< Previous6. 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.The following sections describe the nature and extent of financial risk exposure and the related risk mitigation strategies.Market RiskThe 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 adverse change in the key risk variable – the sector benchmark – for each of the equity mandates in the WCB investment portfolio. Standard deviations are based on historical values for the past five years of market benchmark indices ending on December 31.one standard deviationEquities20182017% decrease in benchmark Estimated loss in fair value - Canadian9.6% $25.6 million 8.2% $23.9 million % decrease in benchmark Estimated loss in fair value - U.S.9.7% $20.0 million 9.8% $26.7 million % decrease in benchmark Estimated loss in fair value - Global10.7%$18.3 million10.9% $16.8 million% decrease in benchmark Estimated loss in fair value - Emerging markets11.7%$5.6 million11.0% $5.4 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, 78 per cent (82 per cent in 2017) have at least an A credit rating. The WCB does not anticipate that any borrowers will fail to meet their obligations.Securities 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, 2018, these loans amounted to $217.2 million ($233.8 million in 2017). As at December 31, 2018, total collateral pledged to the WCB amounted to $228.3 million ($245.6 million in 2017). 60 WCB 2018 ANNUAL REPORTForeign Exchange Risk ManagementThe WCB has certain investments denominated in foreign currencies, which exposes the WCB to foreign currency risk. During 2018, 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 (USD), with USD-denominated holdings of $313.5 million Canadian dollar (CAD) ($372.7 million CAD in 2017) or 18.6 per cent of the portfolio (21.3 per cent in 2017).The table below presents the adverse effects of a 10 per cent appreciation in the Canadian dollar versus the U.S. dollar exchange rate:20182017Estimated loss in fair value$28.5 million$33.9 millionInterest 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, 2018, the duration of the WCB’s bond portfolio was 7.7 years (7.6 years in 2017).The following table shows the effects of a negative 100 basis point (where one basis point equals 1/100 of one per cent) change in interest rates on the bond portfolio: 20182017Estimated loss in fair value of bonds$41.1 million$39.4 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.WCB 2018 ANNUAL REPORT 617. DEFERRED ASSESSMENTSAccounting policyDeferred 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.The changes in deferred assessments were as follows:20182017Balance at beginning of year$141,527 $136,951 Increase in future cost liability 4,258 4,550 Decrease in pension-related transactions (605) (1,413)Interest allocation (7) (40)Increase in deferred assessments (Note 15) 3,646 3,097 Current pension surplus included in receivables and other 371 1,479 Balance at end of year$145,544 $141,527 62 WCB 2018 ANNUAL REPORT8. PROPERTY AND EQUIPMENTAccounting policyProperty and equipment are valued at cost, less accumulated amortization and any 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 equipment 5 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 at a value in excess of the recoverable amount. The changes in property and equipment were as follows:20182017Building and landBuilding renovations and leaseholdsComputer equipmentFurniture, fixtures and equipmentTotalTotalCostAs at January 1$24,377 $ 8,411 $ 9,876 $ 4,568 $ 47,232 $ 43,203 Additions 3,163 3,324 846 1,196 8,529 4,374 Disposals-- (262) (286) (548) (345)As at December 31 27,540 11,735 10,460 5,478 55,213 47,232 AmortizationAs at January 1 (3,829) (4,229) (7,739) (3,342) (19,139) (16,317)Amortization charge (867) (1,262) (1,207) (511) (3,847) (3,167)Disposals- - 253 286 539 345 As at December 31 (4,696) (5,491) (8,693) (3,567) (22,447) (19,139)Net book value, as at December 31$22,844 $ 6,244 $ 1,767 $ 1,911 $ 32,766 $ 28,093 WCB 2018 ANNUAL REPORT 639. INTANGIBLE ASSETSAccounting policyAcquired 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 computer 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 development 10 yearsThe carrying amounts of the WCB’s non-financial assets are reviewed at each reporting date to ensure that assets are not carried at a value in excess of the recoverable amount. The changes in intangible assets were as follows:20182017Computer softwareInternally developed systems and softwareTotalTotalCostAs at January 1$ 4,471 $ 21,881 $ 26,352 $ 23,452 Additions 236 2,819 3,055 4,112 Disposals (3) (6) (9) (1,212)As at December 31 4,704 24,694 29,398 26,352 AmortizationAs at January 1 (4,156) (12,809) (16,965) (16,437)Amortization charge (210) (1,791) (2,001) (1,740)Disposals - 6 6 1,212As at December 31 (4,366) (14,594) (18,960) (16,965)Net book value, as at December 31$338$ 10,100 $10,438 $ 9,387 64 WCB 2018 ANNUAL REPORT10. PAYABLES AND ACCRUALSAccounting policyPayables 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 expected to be settled before the end of the next reporting period.Payables and accruals are comprised of:20182017Accounts payable and accrued liabilities$ 5,597 $ 8,610 Research and Workplace Innovation Program 2,469 2,472 Deposits from self-insured employers 5,363 5,995 Other payables 1,327 1,417 Balance at end of year$ 14,756 $ 18,494 11. WORKERS’ RETIREMENT ANNUITY FUNDAccounting policyIn accordance with Section 42(2) of the 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.The changes in the workers’ retirement annuity fund were as follows:20182017Balance as at January 1$ 33,701 $ 31,245 Investment income 413 2,483 WCB contributions 1,717 1,669 Workers' contributions 515 475 Benefits paid (2,159) (2,171)Balance as at December 31$ 34,187 $33,701 WCB 2018 ANNUAL REPORT 6512. EMPLOYEE BENEFITSAccounting policyThe 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. 