SAMPLE PSAB COLLEGE ILLUSTRATIVE FINANCIAL STATEMENTS FIRST-TIME ADOPTER

Transcription

1 SAMPLE PSAB COLLEGE ILLUSTRATIVE FINANCIAL STATEMENTS FIRST-TIME ADOPTER

2 Illustrative PSAB Financial Statements The purpose of this publication is to assist colleges in preparing their first Public Sector Accounting Standards (PSAB) financial statements for the year ended March 31, In these financial statements, PS 2125 First-time Adoption by Government Organizations has been applied in making the transition from pre-changeover Canadian GAAP to PSAB for Government NPOs. Please note that PS 2125 allows a number of options upon transition. In addition, there are accounting choices available in various areas that allow different accounting treatments (for example, deferral method versus restricted fund method of accounting for contributions). Note that some accounting policies chosen in these illustrative financial statements may be different than the ones you have chosen for your college. The adoption of PSAB for Government NPOs will have the most significant impact on the following areas of a college s financial statements: Financial Statement Item Pre-changeover GAAP PSAB for Government NPOs Non-vesting sick leave Not recognized as a liability. Recognized as a liability (see Note 2 to liability financial statements). Post-employment benefits and compensated absences liabilities (formerly called employee future benefits) Financial instruments - measurement Financial instruments - disclosures The discount rate used to calculate the liability for employee future benefits is the market yield on high quality corporate bonds. Extensive requirements with financial instruments being grouped into categories based on the nature of the instrument as well as management's accounting policy choices. Limited disclosure requirements under Section The rate used must be either the college s cost of borrowing or the plan asset earnings (see Note 2 to the financial statements). The changes under PSAB for Government NPOs and the new financial instrument standard within PSAB (PS 3450) are extensive and include a simplified approach to the recognition and measurement of most financial instruments. Financial instruments are classified as either amortized cost or fair value depending on the nature of the instrument. There is also the introduction of accumulated remeasurement gains and losses where fluctuations in fair value for derivatives and instruments measured at fair value are recognized until ultimate disposition of the instrument. See Note 3 and the Appendices for an in depth discussion of these differences and their effect. Extensive disclosure requirements under PS Disclosures include how colleges are exposed to risks arising from their financial instruments and how these risks are mitigated, disclosure of the categorization of financial instruments and the breakdown of colleges' financial instruments by how their fair value is measured. See Note 20 to the financial statements and the Appendices.

3 Illustrative PSAB Financial Statements These financial statements are based on the following assumptions about the example College: - The College has chosen to adopt PSAB plus the 4200 series of standards applicable to government not-for-profit organizations. - The College classified its bond portfolio as held-to-maturity under pre-changeover Canadian GAAP with bonds being measured at amortized cost using the effective interest rate method. Upon adoption of PSAB for Government NPOs, the College chose to designate its bond portfolio to be measured at fair value with fluctuations in fair value being recognized in the statement of remeasurement gains/(losses). See the Appendices for further discussion of this election. - The College classified its equities as held-for-trading under pre-changeover Canadian GAAP with equities being measured at fair value with fluctuations being recorded in the statement of operations. Upon adoption of PSAB for Government NPOs, equities are classified into the fair value category as they are quoted in an active market and fluctuations in fair value are being recognized in the statement of remeasurement gains/(losses). - The College applied hedge accounting to its derivative financial instrument (an interest rate swap) under pre-changeover Canadian GAAP. The derivative was recorded at fair value as an asset/liability on the statement of financial position with fluctuations in fair value being recorded directly to net assets in a separate unrestricted fund. Upon adoption of PS 3450 Financial Instruments, the previously accumulated fair value adjustment is reclassified to accumulated remeasurement gains/(losses). - The College s tangible capital assets do not include any assets under capital lease. - The College has selected its internal rate of borrowing to be its discount rate for retirement benefit calculations (PSAB for government NPOs allows the rate of return on plan assets to be used alternatively). PS 2125 contains numerous optional exemptions upon the adoption of PSAB for Government NPOs. For the purpose of this publication, these illustrative financial statements have taken the exemptions having the most relevance to colleges under normal circumstances. Users are cautioned that they must consider their own particular circumstances in making choices under PS 2125 as each college may have circumstances and transactions not contemplated in the preparation of this publication. The optional exemptions taken are described in Note 2 and explained in Appendices topic #7. Certain explanatory details and discussions of possible alternative accounting treatments or explanatory information are beyond the scope of the body of the financial statements and thus have been included in appendices to the financial statements. Where financial statement treatments and items require further explanation, a superscript titled App. #1, #2, #3, etc. has been included to the right of the relevant item. The publication is based on standards that have been issued by the Public Sector Accounting Board (PSAB) by January 1, These sample financial statements should not be used as a substitute for referring to standards and interpretations themselves. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

