< Previous5. 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 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 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.60 2021 WCB ANNUAL REPORTThe 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:20212020Portfolio investments$ 1,878,274 $ 1,781,809 Investment properties - 52,140 Investment portfolio 1,878,274 1,833,949 Mortgages payable on investment properties - (15,126)Total investments$ 1,878,274 $ 1,818,823 *All investment properties were sold in 2021.Investment Portfolio Holdings The following table presents the value of the WCB’s investments, together with their classification under the fair value hierarchy:20212020Fair ValueLevel 1Level 2Level 3TotalTotalFixed IncomeBonds$ 526,638 $-$-$ 526,638$ 491,034 Mortgages - 178,174- 178,174 174,386 Cash and short term 32,377-- 32,377 26,614 559,015 178,174- 737,189 692,034 EquitiesCanadian 269,798-- 269,798 256,793 U.S. 199,591 -- 199,591 199,113 Global 179,652 -- 179,652 186,083 Emerging markets 40,835 -- 40,835 47,897 Private placements - - 94 94 918 689,876- 94 689,970 690,804 Real estatePortfolio investments-- 243,134 243,134 196,557 Investment properties*---- 52,140 - - 243,134 243,134 248,697 Infrastructure-- 207,981 207,981 202,414 Total investment portfolio$ 1,248,891$ 178,174$ 451,209$ 1,878,274$ 1,833,949 * Investment properties include the commercial real estate properties consolidated from WCB Realty Limited, which includes directly owned properties and properties owned through joint arrangements.2021 WCB ANNUAL REPORT 61The fair value of the WCB’s portfolio investments and investment properties are categorized into three levels comprising the fair value hierarchy. Valuations are provided by investment managers for financial reporting purposes. Valuation techniques are selected based on the characteristics of the investment, with the overall objective of maximizing the use of market-based information. Management is responsible for ensuring that the chosen valuation technique is appropriate in the circumstances.The three levels of the fair value hierarchy are:Level 1:The fair value is based on quoted prices in active markets for identical assets.Level 2:The fair value is based on inputs other than quoted prices that are observable for the asset either directly or indirectly. The following technique is used: • The fair value of fixed income investments is determined using an income approach, calculating the present value of the future cash flows based on observable yield curves.Level 3:The fair value is based on inputs that are not based on observable market data. The following techniques are used to determine the fair value of investments categorized as Level 3:• The fair value of private placement equity investments is determined by management based on financial information provided by individual capital fund managers, adjusted if deemed appropriate.• The fair value of 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 following table reconciles the changes in the WCB’s Level 3 fair value measurements to December 31:20212020Balance at January 1$ 452,029 $ 419,739 Market (losses) gains43,442 (11,090)Purchases22,998 57,073 Sales (67,260) (13,693)Balance at December 31$ 451,209$ 452,029 Mortgages Payable on Investment Properties The mortgages payable on investment properties are recorded at amortized cost as follows:20212020Mortgages payable on investment properties$-$ 15,126 The fair value of the mortgages payable on investment properties is determined annually and is estimated based on current market rates for mortgages of similar terms and conditions. All investment properties with mortgages payable were sold in the year. The fair value of mortgages payable on investment properties was $15.5 million as at December 31, 2020. 