< Previous50 | WCB 2017 ANNUAL REPORTThe 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.2. 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, 2017, 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 have been eliminated on consolidation. Use of Estimates, Measurement Uncertainty and Critical JudgementsThese consolidated 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. 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. Foreign Currency TranslationTransactions in foreign currency are converted to Canadian dollars at the exchange rate in effect at the time of WCB 2017 ANNUAL REPORT | 51the transaction. Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rates in effect at the date of the consolidated statement of financial position.Specific Accounting PoliciesIn order to facilitate an understanding of the WCB’s consolidated financial statements, significant accounting policies are disclosed in the related notes:NoteTopicPage3Cash 524Receivables and other535Investment portfolio and mortgages payable on investment properties535Investment and real estate income577Deferred assessments608Property and equipment619Intangible assets6210Payables and accruals6311Workers’ retirement annuity fund6312Employee benefits6413Benefit liabilities6815Premium revenue73Changes in Accounting PoliciesThe 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. IFRS issued but not yet effectiveIFRS 9 Financial InstrumentsIn July 2014, the IASB issued IFRS 9 Financial Instruments (2014) which replaced previous versions of IFRS 9 and IAS 39. IFRS 9 introduces a new measurement category, Fair Value through Other Comprehensive Income (FVOCI), for business models that hold financial assets for the purpose of collecting contractual cash flows and for sale purposes. The WCB has reassessed its business model for managing the investment portfolio and has determined that fair value through profit or loss remains the appropriate designation for portfolio investments. IFRS 9 also introduces a new impairment model, with a simplified impairment model applicable to trade receivables. The simplified model allows an entity to recognize a loss allowance at an amount equal to lifetime expected credit losses (ECL) at the inception of the receivable. IFRS 9 is effective for periods beginning on or after January 1, 2018 with early adoption permitted. Based on the above assessment the standard is not expected to have a material impact on the consolidated financial statements. The WCB will adopt IFRS 9 at the effective date of January 1, 2018. Retrospective application is required. IFRS 15 Revenue from Contracts with CustomersIn May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers which replaced IAS 18 Revenue 52 | WCB 2017 ANNUAL REPORTalong with related standards and interpretations. The new standard has an effective date of January 1, 2018 with early adoption permitted. IFRS 15 establishes a single comprehensive model for an entity to use in accounting for revenue arising from contracts with customers. The core principle of IFRS 15 is that an entity should recognize revenue to reflect the consideration the entity expects to receive in exchange for transferring goods or services to a customer. IFRS 15 applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts which are within the scope of other IFRS standards. The WCB will adopt IFRS 15 at the effective date of January 1, 2018. The standard is not expected to have a material impact on the consolidated financial statements. IFRS 16 LeasesIn January 2016, the IASB issued IFRS 16 Leases which replaced IAS 17 Leases. The new standard has an effective date of January 1, 2019 with early adoption permitted. The standard provides a single lessee accounting model, requiring lessees to recognize a right-of-use asset and corresponding lease liability for all leases unless the lease term is 12 months or less or the underlying asset has a low value. At December 31, 2017, the WCB has operating lease commitments of $11.2 million (Note 18). A preliminary review indicates these commitments meet the definition of a lease under IFRS 16, and the WCB will recognize a right-of-use asset and a corresponding lease liability in respect to these leases. The standard is not expected to have a material impact on the consolidated financial statements.IFRS 17 Insurance ContractsIn May 2017, the IASB issued IFRS 17 Insurance Contracts which replaced IFRS 4 Insurance Contracts. The new standard has an effective date of January 1, 2021 and early adoption is permitted. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The standard could have significant impacts on the WCB’s consolidated financial statements but the amount cannot be reasonably estimated at this time.3. CASH Accounting policyCash 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. Cash reported in the consolidated statement of financial position is comprised of:20172016Cash in transit and in banks$29,967$33,026Cheques issued and outstanding(3,299)(4,797)Net cash$26,668$28,229In 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 WCB 2017 ANNUAL REPORT | 53established 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. 