< Previous40 2016 WCB ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2016($ amounts in thousands of dollars unless otherwise noted)1. NATURE OF OPERATIONSReporting EntityThe Workers Compensation Board of Manitoba (the WCB) is a statutory corporation created by the Manitoba Legislature. The WCB is a government agency of the Province of Manitoba that operates at arm’s-length from government. The WCB was created in 1917 under the authority of The Workers Compensation Act (the Act) of Manitoba. In accordance with the provisions of the Act, the WCB is responsible for: • prevention of workplace injuries and illnesses• administering payments to injured workers and suppliers of services to injured workers• levying and collecting premiums from established classes of employers in amounts sufficient to cover the current and future costs of existing claims• investing funds set aside for the future costs of claims as well as surplus funds. SAFE Work Manitoba operates as a separate arm of the WCB and is responsible for the delivery of prevention-related services mandated under the Act.An independent Workers Compensation Appeal Commission operates under the Act to make final rulings on any appeals pertaining to the WCB’s assessment or benefits decisions.The WCB’s vision is a trusted partner, insuring today and building a safer tomorrow. The organization’s mission is to insure and support safe and healthy workplaces. We put workers and employers at the centre of all we do. We provide them with valued services for injury prevention, compensation, and return to health and work while maintaining system integrity.The WCB has its corporate head office in Winnipeg, Manitoba. Funding Policy and Capital ManagementThe workers compensation system is funded through premiums collected from employers. The WCB does not receive government funding or assistance. Available funds are invested and are used to protect the WCB and its ratepayers from general business risks and catastrophic events in areas such as investment returns or extraordinary claim costs. To that end, an accident fund reserve attributable to Class E employers exists. The target balance for the accident fund reserve is calculated based on a targeted funding ratio of 130 per cent. The funding ratio of 130 per cent includes amounts to reflect potential downturns in the financial markets and other risks and uncertainties. The calculation moves in tandem with changes in the size of the WCB’s assets and liabilities, thereby calculating a reserve target that reduces risk to the organization. The target balance for the reserves was $454.9 million at the end of 2016 ($447.7 million in 2015). The WCB’s Funding Policy is intended to ensure that fiduciary responsibilities are carried out in accordance with the Act and that annual influences do not unduly distort the funding process. The WCB is committed to operating on a fully funded basis to a level funding standard. Full funding requires that current employers pay for the current and future cost of existing compensable injuries and their administration, rather than future generations of employers paying for those injuries. Under level funding, the cost of claims with lengthy latency periods is funded in a level manner over the workers’ periods of exposure to the elements that led to the injuries or illnesses.2016 WCB ANNUAL REPORT 412. SIGNIFICANT ACCOUNTING POLICIESBasis of PreparationThe consolidated financial statements of the WCB are prepared in accordance with International Financial Reporting Standards (IFRS) in effect as at December 31, 2016, which have been adopted by the Accounting Standards Board of Canada (AcSB) as Canadian generally accepted accounting principles for public interest entities. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.Basis of MeasurementThe consolidated financial statements of the WCB have been prepared on a historic cost basis except for investment properties and those financial assets and financial liabilities that have been measured at fair value. The WCB’s functional currency is the Canadian dollar, which is the currency of the primary economic environment in which the WCB operates, which is also the presentation currency of the consolidated financial statements. All financial information presented in Canadian dollars has been rounded to the nearest thousand, unless otherwise stated.Basis of ConsolidationThese consolidated financial statements include the accounts of the WCB and its wholly owned real estate investment subsidiary WCB Realty Limited. Intercompany balances and transactions are eliminated on consolidation. Use of Estimates, Measurement Uncertainty and Critical JudgementsThese financial statements have been prepared in accordance with IFRS, which requires the WCB to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. As a result, some of the reported amounts are subject to measurement uncertainty. Measurement uncertainty exists when there is a variance between the recognized amount and another reasonable amount. Assumptions and estimates are reviewed on an ongoing basis, and any related revisions are recorded in the