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.Sick leave plan The 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.WCB Retiree Healthcare Spending Account (RHCSA)The RHCSA is a defined benefit plan. Eligible retirees receive a predetermined annual credit amount which may be used to cover healthcare expenses not covered by other plans. The WCB funds this plan directly via the plan administrator.Recognition and measurementThe 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.66 WCB 2018 ANNUAL REPORTThe 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 Employee Benefits, 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.When past service costs arise they are recognized immediately.Components of the employee benefits liability are as follows:20182017Retirement plans$93,475 $ 109,799 Sick leave plan 12,352 12,760 Employee vacation entitlements 4,618 4,723 Retiree healthcare spending account 2,622 2,583 Other 1,024 589 As at December 31$ 114,091 $ 130,454 The key actuarial assumptions used to value the employee benefit liabilities for accounting purposes are as follows:20182017Discount rate4.00%3.50%Rate of compensation increase3.50%3.50%WCB 2018 ANNUAL REPORT 67Retirement plan A reconciliation of the retirement plan net defined benefit liability and its components is as follows:Defined Benefit ObligationFair Value of Plan AssetsNet Defined Benefit LiabilityNet Defined Benefit Liability20182017Balance at January 1$ 323,828 $(214,029)$ 109,799 $77,911 Benefit cost recognized in income:Current service cost 14,705 - 14,705 13,077 Interest expense (income) 11,229 (7,533) 3,696 2,948 Employee contributions - (3,612) (3,612) (3,619) 25,934 (11,145) 14,789 12,406 Remeasurements recognized in OCI:Experience (gain) loss (3,976)- (3,976) 1,755 (Gain) loss from changes in actuarial assumptions (29,594)- (29,594) 31,438 Return on plan assets excluding interest income- 7,215 7,215 (8,911) (33,570) 7,215 (26,355) 24,282 Other changes:Employer contributions- (4,758) (4,758) (4,800)Transfers to the plan 869 (869)--Benefits paid (6,828) 6,828 -- (5,959) 1,201 (4,758) (4,800)Balance at December 31$310,233 $ (216,758)$ 93,475 109,799 The most recent actuarial valuation of the WCB Retirement Plan for funding purposes, to be filed with the pension regulators, was as at December 31, 2018. This funding valuation showed a funding deficit of $4.9 million (2017 valuation, surplus of $4.4 million). The solvency deficit as at December 31, 2018 was $106.6 million (2017 valuation, deficit of $97.6 million). The WCB is not required to fund this deficiency as the WCB is exempt from the solvency and transfer deficiency provisions of the Pension Benefits Act.The fair value of the retirement plan assets as at December 31 is: 20182017EquityCanadian$ 53,865 $53,804 Foreign (including US) 64,927 64,111 118,792 117,915 Fixed income 53,450 53,079 Real estate 44,516 43,035 As at December 31$216,758 $214,029 68 WCB 2018 ANNUAL REPORTThe retirement plan assets are wholly invested in segregated funds. The fair value represents the retirement plans’ share of the net asset value provided by the custodian and is based on the last market price for the underlying assets. At December 31, 2018, plan assets are categorized as Level 1 with the exception of certain fixed income investments which are categorized as Level 2. Sick leave plan A reconciliation of the sick leave plan net defined benefit liability (equal to the defined benefit obligation) is as follows:20182017Balance at January 1$ 12,760 $ 12,031 Benefit cost recognized in income:Current service cost 661 605 Interest expense 430 464 1,091 1,069 Remeasurements recognized in OCI:Experience gain(11) (11)(Gain) loss on change in actuarial assumptions (514) 522 (525) 511 Benefits paid directly by the employer (974) (851)Net defined benefit liability at December 31$ 12,352 $ 12,760 WCB Retiree Healthcare Spending Account (RHCSA)Details of the WCB RHCSA are as follows:20182017Balance at January 1$2,583 $2,188Benefit cost recognized in income: Current service cost 118 102Interest expense 90 87 208 189Remeasurements recognized in OCI:(Gain) loss on change in actuarial assumptions (140)224Employer contributions (29) (18)Change in net defined benefit liability39 395Net defined benefit liability at December 31$ 2,622 $ 2,583 Defined benefit plan risksThe defined benefit plans expose the WCB to economic and demographic actuarial risk.Economic riskThe retirement plan is exposed to investment risk as plan assets are invested in equity, fixed income and other assets. The defined benefit plans are exposed to interest rate risk through assumptions based on economic factors such as discounts determined with reference to bond markets. Demographic riskDemographic factors affect current and future benefits costs with respect to the amount and timing of expected payments. Demographic factors include average age, retirement rates and longevity. WCB 2018 ANNUAL REPORT 69Next >
