< 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 >