period in which they are adjusted. Consequently, actual results could differ from these estimates by significant amounts. Level 3 portfolio investments (Note 5), employee benefits (Note 12) and benefit liabilities (Note 13) are the most significant items based on accounting estimates.Certain investment properties have been determined as joint operations as the WCB has joint control over the assets with other parties through contractual arrangements and the WCB has rights to the specific assets and obligations for the liabilities. Changes in Accounting PoliciesFuture Accounting and Reporting ChangesThe International Accounting Standards Board (IASB) is working towards continual improvement through the development of new accounting standards and the annual improvements process. The IASB will issue a number of exposure drafts of new or revised standards over the next several years. The WCB monitors the IASB work plans and publications to address any developments that may impact the organization. In July 2014, the IASB issued IFRS 9 Financial Instruments (2014) which introduces a new measurement category, Fair Value through Other Comprehensive Income (FVOCI) for certain business models. The WCB is considering the impact of this revised standard, which has an effective date of January 1, 2018.The IASB is close to finalizing new accounting requirements for insurance contracts. The IASB expects to publish the new standard called IFRS 17 Insurance Contracts in the first half of 2017. The proposed standard represents a major change in accounting for insurance contracts and is expected to have a significant impact on the financial reporting of entities such as the WCB. This standard has an effective date of January 1, 2021.In January 2016, the IASB issued IFRS 16 Leases which replaced IAS 17 Leases. The new standard has an effective date of January 1, 2019 and the impact on the consolidated financial statements is being assessed. 42 2016 WCB ANNUAL REPORTSpecific Accounting PoliciesCash Cash includes cash on hand and balances with banks, net of any outstanding cheques. Cash and short term investments held by investment managers and custodians for investment purposes are included in the investment portfolio. Receivables and OtherReceivables are mainly assessed premiums due from employers, recorded at the estimated premium payable net of a provision for doubtful accounts. Sundry receivables consist of claim related overpayments, payroll related items and prepaid maintenance contracts.Investment Portfolio and Mortgages Payable on Investment PropertiesThe investment portfolio is managed according to the objectives and policies established by the Statement of Investment Policies and Objectives. The statement acknowledges that there is no single asset class that directly matches the obligations and objectives of the WCB, and that a portfolio diversified across a number of distinct asset classes represents the optimal means of meeting the WCB’s investment objectives. The investment portfolio is comprised of portfolio investments consisting of financial assets accounted for in accordance with IFRS 9 Financial Instruments, and investment properties consisting of real estate assets accounted for in accordance with International Accounting Standard 40 (IAS 40) Investment Properties. Mortgages payable on investment properties are accounted for in accordance with IFRS 9 Financial Instruments.Portfolio InvestmentsThe WCB’s investments have been designated at fair value through profit or loss (FVTPL). As such, all investments are reported at fair value, which is the market value. • Publicly traded investments are stated at year end market prices as listed on the appropriate stock exchange, or as provided by the custodian from independent sources.• Pooled fund investments are valued at the most recent unit values supplied by the pooled fund administrator at year end.• Investments denominated in foreign currencies are translated into Canadian dollars at the exchange rates in effect at the statement of financial position date. Foreign currency exchange gains and losses are recorded in the period in which they arise.Investment PropertiesThe WCB owns real estate investment properties directly or by joint arrangement through its wholly owned real estate investment subsidiary WCB Realty Limited. These properties are held to earn rentals or for capital appreciation or both, and are intended to be long term assets. The WCB views the investment properties as an integral component of the diversified investment portfolio with the same value and purpose as all other investment holdings.• Investment property assets are recognized at fair value.• Fair value of the investment properties is determined by annual appraisal conducted by independent qualified appraisers. A gain or loss arising from a change in the fair value of investment property is recognized in profit or loss for the period in which it arises.