< PreviousCONSOLIDATED STATEMENT OF CASH FLOWSYear Ended December 31(in thousands of dollars)Note20182017Operating cash flowsPremiums from employers$ 208,713 $ 238,414 Investment income61,158 45,907 Claim payments13 (180,687) (178,762)Purchases of goods and services (94,345) (89,895)Net operating cash flows(5,161) 15,664 Investing cash flowsPurchases of investments(1,124,104) (814,670)Proceeds on disposal of investments1,155,461 805,931 Asset acquisitions (11,584) (8,486)Net investing cash flows19,773 (17,225)Financing cash flowsProceeds from short term loans 486 10,843 Repayment of short term loans (486) (10,843)Net financing cash flows--Net increase (decrease) in cash 14,612 (1,561)Cash at beginning of year 26,668 28,229 Cash at end of year$41,280 $ 26,668 The accompanying notes are an integral part of the consolidated financial statements.50 WCB 2018 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2018($ 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 has its corporate head office in Winnipeg, Manitoba. 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, a division of the WCB, 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 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 (general employers’ pool) employers exists. WCB 2018 ANNUAL REPORT 512. 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, 2018, 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 the 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. 52 WCB 2018 ANNUAL REPORTSpecific Accounting PoliciesIn order to facilitate an understanding of the WCB’s consolidated financial statements, the following significant accounting policies are disclosed in the related notes:NoteTopicPage3Cash 544Receivables and other555Investment portfolio and mortgages payable on investment properties555Investment and real estate income597Deferred assessments628Property and equipment639Intangible assets6410Payables and accruals6511Workers’ retirement annuity fund6512Employee benefits6613Benefit liabilities7015Premium revenue75Changes 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 adopted in the current yearIFRS 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. The WCB has adopted IFRS 9 at the effective date of January 1, 2018. The adoption of the standard did not have a material impact on the consolidated financial statements. IFRS 15 Revenue from Contracts with CustomersIn May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers which replaced IAS 18 Revenue along with related standards and interpretations. 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. WCB 2018 ANNUAL REPORT 53IFRS 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 has adopted IFRS 15 at the effective date of January 1, 2018. The adoption of the standard did not have a material impact on the consolidated financial statements. IFRS issued but not yet effective 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. The WCB is a party to operating leases for office premises and office equipment that meet the definition of a lease under IFRS 16. At December 31, 2018, the WCB has operating lease commitments of $12.6 million (Note 18). Upon adoption of the standard the WCB will recognize a right-of-use asset and a corresponding lease liability in respect to these leases. The WCB will adopt IFRS 16 at the effective date of January 1, 2019, using the modified retrospective approach. Under this approach, the cumulative effect of initially applying IFRS 16 is recognized as an adjustment to the accident fund reserve at the date of adoption. IFRS 17 Insurance ContractsIn May 2017, the IASB issued IFRS 17 Insurance Contracts which replaced IFRS 4 Insurance Contracts. The new standard has a tentative effective date of January 1, 2022, and early adoption is permitted. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. The WCB has established a project team to implement IFRS 17. The team is currently researching and analysing the standard, including accounting policy choices. The adoption of the standard could have significant impacts on the WCB’s consolidated financial statements; however, the amount of the impact cannot be reasonably estimated at this time. 3. CASH Accounting policyCash includes cash on hand and balances with banks, net of any outstanding cheques. Cash and short-term investments held by investment managers and custodians for investment purposes are included in the investment portfolio. Cash reported in the consolidated statement of financial position is comprised of:20182017Cash in transit and in banks$ 45,489 $ 29,967 Cheques issued and outstanding (4,209) (3,299)Net cash$ 41,280 $ 26,668 In 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. 