4 Statement of Financial Position ASSETS March 31, 2013 March 31, 2012 April 1, 2011 CURRENT ASSETS Cash $ 33,068,000 $ 15,140,000 $ 1,575,000 Accounts receivable (Note 20) 16,537,500 15,750,000 15,000,000 Temporary investments (Note 4) 4,300,000 4,200,000 4,000,000 Inventory 110, , ,000 Prepaid expenses 3,638,250 3,465,000 3,300,000 57,654,000 38,660,000 23,975,000 App. #1 INTEREST IN SAMPLE PSAB CULINARY JOINT VENTURE (Note 5) 2,500,000 2,350,000 2,225,000 LONG-TERM INVESTMENTS (Note 4) 54,000,000 51,750,000 50,000,000 LONG-TERM RECEIVABLE (Note 6) 6,300,000 7,300,000 9,400,000 CONSTRUCTION IN PROGRESS (Note 7) 61,100,000 60,500,000 58,000,000 CAPITAL ASSETS (Note 8) 160,398, ,870, ,700,000 $ 341,952,500 $ 313,430,000 $ 289,300,000 LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities $ 37,485,000 $ 35,700,000 $ 34,000,000 Deferred revenue (Note 9) 33,846,750 32,235,000 30,700,000 Vacation pay 9,150,750 8,715,000 8,300,000 Bank loans (Note 10) 2,600,000 2,800,000 3,000,000 Term debt (Note 11) 18,300,000 18,700,000 19,200, ,382,500 98,150,000 95,200,000 POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES (Note 12) (a) 6,407,500 5,840,000 4,910,000 DEFERRED CONTRIBUTIONS (Note 13) 2,100,000 2,000,000 1,900,000 DEFERRED CAPITAL CONTRIBUTIONS (Note 14) 73,500,000 74,000,000 74,800,000 DEFERRED CAPITAL CONTRIBUTIONS RELATING TO CONSTRUCTION IN PROGRESS (Note 15) 55,500,000 56,000,000 56,200,000 INTEREST RATE SWAP (Note 11) 1,900,000 2,100,000 2,400, ,790, ,090, ,410,000 NET ASSETS Unrestricted Operating 42,499,500 21,195,000 1,700,000 Post-employment benefits and compensated absences (6,407,500) (5,840,000) (4,910,000) Vacation pay (9,150,750) (8,715,000) (8,300,000) Interest rate swap (Note 11) - (2,100,000) (2,400,000) 26,941,250 4,540,000 (13,910,000) INVESTED IN CAPITAL ASSETS (Note 16) 60,086,250 57,225,000 54,500,000 INTERNALLY RESTRICTED (Note 17) 855, , ,000 EXTERNALLY RESTRICTED (Note 18) 12,865,000 12,750,000 12,500, ,747,500 75,340,000 53,890,000 ACCUMULATED REMEASUREMENT GAINS 415, ,162,500 75,340,000 53,890,000 $ 341,952,500 $ 313,430,000 $ 289,300, (a) Note that these liabilities were typically described as "employee future benefits" in college's pre-changeover GAAP financial statements. The terminology used in these example financial statements is the technical definition provided by the relevant sections in PSAB, which describe the relevant liabilities as post-employment and compensated absences liabilities. The accompanying notes are an integral part of these financial statements Page 1 of 35

5 Statement of Operations For the years ended March 31, 2013 March 31, 2012 REVENUE Grants and reimbursements $ 105,600,000 $ 100,600,000 Tuition revenue 101,300,000 96,500,000 Contract training 8,000,000 7,600,000 Amortization of deferred capital contributions 5,600,000 5,300,000 App. #2 Realized gains on sale of temporary investments 42,500 - Interest income 1,500,000 1,400,000 Other income 10,100,000 9,600,000 App. #1 Share of income of joint venture (Note 5) 150, ,000 Ancillary operations 7,900,000 7,500, ,192, ,625,000 EXPENSES Salaries and benefits 139,400, ,725,000 Operating expenses 42,600,000 40,600,000 Plant and property maintenance 11,100,000 10,600,000 Amortization of capital assets 13,200,000 12,600,000 Bursaries and scholarships 4,300,000 4,100,000 Ancillary operations 6,400,000 6,100, ,000, ,725,000 EXCESS OF REVENUE OVER EXPENSES FOR THE YEAR $ 23,192,500 $ 20,900,000 The accompanying notes are an integral part of these financial statements Page 2 of 35

6 Statement of Changes in Net Assets Unrestricted March 31, 2013 Capital Restricted Internally Restricted Externally Restricted (Note 17) (Note 18) (Note 19) Total BALANCE, BEGINNING OF YEAR $ 4,540,000 $ 57,225,000 $ 825,000 $ 12,750,000 $ 75,340,000 RECLASSIFICATION OF UNREALIZED LOSSES ON DERIVATIVE DUE TO ADOPTION OF PS 3450 (NOTE 3) 2,100, ,100,000 ENDOWMENTS RECEIVED DURING THE YEAR , ,000 INTERNALLY RESTRICTED SCHOLARSHIPS & BURSARIES (30,000) - 30, EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES 30,792,500 (7,600,000) ,192,500 INVESTMENT IN CAPITAL ASSETS (10,461,250) 10,461, BALANCE, END OF YEAR $ 26,941,250 $ 60,086,250 $ 855,000 $ 12,865,000 $ 100,747,500 March 31, 2012 Unrestricted Capital Restricted Internally Restricted Externally Restricted (Note 17) (Note 18) (Note 19) Total BALANCE, BEGINNING OF YEAR $ (13,910,000) $ 54,500,000 $ 800,000 $ 12,500,000 $ 53,890,000 ENDOWMENTS RECEIVED DURING THE YEAR , ,000 INTERNALLY RESTRICTED SCHOLARSHIPS & BURSARIES (25,000) - 25, EXCESS (DEFICIENCY) OF REVENUES OVER EXPENSES 28,200,000 (7,300,000) ,900,000 CHANGE IN FAIR VALUE OF INTEREST RATE SWAP 300, ,000 INVESTMENT IN CAPITAL ASSETS (10,025,000) 10,025, BALANCE, END OF YEAR $ 4,540,000 $ 57,225,000 $ 825,000 $ 12,750,000 $ 75,340,000 The accompanying notes are an integral part of these financial statements Page 3 of 35

