< Previous50Notes to Consolidated Financial Statements Year Ended December 31, 2020 ($ 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 1916 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 Act establishes the Accident Fund for the payment of compensation, outlays and expenses of the workers compensation system. The Accident Fund is funded through premiums collected from employers. The WCB does not receive government funding or assistance. The management of the Accident Fund is guided by the funding policy (Note 19). 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, 2020, 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.2020 WCB ANNUAL REPORT51Basis 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. As the COVID-19 pandemic continues to evolve, the WCB is closely monitoring market and economic conditions and the potential impact on the WCB’s results and operations. The economic environment in which the WCB operates continues to be subject to volatility. There is additional uncertainty in estimates and assumptions in the following areas and discussed as noted in the consolidated financial statements: level 3 portfolio investments (Note 5), employee benefits (Note 12), benefit liabilities (Note 13), and premium revenue (Note 15).Insurance Risk The WCB holds the insurance risk, according to the definition in IFRS 4 Insurance Contracts, for all classes of employers insured under the Act and consequently the consolidated financial statements include amounts related to all classes of employers.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. 52Foreign 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. Specific 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 534Receivables and other535Investment portfolio and mortgages payable on investment properties545Investment and real estate income597Deferred assessments628Property and equipment639Intangible assets6410Payables and accruals6511Workers' retirement annuity fund6612Employee benefits6613Benefit liabilities7115Premium revenue76Changes 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 yearNo new IFRS were adopted in the current year.IFRS issued but not yet effectiveIFRS 17 Insurance ContractsIn May 2017, the IASB issued IFRS 17 Insurance Contracts to replace IFRS 4 Insurance Contracts. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. One of the most significant changes requires the WCB to measure the benefit liability using a market-based discount rate, which is expected to increase the benefit liability and introduce increased volatility to the financial results. However, the complete financial impact of IFRS 17 cannot be reasonably estimated at this time. 2020 WCB ANNUAL REPORT53IFRS 17 will also change the financial statement presentation, separating insurance and investment activities, and require expanded disclosures about amounts recognized in the consolidated financial statements, significant judgements, and the nature and extent of risks arising from insurance contracts.The WCB will adopt IFRS 17 on the effective date of January 1, 2023.3. CASHAccounting policy Cash includes cash on hand and balances with banks, net of any outstanding cheques. Cash and short-term investments held by investment managers and custodians for investment purposes are included in the investment portfolio. Cash reported in the consolidated statement of financial position is comprised of:20202019Cash in transit and in banks$ 35,334 $ 27,437 Cheques issued and outstanding (4,093) (3,883)Net cash $ 31,241 $ 23,554 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. 4. RECEIVABLES AND OTHERAccounting policy Receivables are mainly assessed premiums due from Class E employers, recorded at the estimated premium payable net of a provision for doubtful accounts. Current assessments – Class A through Class D employers is comprised of current claim costs billed but not yet received from the Class A through Class D 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:20202019Premiums - Class E employers$15,488$ 4,892 Provision for doubtful accounts (1,156) (854)14,332 4,038 Current assessments - Class A through Class D employers 2,275 8 Sundry 4,135 3,748 Total receivables and other$20,742$ 7,794 545. INVESTMENT PORTFOLIO AND MORTGAGES PAYABLE ON INVESTMENT PROPERTIESAccounting policy Investment Portfolio and Mortgages Payable on Investment Properties The 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 Investments The 