurement The consolidated financial statements have been prepared using the historical basis except availablefor-sale financial assets and financial assets and liabilities held at fair value through profit and loss (FVTPL), which have been measured at fair value, including all derivative contracts. These consolidated financial statements for the year ended were approved and authorized for issue by the Board of Directors on February 28, 2018. Functional and presentation currency These consolidated financial statements are presented in Canadian dollars, which is the Credit Union s functional currency. 2. Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). 3. Significant accounting policies The principle accounting policies adopted in the preparation of the consolidated financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. Basis of consolidation The consolidated financial statements include the financial statements of the Credit Union and its subsidiaries WestProtect Insurance Agency Ltd., Westoba Financial Services Limited, and Westoba Financial Solutions Ltd. All intercompany assets and liabilities, equity, income and expenses relating to transactions between Westoba and its subsidiaries are eliminated in full upon consolidation. Subsidiaries are entities controlled by the Credit Union. Control is achieved where the Credit Union has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date control commences until the date that control ceases. The consolidated financial statements have been prepared using uniform accounting policies for like transactions and other events in similar circumstances. The results of subsidiaries acquired or disposed of during the year are included in these consolidated financial statements from the effective date of acquisition or up to the effective date of disposal, as appropriate. 9
3. Significant accounting policies (continued) Financial instruments All financial instruments are initially recognized on the consolidated statement of financial position at fair value. Measurement in subsequent periods depends on whether the financial instrument has been classified as fair value through profit or loss, available-for-sale, loans and receivables, or other financial liabilities. During the year, there has been no reclassification of financial instruments. The financial instruments classified as fair value through profit or loss are measured at fair value with unrealized gains and losses recognized in consolidated net income. The Credit Union s financial instruments classified as fair value through profit or loss include cash and cash equivalents and derivatives. Available for sale financial assets are measured at fair value with unrealized gains and losses recognized in other comprehensive income. The Credit Union s shares in Credit Union Central of Manitoba and other shares and investments have been classified as available for sale. As there is no active market, these are recorded at cost. Financial assets classified as loans and receivables are initially measured at fair value, then subsequently carried at amortized cost. The Credit Union s financial instruments classified as loans and receivables include all members loans receivable, accounts receivable, Credit Union Central of Manitoba term deposits and prepaid expenses and deposits. Financial instruments classified as other financial liabilities include member deposits and accounts payable. Other financial liabilities are initially measured at fair value, then subsequently measured at amortized cost. Cash and cash equivalents Cash and cash equivalents includes cash on hand and demand deposits. Other investments (term deposits and certificates of deposit) purchased with a maturity date of three months or less are also reported as cash. Investments Credit Union Central of Manitoba term deposits are classified as loans and receivables and measured at amortized cost, adjusted to recognize impairment in the underlying value. Credit Union Central of Manitoba shares and other shares and investments are classified as available for sale and initially recorded at fair value. As the shares are not traded on in a quoted market, fair value is subsequently estimated to equal cost. Derivative financial instruments Derivative financial instruments are financial contracts that require or provide an option to exchange cash flows or payments determined by applying certain rates, indices or changes therein to notional contract amounts. The Credit Union periodically enters into interest rate swaps to manage exposure to interest rate risks. The Credit Union does not enter into derivative financial instruments for trading or speculative purposes. These instruments are measured at fair value through profit and loss with changes in fair value recorded in the consolidated statement of income and comprehensive income. The Credit Union has chosen not to use hedge accounting. 10