7 Statement of Cash Flows March 31, 2013 March 31, 2012 NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES OPERATING Excess of revenue over expenditure $ 23,192,500 $ 20,900,000 Items not involving cash: Realized gains on sale of temporary investments App. #2 (42,500) - Share of income of joint venture (Note 5) (150,000) (125,000) Amortization of capital assets 13,200,000 12,600,000 Amortization of deferred capital contributions (5,600,000) (5,300,000) Deferred contributions recognized as revenue in the year (1,650,000) (1,700,000) 28,950,000 26,375,000 Accrual for post-employment benefits and compensated absences 567, ,000 Changes in non-cash working capital items: Accounts receivable (787,500) (750,000) Inventory (5,250) (5,000) Prepaid expenses (173,250) (165,000) Accounts payable and accrued liabilities 1,785,000 1,700,000 Accrual for vacation pay 435, ,000 Deferred revenue 1,611,750 1,535,000 32,384,000 30,035,000 FINANCING Deferred contributions 1,750,000 1,800,000 Repayment of bank loans (200,000) (200,000) Repayment of term debt (400,000) (500,000) Endowment contributions 115, ,000 1,265,000 1,350,000 App. #8 CAPITAL Contributions received for capital purposes 4,000,000 2,500,000 Contributions received for construction in progress 600,000 1,800,000 Construction in progress (1,700,000) (4,500,000) Purchase of capital assets (19,628,500) (17,770,000) (16,728,500) (17,970,000) INVESTING Long-term receivable 1,000,000 2,100,000 Purchase of long-term investments - (1,750,000) Purchase of temporary investments (185,000) (200,000) Proceeds on sale of temporary investments 192,500-1,007, ,000 NET CASH INFLOW 17,928,000 13,565,000 CASH, BEGINNING OF YEAR 15,140,000 1,575,000 CASH, END OF YEAR $ 33,068,000 $ 15,140,000 Supplemental disclosure INTEREST PAID $ 1,550,000 $ 1,425,000 INTEREST RECEIVED $ 850,000 $ 725,000 The accompanying notes are an integral part of these financial statements Page 4 of 35

8 Statement of Remeasurement Gains and Losses March 31, 2013 March 31, 2012 Accumulated remeasurement losses at beginning of year $ - $ - Adjustment upon adoption of financial instruments section (Note 3) (a) (100,000) App. #3 - Unrealized gains attributable to: Temporary investments 100,000 - Long-term investments 257,500 - Derivative - interest rate swap 200,000 - Amounts reclassified to the statement of operations: Disposition of long-term investments (42,500) App. #2 - Net remeasurement gains for the year 415,000 - Accumulated remeasurement gains at end of year $ 415,000 $ - (a) The adjustment to opening accumulated remeasurement gains/(losses) relates to: Increase due to classifying bond portfolio in the FV category 2,000,000 Decrease due to reclassification of fair value of interest rate swap (2,100,000) Net decrease upon adoption of PSAB (100,000) See Note 3 to the example financial statements for a detailed explanation of these adjustments. The accompanying notes are an integral part of these financial statements Page 5 of 35

9 1. SIGNIFICANT ACCOUNTING POLICIES Description of Organization Sample PSAB College, established in 1967, is an Ontario college of applied arts and technology duly established pursuant to Ontario regulation 34/03 made under the Ontario Colleges of Applied Arts and Technology Act, The College is an agency of the Crown and provides postsecondary, vocationally oriented education in the areas of applied arts, business, health sciences and technology. The College is a not-for-profit organization and, as such, is exempt from income taxes under the Income Tax Act (Canada). Basis of presentation Revenue recognition The financial statements of the College have been prepared in accordance with Canadian public sector accounting standards for government not-for-profit organizations, including the 4200 series of standards, as issued by the Public Sector Accounting Board ( PSAB for Government NPOs ). The College follows the deferral method of accounting for contributions, which include donations and government grants. Tuition fees and contract training revenues are recognized as income to the extent that the related courses and services are provided within the fiscal year of the College. Ancillary revenues including parking, bookstore, residence and other sundry revenues are recognized when products are delivered or services are provided to the student or client, the sales price is fixed and determinable, and collection is reasonably assured. Unrestricted contributions are recognized as revenue when received or receivable. Externally restricted contributions and restricted investment income are recognized as revenue in the year in which the related expenses are incurred. Restricted contributions for the purchase of capital assets are deferred and amortized into revenue at a rate corresponding with the amortization rate for the related capital assets. Endowment contributions are recognized as direct increases in endowed net assets. Restricted investment income is recognized as revenue in the year in which the related expenses are incurred. Restricted investment income that must be maintained as an endowment is credited to net assets. Unrestricted investment income is recognized as revenue when earned. Page 6 of 35

10 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Inventory Capital assets Inventories are valued at the lower of cost and net realizable value. Cost is determined on the first-in first-out basis. Purchased capital assets are recorded at cost less accumulated amortization. Contributed capital assets are recorded at fair value at the date of contribution. Repairs and maintenance costs are charged to expense. Betterments that extend the estimated life of an asset are capitalized. When a capital asset no longer contributes to the College s ability to provide services or the value of future economic benefits associated with the capital asset is less than its net book value, the carrying value of the capital asset is reduced to reflect the decline in the asset s value. Construction in progress is not recorded as a capital asset, or amortized until construction it is put into service. Capital assets are capitalized on acquisition and amortized on a straight-line basis over their useful lives, which has been estimated to be as follows: Buildings & building improvements - 20 to 40 years Building-student residence - 20 years Large machinery - 20 years Leasehold improvements - 5 years Computer software - 5 years Furniture, equipment and computers - 5 years Vacation pay Retirement and post-employment benefits and compensated absences The College recognizes vacation pay as an expense on the accrual basis. The College provides defined retirement and post-employment benefits and compensated absences to certain employee groups. These benefits include pension, health and dental, vesting sick leave and non-vesting sick leave. The College has adopted the following policies with respect to accounting for these employee benefits: (i) The costs of post-employment future benefits are actuarially determined using management s best estimate of health care costs, disability recovery rates and discount rates. Adjustments to these costs arising from changes in estimates and experience gains and losses are amortized to income over the estimated average remaining service life of the employee groups on a straight line basis (ii) The costs of the multi-employer defined benefit pension are the employer s contributions due to the plan in the period. Page 7 of 35