• Investment properties which are determined to be joint operations are recorded in relation to the interest held in the joint operations.Mortgages Payable on Investment PropertiesMortgages payable on investment properties are initially recognized at fair value less transaction costs. Mortgages payable on investment properties are subsequently measured at amortized cost using the effective interest method.Joint Arrangements A joint arrangement is an arrangement of which two or more parties have joint control. In a joint arrangement the parties are bound by a contractual arrangement and the contractual arrangement gives two or more of those parties joint control of the arrangement. A joint arrangement is either a joint operation or a joint venture.2016 WCB ANNUAL REPORT 43The WCB is a joint operator of certain real estate investment properties through its wholly owned subsidiary WCB Realty Limited, and as such recognizes in relation to its interest in the joint operations its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly.Deferred AssessmentsDeferred assessments represent the WCB’s estimate of the present value of premiums which will be received in the future from self-insured employers to fund the future costs of existing claims that have arisen from their employees. As such, the fair value for deferred assessments is not readily determinable. The deferred assessments may be secured by irrevocable letters of credit or other suitable forms of guarantee.Property and EquipmentProperty and equipment are valued at cost, less accumulated amortization and any accumulated impairment loss. Amortization is calculated on a straight line basis over the estimated useful life of the asset, as follows:Building40 yearsBuilding renovations and leasehold improvements2 to 10 yearsComputer equipment3 to 5 yearsFurniture, fixtures and equipment5 yearsAn 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 is included in operating expenses.The carrying amounts of the WCB’s non-financial assets are reviewed at each reporting date to ensure that assets are not carried in excess of the recoverable amount.Intangible AssetsAcquired intangible assets, primarily computer software, are valued at cost less accumulated amortization. Amortization is calculated on a straight line basis over the estimated useful life, and included in operating expenses.Internally generated intangible assets, primarily software and systems development, including professional fees incurred to implement these assets, are valued at cost and amortized over their useful lives. Amortization is calculated on a straight line basis over the estimated useful life, as follows:Computer software3 yearsInternally generated systems development10 yearsThe carrying amounts of the WCB’s non-financial assets are reviewed at each reporting date to ensure that assets are not carried in excess of the recoverable amount. Payables and Accruals Payables and accruals are obligations to pay for goods and services acquired in the normal course of operations. The WCB records a liability and an expense for goods upon receipt or transfer of control, and for services when they are performed. Other payables include various payroll-related liabilities and deposits from self-insured employers. The timing and amount of payables and accruals are readily determinable. These amounts are normally settled before the end of the next reporting period.Workers’ Retirement Annuity FundIn accordance with Section 42(2) of The Workers Compensation Act, where wage loss benefits are paid to a worker after a qualifying period, the WCB is required to invest on a worker’s behalf an amount equal to a percentage between five per cent and seven per cent, to provide an annuity for the worker at retirement. In addition, the worker may contribute an amount of not more than the amount contributed by the WCB. This annuity fund is part of the WCB investment portfolio and is intended to establish or replace lost pension entitlement resulting from a work-related injury or illness.44 2016 WCB ANNUAL REPORTEmployee BenefitsThe WCB has several employee benefit plans:Short Term BenefitsShort term employee benefits are measured on an undiscounted basis and are expensed when the services are rendered. These benefits include wages, salary, vacation entitlements and group health plans. Other Benefit PlansThe WCB sick leave plan is a multi-faceted benefit plan. Sick leave credits are earned and payable in the form of sick leave in the current year. Unused sick leave credits are accumulated and carried forward to future periods, and are available to be taken as sick leave when the current year entitlement is exhausted. For employees that meet established criteria upon termination or retirement, the sick leave plan represents a post-employment benefit plan that provides for payment of sick leave credits. For accounting purposes, it is treated as a defined benefit plan and the liability is valued on the basis of discount rates and other estimates that are consistent with the estimates used for defined benefit obligations. For this unfunded plan, where the WCB funds the obligation directly from its own resources, employee contributions are not required.The WCB Retiree Healthcare Spending Account (the RHCSA) was introduced March 1, 2014. Eligible retirees receive