54 WCB 2018 ANNUAL REPORT4. RECEIVABLES AND OTHERAccounting policyReceivables are mainly assessed premiums due from Class E employers, recorded at the estimated premium payable net of a provision for doubtful accounts. Current assessments – self-insured employers is comprised of current claim costs billed, but not yet received from the self-insured employers. 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:20182017Premiums - Class E employers$2,841$6,253Provision for doubtful accounts (940) (549)1,9015,704Current assessments - Self-insured employers1,900799Sundry4,2405,270Total receivables and other$8,041$11,7735. 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.WCB 2018 ANNUAL REPORT 55Investment 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. 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 consolidated statement of financial position as:20182017Portfolio investments$ 1,631,858 $ 1,645,069 Investment properties 72,454 144,911 Investment portfolio$ 1,704,312 $ 1,789,980 Mortgages payable on investment properties (27,269) (52,096)Total investments 1,677,043 1,737,884 56 WCB 2018 ANNUAL REPORTInvestment Portfolio HoldingsThe following table presents the value of the WCB’s investments, together with their classification under the fair value hierarchy:20182017Fair ValueLevel 1Level 2Level 3TotalTotalFixed IncomeBonds$ 529,180 $-$-$ 529,180 $ 513,111 Mortgages- 177,220 - 177,220 169,885 Cash and short term 18,316 -- 18,316 42,632 547,496 177,220 - 724,716 725,628 EquitiesCanadian 263,657 -- 263,657 284,287 U.S. 203,223 -- 203,223 263,994 Global 171,069 -- 171,069 153,797 Emerging markets 47,560 -- 47,560 48,881 Private placements-- 1,037 1,037 2,696 685,509 - 1,037 686,546 753,655 Real estatePortfolio investments-- 92,611 92,611 59,288 Investment properties*-- 72,454 72,454 144,911 -- 165,065 165,065 204,199 Infrastructure-- 127,985 127,985 106,498 Total investment portfolio$1,233,005$ 177,220 $ 294,087 $1,704,312 $1,789,980 *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.WCB 2018 ANNUAL REPORT 57• The fair value of the infrastructure pooled funds is determined based on the underlying assets held 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 net 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, the capitalization rate decreases, the discount rate decreases or the estimated vacancy 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 $45.50 / sq. ft.Capitalization ratesFrom 5.25% to 8.25%Discount ratesFrom 6.5% to 8.3%Vacancy ratesFrom 0.0% to 25.0%The following table reconciles the changes in the WCB’s Level 3 fair value measurements to December 31:20182017Balance at January 1$ 313,393 $ 334,858 Market gains (losses)21,220 (3,066)Purchases51,074 2,854 Sales(91,600) (21,253)Balance at December 31$ 294,087 $ 313,393 Mortgages Payable on Investment Properties The mortgages payable on investment properties are recorded at amortized cost as follows:20182017Mortgages payable on investment properties$27,269$52,096The following information represents key facts related to mortgages payable on rental properties. Mortgages are secured by the underlying investment property.Interest ratesFrom 3.0% to 4.3%Interest termsVariable and fixedMaturity datesFrom 2019 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 $27.0 million as at December 31, 2018, ($52.1 million in 2017) and determined using the following: Interest ratesFrom 3.0% to 4.2%Term to maturity 39 month to 88 months58 WCB 2018 ANNUAL REPORTThese mortgages are categorized as Level 2 of the fair value hierarchy.For 2019, scheduled principal and interest payments on these mortgages total $0.8 million. The scheduled amounts of principal repayments in each of the next five years are as follows:20192020202120222023ThereafterTotal$846$877$909$5,747$789$18,101$27,269Investment and Real Estate IncomeAccounting policyIncome from interest and dividends is recognized in the period earned and changes in fair value are presented in the period in which they arise. Gross lease revenue for operating leases is recorded on the straight-line revenue basis.Investment income, including net rental income and changes in fair value, was derived from the following sources:20182017IncomeNet gains (losses)TotalTotalFixed IncomeBonds$ 17,393 $ (9,761)$ 7,632 $ 13,570 Mortgages 5,992 1,343 7,335 3,406 Cash and short term 657 55 712 344 24,042 (8,363) 15,679 17,320 EquitiesCanadian 7,233 (24,176) (16,943) 20,891 U.S. 5,416 8,783 14,199 43,611 Global 13,537 (29,428) (15,891) 28,268 Emerging markets1,108 (2,427) (1,319) 9,776 Private placements 132 171 303 83 27,426 (47,077) (19,651) 102,629 Real estate Portfolio investments 4,539 7,484 12,023 7,116 Investment properties* 4,439 (5,590) (1,151) (224) 8,978 1,894 10,872 6,892 Infrastructure 5,377 17,264 22,641 10,111 Investment income$ 65,823 $ (36,282) 29,541 136,952 Less: Portfolio management expenses 7,784 7,183 Net investment income$ 21,757 $ 129,769 *Investment properties income includes gross rental income of $10.8 million net of operating expenses of $5.3 million and mortgage interest of $1.1 million.Commitments The WCB has contractual agreements to contribute further funding to a maximum of $123.9 million ($20.0 million in 2017) to specific investment projects to be financed from the existing portfolio or from available cash.WCB 2018 ANNUAL REPORT 59Next >