11 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Retirement and post-employment benefits and compensated absences (continued) (iii) The cost of vesting and non-vesting sick leave benefits are actuarially determined using management s best estimate of salary escalation, employees use of entitlement and discount rates. Adjustments to these costs arising from changes in actuarial assumption and/or experience are recognized over the estimated average remaining service life of the employees. (iv) The discount used in the determination of the abovementioned liabilities is equal to the College s internal rate of borrowing. Interest in Joint Venture The interest in the joint venture is accounted for using the modified equity method wherein the interest in the joint venture is equal to the College s 50% share of the net assets. No adjustment is made for the basis of accounting of the joint venture being different than PSAB for Government NPOs. Financial instruments The College classifies its financial instruments as either fair value or amortized cost. The College s accounting policy for each category is as follows: Fair value This category includes derivatives and equity instruments quoted in an active market. The College has designated its bond portfolio that would otherwise be classified into the amortized cost category at fair value as the College manages and reports performance of it on a fair value basis. They are initially recognized at cost and subsequently carried at fair value. Unrealized changes in fair value are recognized in the statement of remeasurement gains and losses until they are realized, when they are transferred to the statement of operations. Transaction costs related to financial instruments in the fair value category are expensed as incurred. Where a decline in fair value is determined to be other than temporary, the amount of the loss is removed from accumulated remeasurement gains and losses and recognized in the statement of operations. On sale, the amount held in accumulated remeasurement gains and losses associated with that instrument is removed from net assets and recognized in the statement of operations. Page 8 of 35

12 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Amortized cost This category includes accounts receivable, long-term receivable, accounts payable and accrued liabilities, bank loans and term debt. They are initially recognized at cost and subsequently carried at amortized cost using the effective interest rate method, less any impairment losses on financial assets. Transaction costs related to financial instruments in the amortized cost category are added to the carrying value of the instrument. Writedowns on financial assets in the amortized cost category are recognized when the amount of a loss is known with sufficient precision, and there is no realistic prospect of recovery. Financial assets are then written down to net recoverable value with the writedown being recognized in the statement of operations. Management estimates The preparation of financial statements in conformity with PSAB for Government NPOs requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. Areas of key estimation include determination of fair value for long-term investments, allowance for doubtful accounts, and actuarial estimation of postemployment benefits and compensated absences liabilities. Page 9 of 35

13 2. FIRST TIME ADOPTION OF PUBLIC SECTOR ACCOUNTING STANDARDS The Public Sector Accounting Board (PSAB) issued new standards for government (public sector) not-forprofit organizations. For years beginning on or after January 1, 2012, government NPOs have a choice of: 1. Public sector accounting standards including PS for government not-for-profit organizations; or 2. Public sector accounting standards The College has chosen to follow Public Sector Accounting standards including PS for government not-for-profit organizations. Effective April 1, 2012, the College adopted the requirements of the new accounting framework, Canadian Public Sector Accounting Standards for Not-for-Profit Organizations (PSAB for Government NPOs). These are the College s first financial statements prepared in accordance with this framework and the transitional provisions of Section 2125, First-time Adoption by Government Organizations have App. #8 been applied. Section 2125 requires retroactive application of the accounting standards with certain elective exemptions and mandatory exceptions. The accounting policies set out in the Summary of Significant Accounting Policies have been applied in preparing the financial statements for the year ended March 31, 2013, the comparative information presented in these financial statements for the year ended March 31, 2012 and in the preparation of an opening PSAB for Government NPOs balance sheet at the date of transition of April 1, 2011 with the exception of PS 2601 Foreign Currency Translation and PS 3450 Financial Instruments, which has been applied with an effective date of April 1, 2012 (see Note 3 Change in Accounting Policy). The College issued financial statements for the year ended March 31, 2011 using generally accepted accounting principles prescribed by the CICA Handbook Accounting Part V - Pre-changeover Accounting Standards. The adoption of PSAB for Government NPOs resulted in adjustments to the previously reported assets, liabilities, net assets, excess of revenue over expenses and cash flows of the College. An explanation of how the transition from pre-changeover Canadian GAAP to PSAB for Government NPOs has affected the College s financial position, operations, changes in net assets and cash flows is set out in the following notes and tables. The following exemptions and exceptions were used at the date of transition to Canadian accounting standards for not-for-profit organizations: Optional exemptions App. #7 Actuarial Gains and Losses Pre-changeover GAAP allowed the College to only recognize actuarial gains and losses that exceeded certain prescribed amounts ( the corridor approach ). PSAB for Government NPOs requires the amortization of actuarial gains and losses on post-employment benefit obligations and compensated absences to be amortized over the estimated average remaining service life of employees. Retroactive application of this approach would require the College to split the cumulative actuarial gains and losses from the inception of the plan until the date of transition to PSAB for Government NPOs into a recognized portion and an unrecognized portion. The College has elected to recognize all cumulative actuarial gains and losses as the date of transition to PSAB for Government NPOs directly in net assets. Actuarial gains and losses subsequent to the date of transition to PSAB for Government NPOs are accounted for in accordance with PS 3250 Retirement Benefits. Page 10 of 35

14 2. FIRST TIME ADOPTION OF PUBLIC SECTOR ACCOUNTING STANDARDS (continued) Business combinations The College elected to not retroactively apply the provisions PS 2510 Additional Areas of Consolidation to periods prior to the date of transition to PSAB for Government NPOs. As such, assets, liabilities and net assets have not been restated that may have been required if the provisions of PS 2510 had been applied retroactively. Mandatory exceptions Estimates The estimates previously made by the College under pre-changeover Canadian GAAP were not revised for the application of PSAB for Government NPOs except where necessary to reflect any difference in accounting policy or where there was objective evidence that those estimates were in error. As a result the College has not used hindsight to revise estimates. Reconciliation of net assets and excess of revenue over expenses In preparing these financial statements, management has amended certain accounting policies previously applied in the pre-changeover Canadian GAAP financial statements to comply with PSAB for Government NPOs. The comparative figures for March 31, 2012 were restated to reflect these adjustments. The following reconciliations and explanatory notes provide a description of the effect of the transition from pre-changeover Canadian GAAP to PSAB for Government NPOs on net assets and excess of revenues over expenses: Page 11 of 35