a predetermined annual credit amount which may be used to cover healthcare expenses not covered by other plans. The RHCSA is a defined benefit plan. The WCB funds this plan directly via the plan administrator.Retirement Plans The retirement plans, comprised of the WCB Retirement Plan and the Supplementary Employee Retirement Plan, are funded by employee and employer contributions. The WCB Retirement Plan is a defined benefit pension plan that provides indexed pensions (two-thirds of the Consumer Price Index for Canada) based on years of service and the best five consecutive years average earnings in the last 12 years of employment. The Supplementary Employee Retirement Plan provides that the employees of the WCB, whose pension benefits exceed the maximum pension benefit permitted under the federal Income Tax Act, will receive pension benefits based on their total pensionable earnings.The WCB measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each year, using actuarial assumptions that are unbiased and mutually compatible. The assumptions represent management’s best estimates of the variables that will determine the ultimate cost of post-employment benefits. Actuarial assumptions are comprised of demographic assumptions on matters such as mortality and employee turnover, and financial assumptions on matters such as salary and benefit levels, interest rates and return on investments. Given the long term nature of the plan and the use of these assumptions, the resulting estimates are subject to significant uncertainty.The Projected Unit Credit Method is used to calculate the defined benefit obligations and current service costs. This method reflects service rendered by employees to the date of valuation and incorporates actuarial assumptions regarding discount rates used to determine the present value of benefits, projected rates of salary growth and long term expected rate of return on plan assets.Discount rates are based on the market yields of high-quality corporate bonds.In accordance with IAS 19, the net interest approach is used to disaggregate the costs of the retirement plans. The change in the net defined benefit liability is disaggregated into the following components:• Service cost, or the additional liability that arises from employees providing service during the period• Net interest or the interest expense on the net defined benefit liability calculated using the discount rate• Remeasurements, which are other changes in the value of the defined benefit obligation such as changes in estimates and other changes in the value of plan assets. Service cost and net interest are recognized in operating surplus whereas remeasurements are recognized in other comprehensive income. Employee contributions, which are independent of the number of years of service, are treated as a reduction of service cost.2016 WCB ANNUAL REPORT 45When past service costs arise they are recognized immediately.Benefit LiabilitiesUnder the provisions of the Act, the WCB has a legislated obligation to accept insurance risk from employers in exchange for premiums paid for WCB coverage.The WCB’s Chief Actuary prepares a valuation of the benefit liabilities of the WCB at each year-end. This valuation is conducted in accordance with accepted actuarial practice in Canada, and is subject to peer review by the WCB’s consulting external actuary. The benefit liabilities represent the actuarial present value of all future benefit payments expected to be made for claims or injuries which occurred in the current fiscal year or in any prior year. The benefit liabilities include provisions for all benefits provided by current legislation, policies and/or administrative practices in respect of existing claims, plus provisions for the future expenses of administering the existing claims. Differences arising from actual claims experience and assumptions used for the previous valuation, as well as the impacts of changes in legislation, policy, administrative practice or actuarial methods and assumptions, are recognized in the period that they occur. The benefit liabilities also include an estimated liability for certain long latent occupational diseases. Due to the nature of the estimated liability for long latent occupational diseases and the extent of related historical claims information currently available, this liability is more uncertain by its nature than other benefit liabilities. As information is accumulated and analyzed, adjustments may be necessary to improve precision.Fair Value of Other Financial Assets and LiabilitiesOther financial assets and liabilities consist of cash, receivables and other, and payables and accruals. The carrying value of these items approximates their fair value, consistent with the short term nature of these items. Accumulated Other Comprehensive LossAccumulated other comprehensive loss is a subsection of the funded position. It is comprised of cumulative remeasurements arising from changes in the value of defined benefit obligations that in accordance with IFRS are recognized in other comprehensive income but excluded from the operating surplus.Revenue