3. Significant accounting policies (continued) Financial instruments (continued) Member loans receivable Member loans are initially recognized at their fair value and subsequently measured at amortized cost. Amortized cost is calculated as the loans principal amount, less any allowance for anticipated losses, plus accrued interest. Interest revenue is recorded on the accrual basis using the effective interest method. Loan administration fees are amortized over the term of the loan using the effective interest method. The effective interest rate is the rate that discounts the estimated future cash receipts through the expected life of the financial asset to the carrying amount of the financial asset. Impairment of financial assets For financial assets carried at amortized cost, the Credit Union first assesses individually whether objective evidence of impairment exists for financial assets that are significant, or collectively for financial assets that are not individually significant. If the Credit Union determines that no objective evidence of impairment exists for an individually assessed loan, it then includes the financial asset in a group of financial assets with similar credit risk characteristics and collectively assessed them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the loan s carrying amount and the present value of estimated future cash flows. The carrying amount of the financial asset is reduced through the use of the provision for impaired financial assets and the amount of the impairment loss is recognized in the consolidated statement of income and comprehensive income. Financial assets, together with the associated provision for impairment are reported as a credit loss when there is no realistic prospect of future recovery and when the Credit Union is in possession of the loan. Interest income is accrued until the financial asset becomes a credit loss. Impaired financial assets become a credit loss when in arrears in excess of 90 days. The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. The calculation of the present value of estimated future cash flows reflects the projected cash flows including provisions for impaired financial assets, prepayment losses, and costs to securitize and service financial assets. For the purpose of the collective evaluation of loan impairment, financial assets are grouped on the basis of the Credit Union s internal system that considers credit risk, characteristics such as asset type, industry, geographical location, collateral, delinquency status and other relevant economic factors. Future cash flows on the group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical credit loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical credit loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year such as changes in unemployment rates, inflation, borrowing rates, consumer fuel prices, vehicle auction values or other factors that are indicative of incurred losses in the group and their magnitude. 11
3. Significant accounting policies (continued) Property and equipment Property and equipment are measured at cost less accumulated amortization and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items of property and equipment. Amortization is provided using the following methods and rates intended to amortize the cost of the assets over their estimated useful lives: Method Rate Buildings Straight-line 2.5% Automobiles Straight-line 20% Computer equipment Straight-line 33% Furniture and fixtures Straight-line 20% Leasehold improvement Straight-line term of lease Security equipment Straight-line 20% The useful lives of items of property and equipment are reviewed on an annual basis and the useful life is altered if estimates have changed significantly. Gains or losses on the disposal of property and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the asset, and are recognized in the consolidated statement of income and comprehensive income. Investment property Investment property held by the Credit Union consists of foreclosed assets held for sale and other buildings. Investment property is initially recognized at cost, including transaction costs. Cost is comprised of the balance of the loan at the date on which the Credit Union obtains title to the asset. Subsequent to initial recognition, these assets are stated at fair value at each reporting date, with any gain or loss from a change in the fair value recognized in the consolidated statement of income and comprehensive income. Goodwill Goodwill is recorded as the excess of consideration transferred over the fair value of the identifiable net assets acquired in a business combination, less accumulated impairment charges, and is allocated to the cash-generating units expected to benefit from the acquisition for the purpose of impairment testing. These cash-generating units represent the lowest level at which goodwill is monitored for internal management purposes. Impairment of non-financial assets At the end of each reporting period, the Credit Union reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Credit Union estimates the recoverable amount of the cash-generating units ( CGU ) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU s, or otherwise they are allocated to the smallest group of CGU s for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. 12