62 2021 WCB ANNUAL REPORTInvestment and Real Estate IncomeAccounting policy Income from interest and dividends is recognized in the period earned, and changes in fair value are presented in the period in which they arise. Gross lease revenue for operating leases is recorded on the straight-line revenue basis.Investment income, including net rental income and changes in fair value, was derived from the following sources:20212020IncomeNet gains (losses)TotalTotalFixed IncomeBonds$ 19,875 $ (29,324)$ (9,449)$ 43,389 Mortgages 5,969 (2,182) 3,787 10,374 Cash and short term 109 - 109 532 25,953 (31,506) (5,553) 54,295 EquitiesCanadian 6,251 51,265 57,516 18,528 U.S. 2,772 37,251 40,023 28,070 Global 9,577 11,573 21,150 34,630 Emerging markets 1,319 (1,313) 6 4,420 Private placements - (37) (37) (86) 19,919 98,739 118,658 85,562 Real estate Portfolio investments 8,960 30,154 39,114 5,916 Investment properties* 1,689 (4,249) (2,560) (918) 10,649 25,905 36,554 4,998 Infrastructure7,89917,574 25,473 9,187 Investment income$64,420$110,712 175,132 154,042 Less: Portfolio management expenses 9,758 8,320 Net investment income$165,374$ 145,722 * Investment properties income includes gross rental income of $4.6 million net of operating expenses of $2.6 million and mortgage interest of $0.3 million.2021 WCB ANNUAL REPORT 636. 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 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 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 31.20212020% decrease in benchmark Estimated loss in fair value - Canadian16.3% $44.9 million 15.9% $41.5 million % decrease in benchmark Estimated loss in fair value - U.S.12.3% $24.8 million12.5% $25.3 million % decrease in benchmark Estimated loss in fair value - Global12.1% $12.8 million13.4% $14.3 million % decrease in benchmark Estimated loss in fair value - Emerging markets15.1% $6.2 million15.0% $7.2 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, 95 per cent (92 per cent in 2020) have at least a BBB credit rating. The WCB does not anticipate that any borrowers will fail to meet their obligations.Securities Lending The 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, 2021, these loans amounted to $207.0 million ($151.6 million in 2020). As at December 31, 2021, total collateral pledged to the WCB amounted to $217.3 million ($159.3 million in 2020). 64 2021 WCB ANNUAL REPORTForeign Exchange Risk Management The WCB has certain investments denominated in foreign currencies, which exposes the WCB to foreign currency risk. During 2021, 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 $421.6 million Canadian dollars (CAD) ($396.0 million CAD in 2020) or 22.4 per cent of the portfolio (21.7 per cent in 2020).The table below presents the adverse effects of a 10 per cent appreciation in the Canadian dollar versus the U.S. dollar exchange rate:20212020Estimated loss in fair value$38.3 million$36.0 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, 2021, the duration of the WCB’s bond portfolio was 8.4 years (8.3 years in 2020).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: 20212020Estimated loss in fair value of bonds$44.4 million$40.6 millionLiquidity Risk Management Liquidity risk is the risk that the WCB will be unable to meet its financial obligations. To manage this risk, and avoid liquidation of portfolio assets under unfavourable conditions, the WCB maintains two credit facilities as discussed in Note 3.2021 WCB ANNUAL REPORT 657. DEFERRED ASSESSMENTSAccounting policy Under the authority of the Act, the WCB may defer the collection of the funds, or any portion of the funds, required for the future cost of claims arising in respect of employers in Class A through Class D. Where the WCB defers the collection of the funds the amount deferred is a receivable. Deferred assessments represent the WCB’s estimate of the present value of assessments which will be received in the future to fund the future costs of existing claims that have arisen from the employees of Class A through Class D employers. The fair value for deferred assessments is not readily determinable. Deferred assessments may be secured by irrevocable letters of credit, surety bonds or other suitable forms of guarantee.The changes in deferred assessments were as follows:20212020Balance at beginning of year$ 166,413 $ 152,858 Increase in future cost liability 3,588 13,618 Decrease in pension-related transactions (587) (353)Interest allocation (86) (73)Increase in deferred assessments (Note 15) 2,915 13,192Refund of accumulated excess pension income 1,147 -Current pension surplus included in receivables and other544 363 Balance at end of year$ 171,019$ 166,413 66 2021 WCB ANNUAL REPORT8. PROPERTY AND EQUIPMENTAccounting policy Property and equipment are valued at cost, less accumulated amortization and any impairment