15 2. FIRST TIME ADOPTION OF PUBLIC SECTOR ACCOUNTING STANDARDS (continued) Statement of Financial Position as at April 1, 2011 Transition Date Transitional Adjustments Pre-changeover Canadian GAAP Adj. (i) Adj. (ii) Adj. (iii) PSAB for Government NPOs Liabilities Post-employment benefits and compensated absences Vesting sick leave $ 900,000 $ - $ 120,000 $ 180,000 $ 1,200,000 Non-vesting sick leave - 2,300, ,300,000 Retirement benefits 1,300,000-20,000 90,000 1,410,000 $ 2,200,000 $ 2,300,000 $ 140,000 $ 270,000 $ 4,910,000 Net Assets Post-employment benefits and compensated absences $ (2,200,000) $ (2,300,000) $ (140,000) $ (270,000) $ (4,910,000) Statement of Financial Position for the year-ended March 31, 2012 Transitional Adjustments Pre-changeover Canadian GAAP Adj. (i) Adj. (ii) Adj. (iii) PSAB for Government NPOs Liabilities Post-employment benefits and compensated absences Vesting sick leave $ 775,000 $ - $ 110,000 $ 215,000 $ 1,100,000 Non-vesting sick leave - 3,300, ,300,000 Retirement benefits 1,325,000-15, ,000 1,440,000 $ 2,100,000 $ 3,300,000 $ 125,000 $ 315,000 $ 5,840,000 Net Assets Post-employment benefits and compensated absences $ (2,100,000) $ (3,300,000) $ (125,000) $ (315,000) $ (5,840,000) Page 12 of 35

16 2. FIRST TIME ADOPTION OF PUBLIC SECTOR ACCOUNTING STANDARDS (continued) Statement of Operations for the year-ended March 31, 2012 Sub-note Pre-changeover Canadian GAAP Adjustments PSAB for Government NPOs Expenses App. #4 Salaries and benefits (i), (ii), (iii) $ 132,685,000 $ 1,040,000 $ 133,725,000 Excess of revenue over expenses (i), (ii), (iii) $ 21,940,000 $ (1,040,000) $ 20,900,000 Statement of Cash Flows for the year-ended March 31, 2012 The transition to PSAB for Government NPOs had no impact on total operating or financing activities on the statement of cash flows. The change in excess of revenues over expenses for year-ended March 31, 2012 has been offset by adjustments to operating activities. The transition to PSAB for Government NPOs resulted in the reclassification of cash receipts and outflows relating to the acquisition of tangible capital assets from investing activities to capital activities. The capital section of the statement of cash flows did not exist prior to the transition to PSAB for Government NPOs. Explanations for Adjustments to PSAB for Government NPOs (i) Non-vesting Sick Leave App. #4 PSAB for Government NPOs requires the recognition of a liability for sick leave benefits that accumulate, but do not vest, which was not required under pre-changeover GAAP. As a result, the College has recognized a liability and charge to net assets as described in the tables above. (ii) Amortization of Actuarial Gains/Losses As discussed in Note 2 First Time Adoption of Public Sector Accounting Standards, Optional Exemptions, the College has elected to recognize actuarial gains and losses at the date of transition to PSAB for Government NPOs directly in net assets. As a result, the College has recognized an increased liability and a charge to net assets as described in the tables above. (iii) Discount Rate Used to Calculate Post-Employment Benefits and Compensated Absences Liabilities PSAB for Government NPOs requires these liabilities to be calculated with a discount rate that is equal to either the College s rate of borrowing or the rate of return on the plan assets. Prechangeover GAAP required the discount rate to be equal to the yield on high quality corporate bonds. The College has chosen to discount these liabilities using its internal rate of borrowing. The change in the discount rate resulted in changes to the related liabilities and charges to net income as described in the tables above. Page 13 of 35

17 3. CHANGE IN ACCOUNTING POLICY App #3 On April 1, 2012, the College adopted Public Accounting Standards PS Financial Instruments and PS 2601 Foreign Currency Translation. The standards were adopted prospectively from the date of adoption. The new standards provide comprehensive requirements for the recognition, measurement, presentation and disclosure of financial instruments and foreign currency transactions. Under PS 3450, all financial instruments, including derivatives, are included on the statement of financial position and are measured either at fair value or amortized cost based on the characteristics of the instrument and the College s accounting policy choices (see Note 1 Significant Accounting Policies). In accordance with the provisions of this new standard, the College reflected the following adjustments: - April 1, 2012: an increase of $2,000,000 to long-term investments and an increase of $2,000,000 to accumulated remeasurement gains/(losses) due to the College choosing to designate its bond portfolio at fair value upon initial adoption of the standard whereas it was originally classified as held to maturity under pre-changeover GAAP. - April 1, 2012: an increase of $2,100,000 to unrestricted net assets and a decrease of $2,100,000 to accumulated remeasurement gains/(losses) due to the fair value of the College s interest rate swap derivative being reclassified to accumulated remeasurement gains/(losses). 4. FINANCIAL INSTRUMENT CLASSIFICATION App #6 The following table provides cost and fair value information of financial instruments by category. The maximum exposure to credit risk would be the carrying value as shown below Fair Value Amortized Cost Total Cash $ 33,068,000 $ - $ 33,068,000 Accounts receivable - 16,537,500 16,537,500 Temporary investments 4,300,000-4,300,000 Long-term investments 54,000,000-54,000,000 Long-term receivable - 6,300,000 6,300,000 Accounts payable and accrued liab. - 37,485,000 37,485,000 Interest rate swap 2,100,000-2,100,000 $ 93,468,000 $ 60,322,500 $ 153,790,500 Temporary investments consist of equity instruments in Canadian public companies and long-term investments consist of government of Canada bonds. Long-term investments include $12,900,000 ( $12,798,000) of investments externally restricted for endowment purposes (see Note 18). Page 14 of 35