4. RECEIVABLES AND OTHERAccounting policyReceivables 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.Receivables and other reported in the consolidated statement of financial position is comprised of:20172016Premiums — Class E employers$6,253$5,652Provision for doubtful accounts(549)(623)5,7045,029Current assessments — Self-insured employers7993,377Sundry5,2704,438Total receivables and other$11,773$12,8445. INVESTMENT PORTFOLIO AND MORTGAGES PAYABLE ON INVESTMENT PROPERTIESAccounting policyInvestment 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 are designated as 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.54 | WCB 2017 ANNUAL REPORTInvestment 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 rental income 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 carried 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.The 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; and its expenses, including its share of any expenses incurred jointly.The 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:20172016Portfolio investments$1,645,069$1,521,141Investment properties144,911178,343Investment portfolio$1,789,980$1,669,484Mortgages payable on investment properties(52,096)(59,914)Total investments1,737,8841,639,570WCB 2017 ANNUAL REPORT | 55Investment Portfolio HoldingsThe following table presents the value of the WCB’s investments, together with their classification under the fair value hierarchy:20172016Fair ValueLevel 1Level 2Level 3TotalTotalFixed IncomeBonds$513,111$-$-$513,111$487,898Mortgages-169,885-169,885132,756Cash and short term42,632--42,63225,460555,743169,885-725,628646,114EquitiesCanadian284,287--284,287265,593U.S.263,994--263,994265,188Europe, Australasia & Far East153,797--153,797144,546Emerging markets48,881--48,88143,185Private placements--2,6962,6963,760750,959-2,696753,655722,272Real estatePortfolio investments--59,28859,28855,360Investment properties*--144,911144,911178,343--204,199204,199233,703Infrastructure--106,498106,49897,395Total investment portfolio$1,306,702$169,885$313,393$1,789,980$1,699,484*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 3:56 | WCB 2017 ANNUAL REPORT• 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.• 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 3.1% to 9.5% The following table reconciles the changes in the WCB’s Level 3 fair value measurements to December 31:20172016Balance at January 1$334,858 $ 340,830 Market losses(3,066) (16,651)Purchases2,854 12,632 Sales(21,253) (1,953)Balance at December 31$313,393 $ 334,858 Mortgages Payable on Investment Properties The mortgages payable on investment properties are recorded at amortized cost as follows:20172016Mortgages payable on investment properties$52,096$59,914The following information represents key facts related to mortgages payable on rental properties. Mortgages are secured by the underlying investment property.Interest ratesFrom 3.01% to 4.32%Interest termsVariable and fixedMaturity datesFrom 2018 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 $52.1 million as at December 31, 2017 ($60.9 million in 2016) and determined using the following: Interest ratesFrom 3.52% to 4.62%Term to maturity 1 month to 99 monthsWCB 2017 ANNUAL REPORT | 57These mortgages are categorized as Level 2 of the fair value hierarchy.For 2018, scheduled principal and interest payments on these mortgages total $2.6 million. The scheduled amounts of principal repayments in each of the next five years are as follows:20182019202020212022ThereafterTotal$2,181$9,941$1,578$5,770$6,340$26,286$52,096Investment and Real Estate IncomeAccounting policyIncome 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.Investment income, including net rental income and changes in fair value, was derived from the following sources:20172016IncomeNet gains (losses)TotalTotalFixed IncomeBonds$16,572$(3,002)$13,570 $ 11,692 Mortgages5,146(1,740)3,406 4,044Cash and short term520(176)344 (10)22,238(4,918)17,320 15,726EquitiesCanadian6,82214,06920,891 41,099U.S.4,58139,03043,611 15,502Europe, Australasia & Far East2,72625,54228,268 (4,567)Emerging markets1,1088,6689,776 2,257Private placements932(849)83 (537)16,16986,460102,629 53,754Real estate Portfolio investments3,0944,0227,116 (2,321)Investment properties*9,468(9,692)(224) (12,081)12,562(5,670)6,892 (14,402)Infrastructure5,1574,95410,111 940Investment income$56,126$80,826136,95256,018Less: Portfolio management expenses7,183 7,390Net investment income$129,769$ 48,628*Investment properties income includes gross rental income of $19.1 million net of operating expenses of $7.4 million and mortgage interest of $2.2 million.Commitments The WCB has contractual agreements to contribute further funding to a maximum of $20.0 million (none in 2016) to specific investment projects to be financed from the existing portfolio or from available cash.58 | WCB 2017 ANNUAL REPORT6. INVESTMENT RISK MANAGEMENTIn accordance with the Statement of Investment Policy and Objectives, the investment objective of the WCB is to generate a consistent, positive, real rate of