3. Significant accounting policies (continued) Impairment of non-financial assets The amount recoverable is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Goodwill is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Credit Union s CGU s expected to benefit from the synergies of the combination. CGU s to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. Accounts payable Accounts payable are initially recorded at fair value and are subsequently carried at amortized cost, which approximates fair value due to the short term nature of these liabilities. Accounts payable are categorized as other financial liabilities. Member deposits Member deposits are initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using the effective interest method. Member deposits are categorized as other financial liabilities. Member shares Member shares are classified as liabilities or member equity in accordance with their terms. Shares redeemable at the option of the member, either on demand or on withdrawal from membership, are classified as liabilities. Shares redeemable at the discretion of the Credit Union board of directors are classified as equity. Shares subject to regulatory restrictions are accounted for using the criteria set out in IFRIC 2 Members Shares in Cooperative Entities and Similar Instruments. As at December 31, 2017 and 2016 there are no member shares that meet the definition of a liability. 13
3. Significant accounting policies (continued) Revenue recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Credit Union and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Interest income is recognized on the consolidated income statement for all financial assets measured at amortized cost using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash flows through the expected life of the financial instrument back to the net carrying amount of the financial asset. The application of the method has the effect of recognizing revenue of the financial instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. Investment income is recognized as interest is earned on interest-bearing investments, and when dividends are declared on shares. Loan fees are amortized over the term of the instrument using the effective interest rate method. Loan syndication fees are included in other income on completion of the syndication arrangement. Incremental direct costs originating or acquiring a loan are netted against origination fees. Commission revenue is recognized net of broker commission expense as earned on the effective date of each policy. Income taxes Current tax and deferred tax are recognized in profit or loss except to the extent that the tax is recognized either in other comprehensive income or directly in equity, or the tax arises from a business combination. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The calculation of current tax is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the assets are realized or the liabilities are settled. The calculation of deferred tax is based on the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting year. Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable income. Recognition of deferred tax assets for unused tax (losses), tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available which allow the deferred tax asset to be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 14
3. Significant accounting policies (continued) Foreign currency translation Transaction amounts denominated in foreign currencies are translated into their Canadian dollar equivalents at exchange rates prevailing at the transaction dates. Carrying values of monetary assets and liabilities reflect the exchange rates at the year end date. Translation gains and losses are recognized in profit or loss for the current period. Syndication The Credit Union syndicates groups of assets with various other financial institutions primarily to create liquidity and manage regulatory capital for the Credit Union. Syndicated loans transfer substantially all the risks and rewards related to the transferred financial assets and are derecognized from the Credit Union s consolidated statement of financial position. All loans syndicated by the Credit Union have been on a fully serviced basis. The Credit Union receives fee income for services provided in the servicing of the transferred financial assets. Fee income is recognized in other income on an accrual basis in relation to the reporting period in which the costs of providing the services are incurred. Standards issued but not yet effective The Credit Union has not yet applied the following new standards, interpretations and amendments to standards that have been issued as at but are not yet effective. Unless otherwise stated, the Credit Union does not plan to early adopt any of these new or amended standards and interpretations. IFRS 9 Financial instruments The final version of IFRS 9 (2014) was issued in July 2014 as a complete standard including the requirements for classification and measurement of financial instruments, the new expected loss impairment model and the new hedge accounting model. IFRS 9 (2014) will replace IAS 39 Financial instruments: recognition and measurement. IFRS 9 (2014) is effective for reporting periods beginning on or after January 1, 2018. The Credit Union is currently assessing the impact of the standard on its consolidated financial statements. IFRS 15 Revenue from contracts with customers IFRS 15, issued in May 2014, specifies how and when entities recognize, measure, and disclose revenue. The standard supersedes all current standards dealing with revenue recognition, including IAS 11 Construction contracts, IAS 18 Revenue, IFRIC 13 Customer loyalty programmes, IFRIC 15 Agreements for the construction of real estate, IFRIC 18 Transfers of assets from customers, and SIC 31 Revenue barter transactions involving advertising services. Amendments to IFRS 15, issued in April 2016, clarify some requirements and provide additional transition relief for when an entity first applies IFRS 15. IFRS 15 is effective for annual periods beginning on or after January 1, 2018. The Credit Union is currently assessing the impact of this standard on its consolidated financial statements. 15