RecognitionPremium Revenue The operations of the WCB are categorized, in accordance with the Act, into Class E (general employers pool) and several classes of self-insured employers.General Employers PoolEmployers registered within Class E are subject to collective liability and premium revenue is estimated by applying applicable industry assessment rates to the employers’ reported assessable payrolls for the current year. Any difference between the estimated premium revenue and the actual premium revenue is credited or charged to income in the year the determination is made.Premium revenue is fully earned and recognized over the period that coverage is provided. Premium revenue reported in the period is recorded net of uncollectable account write-offs, interest and penalties on overdue amounts and adjustments of premiums for prior periods. Self-Insured EmployersSelf-insured employers – principally government bodies and railways and their subsidiaries – are subject to individual responsibility for costs attributable to claims arising from their employees, as well as administration expenses incurred on behalf of self-insured employers. As such, premium revenue from self-insured employers is recognized as these costs are incurred. Current costs are collected as billed while future costs are recorded as deferred assessments. The Government of Canada and its agencies are self-insured based on the Government Employees Compensation Act. Under this Act, the administration of this program is delegated to the WCB which acts as agent of the Government of Canada for the payment of compensation to federal employees in this province.46 2016 WCB ANNUAL REPORTInvestment and Real Estate IncomeIncome from interest and dividends is recognized in the period earned, and changes in fair value are presented in the period in which they arise. Gross lease revenue for operating leases is recorded on the straight-line revenue basis.Foreign Currency TranslationTransactions in foreign currency are converted to Canadian dollars at the exchange rate in effect at the time of the transaction. Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates in effect at the balance sheet date. 3. CASH AND LINES OF CREDITCash reported in the consolidated statement of financial position is comprised of:20162015Cash in transit and in banks$ 33,026$18,572 Cheques issued and outstanding (4,797)(4,735) Net operating cash flows$ 28,229$13,837In addition, the WCB has established an operating line of credit with its principal banker in the amount of $3 million. Advances on the line of credit bear interest at the bank’s prime interest rate. The WCB has also established a revolving credit facility with the Province of Manitoba in the amount of $40 million. Advances on the revolving credit facility bear interest at the Province’s preferred lending rate. Both credit facilities are unsecured. The WCB did not utilize the credit facilities in 2016 or 2015.4. RECEIVABLES AND OTHERReceivables and other reported in the consolidated statement of financial position is comprised of:20162015Premiums - Class E employers$ 5,652$3,722 Provision for doubtful accounts (623)(1,004) 5,0292,718Current assessments - Self-insured employers 3,377413 Sundry 4,4383,816 $ 12,844$6,9475. INVESTMENT PORTFOLIO AND MORTGAGES PAYABLE ON INVESTMENT PROPERTIESThe total investments of the WCB are comprised of the investment portfolio net of mortgages payable on investment properties. The investments are reported in the comprehensive statement of financial position as:20162015Portfolio investments$ 1,521,141 $ 1,504,890 Investment properties 178,343176,291 Investment portfolio 1,699,4841,681,181 Mortgages payable on investment properties (59,914)(57,492)Total investments$ 1,639,570$1,623,6892016 WCB ANNUAL REPORT 47Investment Portfolio HoldingsThe following table presents the value of the WCB’s investments, together with their classification under the fair value hierarchy:20162015Level 1Level 2Level 3TotalTotalFixed IncomeBonds$ 487,898 $-$-$ 487,898 $ 475,794 Mortgages- 132,756 - 132,756 121,701 Cash and short term 25,460 -- 25,460 81,780 513,358 132,756 - 646,114 679,275 EquitiesCanadian 265,593 -- 265,593 228,486 U.S. 265,188 -- 265,188 242,488 Europe, Australasia & Far East 144,546 -- 144,546 149,305 Emerging markets 43,185 -- 43,185 40,797 Private placements-- 3,760 3,760 4,823 718,512 - 3,760 722,272 665,899 Real estatePortfolio investments-- 55,360 55,360 62,232 Investment properties*-- 178,343 178,343 176,291 -- 233,703 233,703 238,523 Infrastructure-- 97,395 97,395 97,484 $1,231,870$ 132,756 $ 334,858 $1,699,484$1,681,181*Investment properties include the commercial real estate properties consolidated from WCB Realty Limited, which includes directly owned properties and properties owned through joint arrangements.The fair value of the WCB’s portfolio investments and investment properties are categorized into three levels comprising the fair value hierarchy. Valuations are provided by investment managers for financial reporting purposes. Valuation techniques are selected based on the characteristics of the investment, with the