18 4. FINANCIAL INSTRUMENT CLASSIFICATION (continued) Maturity profile of bonds held is as follows: 2013 Within 2 to 5 6 to 10 Over 10 1 year years years years Total Carrying value $ - $ 11,450,000 $ 25,000,000 $ 17,550,000 $ 54,000,000 Percent of Total 0% 21% 46% 33% The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable: - Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities using the last bid price; - Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and - Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs) Level 1 Level 2 Level 3 Total Cash $ 33,068,000 $ - $ - $ 33,068,000 Temporary investments 4,300, ,300,000 Long-term investments - 54,000,000-54,000,000 Interest rate swap - - 2,100,000 2,100,000 Total $ 37,368,000 $ 54,000,000 $ 2,100,000 $ 93,468,000 There were no transfers between Level 1 and Level 2 for the years ended March 31, 2013 and There were also no transfers in or out of Level 3. For a sensitivity analysis of financial instruments recognized in Level 3, see Note 20 Interest rate risk, as the prevailing interest rate is the most significant input into the fair value of the instrument. 5. INTEREST IN SAMPLE PSAB JOINT VENTURE On April 1, 2010, the College entered into a Memorandum of Understanding with the University of Sample, known as the Sample PSAB Culinary Joint Venture. The purpose of the Joint Venture is to provide the College and the University the opportunity to train students in hands-on culinary arts. The Joint Venture operates a restaurant with the space and employees being shared between the College and the University. The following is the College s 50% share of the components of the financial statements of the Joint Venture: Page 15 of 35

19 5. INTEREST IN SAMPLE PSAB JOINT VENTURE (continued) Total assets $ 5,250,000 $ 5,150,000 Total liabilities 2,750,000 2,800,000 Net assets $ 2,500,000 $ 2,350,000 Revenue $ 1,100,000 $ 1,075,000 Expenses 950, ,000 Excess of revenue over expenses for the year $ 150,000 $ 125,000 Cash provided by operating activities $ 250,000 $ 295,000 Cash used in investing activities (75,000) (115,000) Cash used in financing activities (25,000) (35,000) Net cash flows $ 150,000 $ 145,000 The Joint Venture is a not-for-profit organization, and as such follows the recommendations of CICA Handbook Part III Accounting Standards for Not-for-Profit Organizations. As such, there are differences between the accounting policies of the College under PSAB for Government NPOs and the Joint Venture under Part III of the CICA Handbook. Under the modified equity approach, the College makes no adjustment to the amounts disclosed or recognized in its financial statements for these differences. These differences include: (a) The employees of the joint venture are entitled to sick leave that accumulates, but does not vest. Under Part III of the CICA Handbook, no liability is recognized for non-vesting leave and as such, no such liability or expense has been provided for. Page 16 of 35

20 6. LONG TERM RECEIVABLE The College has financed the building of the New Campus Student Centre on behalf of the Sample PSAB College Student Association Inc. ( SPCSAI ). This receivable bears interest at prime minus 25 bps. This receivable is to be repaid through the collection of an annual student centre-building levy, which is collected from all full-time and part-time students and bears interest at 3% per annum. The College has also agreed to finance the building of the Health Centre on behalf of the SPCSAI. This building is currently under construction, and has a forecasted cost of $24.2 million. The total cost will be repaid through the collection of an annual levy, which is collected from all full-time and parttime students Note receivable - Student Centre $ 2,000,000 $ 2,500,000 Note receivable - Health Centre 8,200,000 8,700,000 Less current portion estimate included in accounts receivable (3,900,000) (3,900,000) $ 6,300,000 $ 7,300, CONSTRUCTION IN PROGRESS Construction in progress represents costs incurred to date on the construction of a new library and academic facility, of which approximately $45.1 million has been spent to date, and a new Health Centre, of which approximately $16 million has been spent to date. Once the construction has been completed, the total cost will be reclassified to capital assets and amortization will commence. As at March 31, 2013, construction in progress amounted to $61,100,000 ( $60,500,000). Page 17 of 35

21 8. CAPITAL ASSETS 2013 Accumulated Net Book Cost Amortization Value Land $ 5,000,000 $ - $ 5,000,000 Buildings & improvements 177,550,000 63,750, ,800,000 Building - Student Residence 13,900,000 3,190,000 10,710,000 Leasehold improvements 250, , ,000 Site improvements 500,000 75, ,000 Furniture, equipment and computers 115,463, ,000,000 10,463,500 Computer software 17,000,000 10,100,000 6,900,000 Large machinery 15,000,000 2,000,000 13,000,000 $ 344,663,500 $ 184,265,000 $ 160,398, Accumulated Net Book Cost Amortization Value Land $ 5,000,000 $ - $ 5,000,000 Buildings & improvements 176,550,000 64,430, ,120,000 Building - Student Residence 13,500,000 3,500,000 10,000,000 Leasehold improvements 250, , ,000 Site improvements 500, , ,000 Furniture, equipment and computers 113,000, ,800,000 9,200,000 Computer software 13,500,000 9,500,000 4,000,000 Large machinery 14,500,000 2,500,000 12,000,000 $ 336,800,000 $ 183,930,000 $ 152,870,000 Amortization expense for the year is $13,200,000 ( $12,600,000). Page 18 of 35