3. Significant accounting policies (continued) IFRS 16 Leases IFRS 16, issued in January 2016, introduces a single lessee accounting model that requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The standard will supersede IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Credit Union is currently assessing the impact of this standard on its consolidated financial statements. 4. Significant accounting judgments, estimates and assumptions The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, profits and losses during the reporting period. Accordingly, actual results may differ from those estimates. All estimates and assumptions required in conformity with IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on historical experience and other factors, including expectations with regard to future events. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are the critical judgements that management have made in the process of applying the Credit Union s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Allowance for impaired loans The Credit Union reviews its loan portfolio at each reporting date to assess whether an impairment loss should be recognized. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Credit Union makes judgments about the borrower s financial situation and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Member loans receivable that have been assessed individually and found not to be impaired and all individually insignificant loans are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective provision assessment takes account of data from the loan portfolio such as credit quality, delinquency, historical performance and industry economic outlook. The impairment loss on member loans receivable is disclosed in more detail in Note 7. Impairment of non-financial assets At each reporting date, the Credit Union assesses whether there are any indicators of impairment for non-financial assets. Non-financial assets that have an indefinite useful life or are not subject to amortization, such as goodwill, are tested annually for impairment. Other non-financial assets are tested for impairment if there are indicators that their carrying amounts may not be recoverable. 16
4. Significant accounting judgments, estimates and assumptions (continued) Income taxes The Credit Union periodically assesses its liabilities and contingencies related to income taxes for all years open to audit based on the latest information available. For matters where it is probable that an adjustment will be made, the Credit Union records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes that they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities. Fair value measurements and valuation processes Some of the Credit Union s financial assets and liabilities are measured at fair value for financial reporting purposes or the fair value is disclosed. In estimating the fair value, the Credit Union uses market-observable data to the extent it is available. Where Level 1 inputs are not available, the Credit Union utilizes valuation techniques, such as discounted cash flow models or observable data from sources such as Bloomberg to calculate the fair value. 5. Investments Available-for-sale Credit Union Central of Manitoba shares 12,518,350 12,070,365 Concentra Financial debenture 5,000,000 Other shares and investments 5,381,025 5,446,807 Loans and receivables Credit Union Central of Manitoba term deposits 137,528,800 178,070,000 Accrued interest 686,710 515,789 156,114,885 201,102,961 The above term deposits bear interest at rates between 1.17% and 1.47% (0.45% and 0.84% in 2016). The term deposit maturities range from January to June 2018 (2016 January to June 2017). The Credit Union is required to maintain 8.00% of its total member deposits in specified liquidity deposits offered by Credit Union Central of Manitoba. As of the Credit Union met this requirement. 17
6. Derivatives The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount is the amount of a derivative s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of the transactions outstanding at December 31 and are indicative of either the market risk or credit risk. Maturities of derivatives (notional amount) Net fair value 2017 $ 2016 $ 2017 $ 2016 $ 1-5 years > 5 years Assets Assets Derivatives at held-for-trading Interest rate swaps 25,000,000 21,292,946 47,645,250 948,544 10,312 The Credit Union currently enters into interest rate swaps with Credit Union Central of Manitoba to manage exposure to interest rate risk. The Credit Union pays a fixed interest rate ranging from 1.135% to 1.738% and receives a floating interest rate ranging from the CAD-BA-CDOR 1 month rate to the CAD-BA-CDOR 3 month rate. Unrealized gains on these derivatives is $938,232 (2016 - $275,828) and realized losses on these derivatives is $133,886 (2016 - $277,221). 