overall objective of maximizing the use of market-based information. Management is responsible for ensuring that the chosen valuation technique is appropriate in the circumstances.The three levels of the fair value hierarchy are:Level 1 – The fair value is based on quoted prices in active markets for identical assets.Level 2 – The fair value is based on inputs other than quoted prices that are observable for the asset either directly or indirectly. The following technique is used: • The fair value of fixed income investments is determined using an income approach, calculating the present value of the future cash flows based on observable yield curves.Level 3 – The fair value is based on inputs that are not based on observable market data. The following techniques are used to determine the fair value of investments categorized as Level 3:• The fair value of private placement equity investments is determined by management based on financial information provided by individual capital fund managers, adjusted if deemed appropriate.• The fair value of infrastructure is determined based on the underlying assets in the pooled fund using the most up-to-date information available provided by the pooled fund manager and adjusted by management for any other information available.48 2016 WCB ANNUAL REPORT• The fair value of real estate investments is determined using an income approach based on estimated rental income of the properties. Properties are valued annually by independent appraisers. The most significant assumptions, all of which are unobservable, are estimated rental income, capitalization rates, discount rates and estimated vacancy rates. The estimated fair value of the real estate portfolio is sensitive to changes in these assumptions, and the fair value increases if estimated rental income increases, or the capitalization rate decreases. As the WCB is invested in a diversified real estate portfolio, assumptions are appropriate to the underlying asset, asset type and location. The following table illustrates the significant inputs and range of assumptions used in the valuation of real estate investments: Estimated rental incomeFrom $4.50 / sq. ft. to $45.50 / sq. ft.Capitalization ratesFrom 4.0% to 9.5% The following table reconciles the changes in the WCB’s Level 3 fair value measurements to December 31:20162015Balance at January 1$ 340,830 $ 290,941 Market (losses) gains: (16,651) 13,229Purchases 12,632 56,720 Sales (1,953) (20,060)Balance at December 31$ 334,858 $ 340,830 Mortgages Payable on Investment Properties The mortgages payable on investment properties are recorded at amortized cost as follows:20162015Mortgages payable on investment properties$ 59,914 $ 57,492 The following information represents key facts related to mortgages payable on rental properties. Mortgages are secured by the underlying investment property.Interest ratesFrom 2.79% to 5.26%Interest termsVariable and fixedMaturity datesFrom 2017 to 2026The fair value of mortgages payable on investment properties is determined annually. Fair value is impacted by changes in market yields which can result in differences between the carrying value and the fair value of the instruments. The fair value of the mortgages payable has been estimated based on the current market rates for mortgages of similar terms and conditions. The fair value of these mortgages was $60.9 million as at December 31, 2016 ($59.4 million in 2015) determined using the following: Interest ratesFrom 2.77% to 3.82%Term to maturity 7 months to 111 monthsThese mortgages are categorized as Level 2 of the fair value hierarchy.For 2017, scheduled principal and interest payments on these mortgages total $11.5 million. The scheduled amounts of principal repayments in each of the next five years are as follows:20172018201920202021ThereafterTotal$ 9,509 $ 2,361 $10,133$1,783$5,854$30,274$59,9142016 WCB ANNUAL REPORT 49Investment Income Investment income, including net rental income and changes in fair value, was derived from the following sources:20162015IncomeNet gains (losses)TotalTotalFixed IncomeBonds$ 16,738 $ (5,046)$ 11,692 $ 15,588Mortgages 4,851 (807) 4,0444,445Cash and short term 342 (352) (10)2,640 21,931 (6,205) 15,726 22,673EquitiesCanadian 7,746 33,353 41,099 (2,971)U.S. 6,400 9,102 15,502 43,713Europe, Australasia & Far East 3,177 (7,744) (4,567) 24,382Emerging markets 901 1,356 2,257 3,472Private placements- (537) (537) 176 18,224 35,530 53,754 68,772Real estate Portfolio investments 3,301 (5,622) (2,321) 4,290Investment properties* 8,536 (20,617) (12,081) 6,790 11,837 (26,239) (14,402) 11,080Infrastructure 5,728 (4,788) 940 16,406Investment income$ 57,720$ (1,702)56,018118,931Less: Portfolio management expenses 7,390 7,411Net investment income$ 48,628$ 111,520*Investment properties income includes gross rental income of $19.6 million net of operating expenses of $8.6 million and mortgage interest of $2.5 million.Commitments The WCB has no contractual agreements to contribute further funding ($13.1 million in 2015) to specific investment projects to be financed from the existing portfolio or from available cash.Next >