return on invested assets. Recognizing the need to achieve a balance between risk and return, investment risk is managed through a portfolio that is diversified across a number of distinct asset classes, as well as geographic region and investment style. The following sections describe the nature and extent of financial risk exposure and the related risk mitigation strategies.Market Risk The WCB invests in publicly and privately traded equities and fixed income instruments available on domestic and foreign exchanges. As these securities are affected by market changes and fluctuations, the WCB is exposed to market risk as a result of price changes due to economic fluctuations in capital markets. The following table presents the effect of a material change in the key risk variable – the sector benchmark – for each of the equity mandates in the WCB investment portfolio: 201720165 year annualized5 year annualizedEquities+/- 1 standard deviation+/- 2 standard deviations+/- 1 standard deviation+/- 2 standard deviations% change in benchmark Canadian8.2% $23.9 million 16.4% $47.8 million 9.0% $23.9 million 18.0% $47.8 million % change in benchmark U.S.9.8%$26.7 million19.6%$53.4 million10.2% $27.0 million 20.4% $54.0 million % change in benchmark Europe, Australasia & Far East10.9%$16.8 million21.8%$33.6 million11.8% $17.1 million 23.6% $34.2 million % change in benchmark Emerging markets11.0%$5.4 million22.0% $10.8 million11.9% $5.1 million 23.8% $10.2 million Credit Risk Management Credit exposure on fixed income securities arises from the possibility that the issuer of an instrument fails to meet its obligation to make interest payments and repay principal. To mitigate the risk of credit default, the minimum quality standard for individual bonds and debentures at time of purchase is BBB, as rated by an established bond rating service. To further mitigate this risk, bonds with a BBB rating are limited to a maximum of 15 per cent of the bond portfolio. The balance of the portfolio should be invested in bonds with a minimum rating of A or higher.In addition to directly owned fixed income securities, the WCB is invested in a pooled bond fund. The pooled fund guidelines require that the average credit quality of the pooled fund’s assets must be BBB- or higher, and that non-investment grade securities shall not exceed 25 per cent of the pooled fund’s assets on a market value basis.Of the fixed income assets in the investment portfolio, 82 per cent (81 per cent in 2016) have at least an A credit rating. The WCB does not anticipate that any borrowers will fail to meet their obligations.WCB 2017 ANNUAL REPORT | 59Securities LendingThe WCB may lend, for fee income, any of its securities to third parties, provided the loans are secured by cash or readily marketable securities having a market value of at least 105 per cent of the market amount of the asset borrowed. As at December 31, 2017, these loans amounted to $233.8 million ($228.3 million in 2016). As at December 31, 2017, total collateral pledged to the WCB amounted to $245.6 million ($239.8 million in 2016). Foreign Exchange Risk ManagementThe WCB has certain investments denominated in foreign currencies, which exposes the WCB to foreign currency risk. During 2017, the WCB did not undertake hedging strategies for the currency risk of foreign investments. While currency fluctuations influence short term returns, these fluctuations are not expected to affect the long term position of the investment portfolio.The WCB has exposure to the U.S. dollar, with USD-denominated holdings of $372.7 million CAD ($363.5 million CAD in 2016) or 21.3 per cent of the portfolio (22.1 per cent in 2016).The table below presents the effects of a material change in the Canadian/U.S. dollar exchange rates:CAD/USD2017201610% appreciation in the Canadian dollar$(33.9 million)$(33.1 million)Interest Rate Risk Management The WCB is exposed to interest rate risk to the extent that the fair value or future cash flows of a financial instrument fluctuate due to changes in market interest rates. These fluctuations are managed by actively controlling the duration of the fixed income portfolio. As at December 31, 2017, the duration of the WCB’s bond portfolio was 7.6 years (7.7 years in 2016).The following table shows the effects of a negative 50 and 100 basis point (where one basis point equals 1/100 of one per cent and 50 basis points equals 0.5 per cent) change in interest rates on the bond portfolio: 20172016+/- basis point change50 basis points100 basis points50 basis points100 basis pointsBonds$19.7 million$39.4 million$18.9 million$37.8 millionThe WCB is also subject to interest rate risk through the wholly owned subsidiary WCB Realty Limited. The mortgages payable on investment properties are primarily fixed rate mortgages which do not create cash flow risk.Liquidity Risk Management Liquidity risk is the risk that the WCB will be unable to meet its financial obligations. To manage this risk, and avoid liquidation of portfolio assets under unfavourable conditions, the WCB maintains two credit facilities as discussed in Note 3.Next >