7. Member loans receivable 2017 Principal Principal Allowance Allowance Net carrying performing impaired specific collective value $ Personal and other 83,044,112 319,850 643,549 159,800 82,560,613 Real estate secured 409,779,754 1,480,064 100,000 411,159,818 Commerc ial 416,738,424 2,733 98,979 319,600 416,322,578 Agricultural 157,041,771 45,489 319,600 156,767,660 Accrued interest 2,519,482 1,066,604,061 1,848,136 742,528 899,000 1,069,330,151 Total allowance 1,641,528 2016 Principal Principal Allowance Allowance Net carrying performing impaired specific collective value $ Personal and other 61,236,196 173,649 220,373 190,800 60,998,672 Real estate secured 402,748,548 1,176,373 100,000 403,824,921 Commercial 396,758,067 235,691 78,039 381,600 396,534,119 Agricultural 159,655,478 379,688 381,600 159,653,566 Accrued interest 2,430,650 1,020,398,289 1,965,401 298,412 1,054,000 1,023,441,928 Total allowance 1,352,412 18
7. Member loans receivable (continued) Allowance for Impaired Loans Balance, beginning of year 1,352,412 1,635,462 Provision for impaired loans 480,000 714,203 1,832,412 2,349,665 Amounts written off 190,884 997,253 Balance, end of year 1,641,528 1,352,412 Allowance for Impaired Loans (continued) A loan is considered past due when a counter-party has not made a payment by the contractual due date. The table that follows presents the carrying value of loans at year-end that are past due but not classified as impaired because they are either i) less than 90 days past due, or ii) fully secured and collection efforts are reasonably expected to result in repayment. 2017 91 days and 1-30 days 31-60 days 61-90 days greater Total $ Personal and other 3,479,607 102,225 118,875 332,844 4,033,551 Real estate secured 12,675,927 1,175,138 538,239 885,325 15,274,629 Commercial 14,090,147 1,430,335 2,746 15,523,228 Agricultural 443,255 170,758 47,894 661,907 30,688,936 2,878,456 657,114 1,268,809 35,493,315 2016 91 days and 1-30 days 31-60 days 61-90 days greater Total $ Personal and other 1,394,815 196,621 59,926 1,651,362 Real estate secured 12,035,999 933,822 566,096 13,535,917 Commercial 14,923,983 276,563 15,200,546 Agricultural 778,466 33,711 42,122 854,299 29,133,263 1,164,154 276,563 668,144 31,242,124 The principal collateral and other credit enhancements the Credit Union holds as security for loans include (i) insurance, mortgages over residential lots and properties, (ii) recourse to business assets such as real estate, equipment, inventory and accounts receivable, (iii) recourse to commercial real estate properties being financed, and (iv) recourse to liquid assets, guarantees and securities. Valuations of collateral are updated periodically depending on the nature of the collateral. The Credit Union has policies in place to monitor the existence of undesirable concentration in the collateral supporting its credit exposure. In management s estimation, the fair value of the collateral is sufficient to offset the risk of loss on the loans past due but not impaired. 19
8. Property and equipment Computer Furniture and Leasehold Security Projects in Land Building Automobiles equipment fixture improvement equipment Progress Total Cost Balance at December 31, 2015 2,042,681 28,811,134 175,125 7,534,269 3,821,931 2,522,927 826,528 45,734,595 Additions 91,926 1,002,286 32,609 100,000 4,062 1,230,883 Disposals (6,000) (29,847) (35,847) Disposal of subsidiary (2,902) (15,346) (8,726) (26,974) Balance at December 31, 2016 2,036,681 28,903,060 175,125 8,533,653 3,839,194 2,614,201 800,743 46,902,657 Additions 49,887 506,221 132,055 4,991 174,401 867,555 Disposals (100,194) (100,194) Balance at 2,036,681 28,952,947 175,125 9,039,874 3,971,249 2,514,007 805,734 174,401 47,670,018 Amortization Balance at December 31, 2015 8,514,607 158,648 5,255,570 3,564,193 604,053 726,757 18,823,828 Additions 723,511 5,649 539,904 142,797 121,397 38,917 1,572,175 Disposals (21,204) (21,204) Disposal of subsidiary (2,902) (10,415) (3,491) (16,808) Balance at December 31, 2016 9,238,118 164,297 5,792,572 3,675,371 721,959 765,674-20,357,991 Additions 750,500 5,649 683,545 66,472 112,305 31,854 1,650,325 Disposals (100,194) (100,194) Balance at 9,988,618 169,946 6,476,117 3,741,843 734,070 797,528 21,908,122 Net book value At December 31, 2016 2,036,681 19,664,942 10,828 2,741,081 163,823 1,892,242 35,069-26,544,666 At 2,036,681 18,964,329 5,179 2,563,757 229,406 1,779,937 8,206 174,401 25,761,896 20
9. Goodwill Goodwill, cost 2,431,627 2,431,627 Impairment losses (1,563,317) (1,563,317) 868,310 868,310 10. Line of credit The Credit Union has an approved borrowing limit of 10% of member deposits. Borrowings are payable to Credit Union Central of Manitoba at an interest rate tied to the bankers acceptance rates and are secured by an assignment of term and contract deposits, with no fixed terms of repayment. At the balance was nil (2016 - nil). 11. Member deposits Chequing 410,028,742 392,154,344 Registered plans 185,887,490 190,020,216 Savings 90,100 96,024 Plan 24 112,162,325 109,036,641 Agri-invest 32,048,198 29,601,381 Tax free savings 85,197,800 78,379,469 Term deposits 359,587,188 385,914,891 Accrued interest 6,495,409 7,789,044 1,191,497,252 1,192,992,010 Member deposits are subject to the following terms: Chequing, plan 24, savings products and Agri-invest are due on demand and bear interest at rates up to 1.95% (1.70% in 2016) Term deposits are subject to fixed and variable rates of interest ranging from 0.05% to 5.10%, (0.05% to 5.10% in 2016) with interest payments due monthly, annually or on maturity. Registered plans and tax free savings are subject to fixed and variable rates of interest ranging from 1.25% to 5.10% (1.25% to 5.10% in 2016) with interest payments due monthly, annually or on maturity. 21