22 9. DEFERRED REVENUE Advanced tuition fees 30,835,000 29,900,000 Other 3,011,750 2,335,000 $ 33,846,750 $ 32,235, BANK LOANS The College has a $7,000,000 operating line of credit during the months of October through April and a $12,000,000 operating line of credit during the months of May through September. No amount has been drawn upon this operating line of credit as at March 31, The College has $2,100,000 ( $1,900,000) in letters of credit outstanding as of March 31, In addition, the College has an unused demand instalment loan facility of $2,145,000. The bank loan outstanding at year-end is as follows: Demand loan bearing interest at prime minus 25bps, repayable in monthly instalments of $16,667 excluding interest through This loan is secured by a general security agreement on all assets of the Student Association $ 2,600,000 $ 2,800,000 The scheduled principal amounts payable within the next five years and thereafter are as follows: 2014 $ 200, , , , ,000 Thereafter 1,600,000 Total $ 2,600,000 Page 19 of 35

23 11. LENDING FACILITIES The College has partially financed the building of the Student Residence through an unsecured nonrevolving bank loan, repayable in monthly installments of $90,900 principal and interest at the rate of prime plus 3%. The bank loan is due on demand and has therefore been classified as current. The College has fixed its interest rate at 6.82% through an interest rate swap for the term of the loan. The interest rate includes a credit spread of 0.35%. The interest rate swap is a derivative financial instrument. It has effectively locked in a fixed rate through The fair value of the interest rate swap (in favour of the bank) of $1,900,000 ( $2,100,000) is recorded in the statement of financial position with the fluctuations being recorded in the statement of remeasurement gains and losses. The scheduled principal amounts payable within the next five years and thereafter are as follows: 2014 $ 415, , , , ,936 Thereafter 15,926,110 Total $ 18,300, POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES LIABILITY The following tables outline the components of the College s post-employment benefits and compensated absences liabilities and the related expenses Post-employment Benefits Non-vesting sick leave Vesting sick leave Total liability Accrued employee future benefits obligations $ 2,155,400 $ 4,485,300 $ 559,300 $ 7,200,000 Value of plan assets (150,000) - - (150,000) Unamortized actuarial losses (245,000) (200,000) (197,500) (642,500) Total liability $ 1,760,400 $ 4,285,300 $ 361,800 $ 6,407,500 Page 20 of 35

24 12. POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES LIABILITY (continued) 2012 Post-employment Benefits Non-vesting sick leave Vesting sick leave Total liability Accrued employee future benefits obligations $ 1,673,000 $ 3,480,000 $ 1,290,000 $ 6,443,000 Unamortized actuarial losses (233,000) (180,000) (190,000) (603,000) Total liability $ 1,440,000 $ 3,300,000 $ 1,100,000 $ 5,840, Post-employment Benefits Non-vesting sick leave Vesting sick leave Total expense Current year benefit cost $ 235,000 $ 800,000 $ 100,000 $ 1,135,000 Interest on accrued benefit obligation 64, ,000 50, ,000 Amortized actuarial losses 21,400 17,300 16,800 55,500 Total expense $ 320,400 $ 985,300 $ 166,800 $ 1,472,500 Post-employment Benefits 2012 Non-vesting sick leave Vesting sick leave Total expense Current year benefit cost $ 230,000 $ 790,000 $ 92,500 $ 1,112,500 Interest on accrued benefit obligation 66, ,200 51, ,700 Amortized actuarial losses 20,000 16,500 15,400 51,900 Total expense $ 316,900 $ 945,700 $ 159,500 $ 1,422,100 Page 21 of 35

25 12. POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES LIABILITY (continued) Above amounts exclude pension contributions to the Colleges of Applied Arts and Technology pension plan, a multi-employer plan, described below. Retirement Benefits CAAT Pension Plan A majority of the College's employees are participants in the defined benefit contributory retirement pension plan of the Colleges of Applied Arts and Technology. The plan is a mutli-employer plan and therefore the College s contributions are accounted for as if the plan were a defined contribution plan with the College s contributions being expensed in the period they come due. Any unfunded liability is to be paid directly by the Ministry of Training, Colleges and Universities. Contributions by the College on account of current service pension costs amounted to $8,250,000 ( $7,125,000) and contributions by employees amounted to $7,650,000 ( $6,800,000). The most recent actuarial valuation filed with pension regulators as at January 1, 2012 indicated an actuarial surplus of $150 million. Post-Employment Benefits The College extends post employment life insurance, health and dental benefits to certain employee groups subsequent to their retirement. The College recognizes these benefits as they are earned during the employees tenure of service. The related benefit liability was determined by an actuarial valuation study commissioned by the College Employer Council. The major actuarial assumptions employed for the valuations are as follows: a) Discount rate The present value as at March 31, 2013 of the future benefits was determined using a discount rate of 4% (2012 4%). b) Drug Costs Drug costs were assumed to increase at a 10.5% rate for 2013 ( %) and decrease proportionately thereafter to an ultimate rate of 4.5% in 2026 for fiscal 2013 ( %). c) Hospital and other medical Hospital and other medical costs were assumed to increase at 4.5% per annum ( %). Medical premium increases were assumed to increase at 8.0% per annum in 2013 ( %) and decrease proportionately thereafter to an ultimate rate of 4.5% in 2026 for the fiscal 2013 ( %). d) Dental costs Dental costs were assumed to increase at 7.5% per annum in 2013 (7.25%) and decrease proportionately thereafter to an ultimate rate of 4.5% in 2023 for the fiscal 2013 benefits cost ( %). Dental costs were assumed to increase at 4.5% per annum for fiscal Page 22 of 35