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.Investment Properties The 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.2020 WCB ANNUAL REPORT55Mortgages Payable on Investment Properties Mortgages 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:20202019Portfolio investments$ 1,781,809 $ 1,727,113 Investment properties 52,140 68,551 Investment portfolio 1,833,949 1,795,664 Mortgages payable on investment properties (15,126) (26,423)Total investments$ 1,818,823 $ 1,769,241 56Investment Portfolio Holdings The following table presents the value of the WCB’s investments, together with their classification under the fair value hierarchy:20202019Fair ValueLevel 1Level 2Level 3TotalTotalFixed IncomeBonds$ 491,034 $-$-$ 491,034 $ 498,867 Mortgages - 174,386 - 174,386 184,012 Cash and short term 26,614 -- 26,614 47,332 517,648 174,386 - 692,034 730,211 EquitiesCanadian 256,793 -- 256,793 238,286 U.S. 199,113 -- 199,113 184,717 Global 186,083 -- 186,083 179,170 Emerging markets 47,897 -- 47,897 43,541 Private placements - - 918 918 1,007 689,886 - 918 690,804 646,721 Real estatePortfolio investments-- 196,557 196,557 150,514 Investment properties*-- 52,140 52,140 68,551 -- 248,697 248,697 219,065 Infrastructure-- 202,414 202,414 199,667 Total investment portfolio$1,207,534 $ 174,386 $ 452,029 $ 1,833,949 $1,795,664* 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.2020 WCB ANNUAL REPORT57Level 3:The fair value is based on inputs that are not based on observable market data. The following techniques are used to determine the fair value of investments categorized as Level 3:• The fair value of private placement equity investments is determined by management based on financial information provided by individual capital fund managers, adjusted if deemed appropriate.• The fair value of the 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 investment properties 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 $6.17 / sq. ft. to $36.00 / sq. ft.Capitalization ratesFrom 5.25% to 11.50%Discount ratesFrom 6.3% to 10.3%Vacancy rates From 0.0% to 49.0% The following table reconciles the changes in the WCB’s Level 3 fair value measurements to December 31:20202019Balance at January 1$ 419,739 $294,087Market (losses) gains (11,090)5,094Purchases 57,073 121,506Sales (13,693)(948)Balance at December 31$ 452,029 $419,739Mortgages Payable on Investment Properties The mortgages payable on investment properties are recorded at amortized cost as follows:20202019Mortgages payable on investment properties$ 15,126 $ 26,423 58The 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 3.2%Interest terms Variable and fixedMaturity datesFrom 2022 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 $15.5 million as at December 31, 2020, ($26.4 million in 2019) and determined using the following: Interest ratesFrom 3.0% to 3.2%Term to maturity 14 months to 63 monthsThese mortgages are categorized as Level 2 of the fair value hierarchy.For 2021, scheduled principal and interest payments on these mortgages total $11.9 million. The scheduled amounts of principal repayments in each of the next five years are as follows:2021 202220232024 2025ThereafterTotal$ 528 $ 5,352 $ 376 $388$ 401 $ 8,081 $ 15,126 2020 WCB ANNUAL REPORT59Investment and Real Estate IncomeAccounting policy Income 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:20202019IncomeNet gains (losses)TotalTotalFixed IncomeBonds$ 14,822 $ 28,567 $ 43,389 $ 42,668 Mortgages 6,428 3,946 10,374 6,792 Cash and short term 325 207 532 864 21,575 32,720 54,295 50,324 EquitiesCanadian 6,069 12,459 18,528 56,462 U.S. 5,122 22,948 28,070 47,148 Global 4,532 30,098 34,630 30,136 Emerging markets 1,028 3,392 4,420 2,038 Private placements- (86) (86) 36 16,751 68,811 85,562 135,820 Real estate Portfolio investments 7,502 (1,586) 5,916 11,692 Investment properties* 2,668 (3,586) (918) (1,579) 10,170 (5,172) 4,998 10,113 Infrastructure 15,019 (5,832) 9,187 11,462 Investment income$ 63,515 $ 90,527 154,042 207,719 Less: Portfolio management expenses 8,320 7,767 Net investment income$ 145,722 $ 199,952 * Investment properties income includes gross rental income of $6.5 million net of operating expenses of $3.3 million and mortgage interest of $0.5 million.Commitments The WCB has contractual agreements to contribute further funding to a maximum of $15.7 million ($58.5 million in 2019) to specific investment projects to be financed from the existing portfolio or from available cash.Next >