12. Other Income Other income is comprised of the following: Loan fees 626,144 611,681 Member fees 2,152,445 2,220,564 Member service charges 1,742,819 1,612,304 Commissions and rental 1,578,459 1,865,307 Foreign exchange 279,549 285,682 Other 333,000 109,445 6,712,416 6,704,983 13. Income tax The tax effects of temporary differences which give rise to the deferred tax liability reported in the consolidated statement of financial position is from differences between amounts deducted for accounting and income tax purposes for property and equipment and the allowance for impaired loans and goodwill. Net deferred income tax assets (liabilities) are comprised of the following: Deferred tax asset Allowance for impaired loans 161,914 158,000 Deferred tax liabilities Property and equipment (297,442) (45,000) Goodwill and intangible assets (57,100) (154,000) Net balance (192,628) (41,000) 22
13. Income tax (continued) The total provision for income taxes in the consolidated statement of income and comprehensive income is at a rate differing from the federal base rate for the following reasons: % % Federal base statutory rate 38.00 38.00 Federal abatement (10.00) (10.00) Reduction for Credit Unions (13.00) (10.20) Other (0.25) (0.63) Income tax as reported 14.75 17.17 14. Member shares Authorized Common shares: Authorized common share capital consists of an unlimited number of common shares with an issue price of $5 per share and redeemable in the amount of consideration received for the share. Surplus shares: Authorized surplus share capital consists of an unlimited number of surplus shares, with an issue price per share of $1 and redeemable at $1 per share. Preference shares: Authorized Class A non-cumulative preference share capital consists of 1,000,000 preference shares with an issue price per share of $10 with an aggregate consideration which shall not exceed $10,000,000 and redeemable in the amount of consideration received for the share. Dividends are payable at the discretion of the Board of Directors Issued 33,194 Common shares (33,591 in 2016) 165,970 167,955 7,197,860 Surplus shares (7,484,740 in 2016) 7,197,860 7,484,739 712,147 Preference shares (746,483 in 2016) 7,121,475 7,464,828 Total 14,485,305 15,117,522 During the year, the Credit Union issued 2,138 (1,481 in 2016) and redeemed 2,535 (2,204 in 2016) common shares, issued nil (nil in 2016) and redeemed 286,880 (217,197 in 2016) surplus shares, and issued 26,128 (30,734 in 2016) and redeemed 60,463 (52,593 in 2016) Class A preference shares. When an individual becomes a member of the Credit Union, they are issued a common share at $5 per share. Each member of the Credit Union has one vote, regardless of the number of shares held. Surplus shares are established as a means of returning excess earnings to the members and at the same time increasing the Credit Union s equity base. The articles of incorporation for Westoba Credit Union Limited disclose the conditions concerning Surplus shares. 23
15. Dividends on preference shares During the year, the Board of Directors declared a dividend on preference shares in the amount of $265,401 ($298,368 in 2016). The amount net of tax savings of $39,810 ($42,070 in 2016), has been reflected as a charge to retained earnings. 16. Related party transactions Directors and key management personnel Key management personnel ( KMP ) consists of the Chief Executive Officer, Chief Operating Officer, Vice President (VP) of Member Solutions, VP of Information Solutions, VP of Lending Solutions, VP of People Solutions, VP of Financial Solutions, Assistant Vice President s (AVP) of Member Solutions, AVP of Marketing and Communication, AVP of Business Member Solutions, AVP of Financial Planning and Insurance Solutions and Directors. Loans made to KMP are approved under the same lending criteria applicable to members. KMP may receive concessional rates of interest on their loans and facilities. These benefits are subject to tax with the total value of the benefit included in the compensation figures below. There are no loans that are impaired in relation to loan balances with KMP. There are no benefits or concessional terms and conditions applicable to the family members of KMP. There are no loans that are impaired in relation to the loan balances with family or relatives of KMP. Aggregate compensation of KMP during the year consisted of: Salary and short term benefits 1,486,731 1,995,497 The total value of loans outstanding to KMP at year end amount to: Aggregate of loans 1,448,409 3,479,800 The total value of revolving credit facilities 308,200 324,213 1,756,609 3,804,013 During the year the aggregate value of loans disbursed to KMP amounted to: Lines of Credit 50,000 29,511 Mortgages 302,000 368,000 Loans 34,895 212,080 386,895 609,591 24