loss. Right-of-use assets (leases) are measured at an amount equal to the lease liabilities (Note 10). Amortization is calculated on a straight line basis over the estimated useful life of the asset, as follows:Building40 yearsBuilding renovations and leasehold improvements2 to 10 yearsComputer equipment3 to 5 yearsFurniture, fixtures and equipment5 yearsLeasesLease termThe WCB does not recognize a lease liability or corresponding right-of-use asset for leases where the total lease term is less than 12 months or for leases of low value. Payments for these leases are recognized in operating expenses on a straight-line basis over the term of the lease. An 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:20212020Building and land1Building renovations and leaseholdsComputer equipmentFurniture, fixtures and equipmentTotalTotalCostAs at January 1$ 36,597 $ 12,529 $ 12,718 $ 5,765 $ 67,609 $66,499Additions - 184 205 7 396 1,110 Disposals (196) (427) (507) (130) (1,260)-As at December 31 36,401 12,286 12,416 5,642 66,74567,609AmortizationAs at January 1 (8,149) (7,589) (10,751) (4,708) (31,197)(27,118)Amortization charge (1,906) (1,019) (923) (472) (4,320)(4,079)Disposals 105 427 506 130 1,168-As at December 31 (9,950) (8,181) (11,168) (5,050) (34,349)(31,197) Net book value, as at December 31$ 26,451$ 4,105$ 1,248$ 592$ 32,396$ 36,412 1. Buildings include right-of-use assets of $4,782, net of accumulated depreciation of $884. 2021 WCB ANNUAL REPORT 679. INTANGIBLE ASSETSAccounting policy Acquired intangible assets, primarily computer software, are valued at cost less accumulated amortization. Amortization is calculated on a straight line basis over the estimated useful life, and included in operating expenses.Internally generated intangible assets, primarily computer software and systems development, including professional fees incurred to implement these assets, are valued at cost and amortized over their useful lives. Amortization is calculated on a straight line basis over the estimated useful life, as follows:Computer software 3 yearsInternally generated systems development 10 yearsThe carrying amounts of the WCB’s non-financial assets are reviewed at each reporting date to ensure that assets are not carried at a value in excess of the recoverable amount. The changes in intangible assets were as follows:20212020Computer softwareInternally developed systems and softwareTotalTotalCostAs at January 1$ 5,442 $ 27,023 $ 32,465 $ 31,770 Additions 187 - 187 695 Disposals (1,438) (1,391) (2,829) - As at December 31 4,191 25,632 29,823 32,465 AmortizationAs at January 1 (4,922) (18,518) (23,440) (21,201)Amortization charge (320) (1,503) (1,823) (2,239)Disposals 1,438 1,391 2,829 - As at December 31 (3,804) (18,630) (22,434) (23,440)Net book value, as at December 31$ 387$ 7,002$ 7,389$9,02568 2021 WCB ANNUAL REPORT10. PAYABLES AND ACCRUALSAccounting policy Payables and accruals are obligations to pay for goods and services acquired in the normal course of operations. The WCB records a liability and an expense for goods upon receipt or transfer of control, and for services when they are performed. For lease liabilities, the WCB records a liability and a right-of-use asset upon commencement of a lease. Lease liabilities are measured at the present value of remaining lease payments, discounted by the WCB’s incremental borrowing rate of 3.95 per cent. The amount in Employer refunds payable represents all outstanding employer accounts with credit balances, arising primarily from surplus distributions, prevention rebates and changes to estimated premiums due.Other payables include various payroll-related liabilities and deposits from Class A through Class D employers. The timing and amount of payables and accruals are readily determinable. The liability for each lease is settled at the end of its lease term; otherwise, these amounts are expected to be settled before the end of the next reporting period.Payables and accruals are comprised of:20212020Accounts payable and accrued liabilities$ 4,391 $5,080 Employer refunds payable 11,331 21,558Research and Workplace Innovation Program 1,272 1,773 Deposits from Class A through Class D employers 2,089 2,055 Lease liabilities 4,239 5,068 Other payables 1,670 1,450 Balance at end of year$ 24,992$36,9842021 WCB ANNUAL REPORT 69Next >