26 12. POST-EMPLOYMENT BENEFITS AND COMPENSATED ABSENCES LIABILITY (continued) Compensated Absences Vesting Sick Leave The College has provided for vesting sick leave benefits during the year. Eligible employees, after 10 years of service, are entitled to receive 50% of their accumulated sick leave credit on termination or retirement to a maximum of 6 months salary. The program to accumulate sick leave credits ceased for employees hired after March 31, The related benefit liability was determined by an actuarial valuation study commissioned by the College Employer Council. Non-Vesting Sick Leave The College allocates to certain employee groups a specified number of days each year for use as paid absences in the event of illness or injury. These days do not vest and are available immediately. Employees are permitted to accumulate their unused allocation each year, up to the allowable maximum provided in their employment agreements. Accumulated days may be used in future years to the extent that the employees illness or injury exceeds the current year s allocation of days. Sick days are paid out at the salary in effect at the time of usage. The related benefit liability was determined by an actuarial valuation study commissioned by the College Employer Council. The assumptions used in the valuation of vesting and non-vesting sick leave are the College s best estimates of expected rates of: Wage and salary escalation 1.75% 1.50% Discount rate 4.00% 4.00% The probability that the employee will use more sick days than the annual accrual and the excess number of sick days used are within ranges of 0% to 39.2% and 0 to 19.3 days respectively for age groups ranging from 20 and under to 65 and over in bands of 5 years. 13. DEFERRED CONTRIBUTIONS Deferred contributions represent unspent externally restricted funding that has been received and relates to a subsequent year. Changes in the contributions deferred to future periods are as follows: Balance, beginning of year $ 2,000,000 $ 1,900,000 Less amounts recognized as revenue in the year (1,650,000) (1,700,000) Add amounts received during the year 1,750,000 1,800,000 Balance, end of year $ 2,100,000 $ 2,000,000 Page 23 of 35

27 13. DEFERRED CONTRIBUTIONS (continued) Deferred contributions are comprised of: Scholarships and bursaries $ 1,600,000 $ 1,550,000 Endowment interest funds 100, ,000 Joint employment stability reserve 400, ,000 $ 2,100,000 $ 2,000, DEFERRED CAPITAL CONTRIBUTIONS Deferred capital contributions represent the unamortized amount and unspent amount of donations and grants received for the purchase of capital assets. The amortization of capital contributions is recorded as revenue in the statement of operations. The changes in the deferred capital contributions balances are as follows: Balance, beginning of year $ 74,000,000 $ 74,800,000 Less amortization of deferred capital contributions (5,600,000) (5,300,000) Add transfers for construction in progress 1,100,000 2,000,000 Add contributions received for capital purposes 4,000,000 2,500,000 Balance, end of year $ 73,500,000 $ 74,000,000 As at March 31, 2013 there were $1,000,000 ( $1,500,000) of deferred capital contributions received which were not spent. 15. DEFERRED CAPITAL CONTRIBUTIONS RELATING TO CONSTRUCTION IN PROGRESS Deferred capital contributions relating to construction in progress represents the amount of grants and other restricted funding received for the Library and the Athletic and Wellness Centre construction projects in progress Balance, beginning of year $ 56,000,000 $ 56,200,000 Less amounts transferred to assets in the year (1,100,000) (2,000,000) Add contributions received for capital purposes 600,000 1,800,000 Balance, end of year $ 55,500,000 $ 56,000,000 Page 24 of 35

28 16. INVESTMENT IN CAPITAL ASSETS A. Investment in capital assets represents the following: Capital assets $ 160,398,500 $ 152,870,000 Construction in progress 61,100,000 60,500, ,498, ,370,000 Less amounts financed by: Accounts payable 15,112,250 8,945,000 Term debt (Note 12) 18,300,000 18,700,000 Deferred capital contributions (Note 15) 72,500,000 72,500,000 Deferred capital contributions - construction (Note 16) 55,500,000 56,000,000 Balance, end of year $ 60,086,250 $ 57,225,000 B. Change in net assets invested in capital assets is calculated as follows: Deficiency of revenues over expenditures: Amortization of deferred capital contributions related to capital assets $ 5,600,000 $ 5,300,000 Amortization of capital assets (13,200,000) (12,600,000) (7,600,000) (7,300,000) Net change in investment in capital assets: Purchase of capital assets and transfers from construction in progress 21,328,500 22,270,000 Amounts funded by deferred capital contributions (5,100,000) (3,800,000) Amounts funded by accounts payable (6,167,250) (8,945,000) Repayment of term debt 400, ,000 10,461,250 10,025, INTERNALLY RESTRICTED NET ASSETS Internally restricted net assets represents money set aside by College senior management for an international student endowment fund. A commitment has been made by College senior management to contribute 1% of international education tuition fees to this endowment fund. As at March 31, 2013, internally restricted endowments were $855,000 ( $825,000). Page 25 of 35

29 18. EXTERNALLY RESTRICTED NET ASSETS Externally restricted net assets include restricted donations received by the College where the endowment principal is required to be maintained intact. The investment income generated from these endowments must be used in accordance with the various purposes established by donors. The College ensures, as part of its fiduciary responsibilities, that all funds received with a restricted purpose are expended for the purpose for which they were provided. Investment income on externally restricted endowments that was disbursed during the year has been recorded in the statement of operations since this income is available for disbursement as scholarships and bursaries and the donors conditions have been met. The unspent portion of investment income is recorded in deferred contributions. Investment income on endowed assets recognized and deferred was $125,000 and $75,000 respectively ( $130,000 and $65,000). Externally restricted endowment funds include grants provided by the Government of Ontario from the Ontario Student Opportunity Trust Fund. Under this program, the government matches funds raised by the College. The purpose of the program is to assist academically qualified individuals who, for financial reasons, would not otherwise be able to attend College. 19. COMMITMENTS The College is committed to estimated minimum annual payments under operating lease agreements over the next two years as follows: Equipment and services 2014 $ 1,600, ,200, FINANCIAL INSTRUMENT RISK MANAGEMENT Credit risk App. #6 Credit risk is the risk of financial loss to the College if a debtor fails to make payments of interest and principal when due. The College is exposed to this risk relating to its cash, debt holdings in its investment portfolio, long-term receivable and accounts receivable. The College holds its cash accounts with federally regulated chartered banks who are insured by the Canadian Deposit Insurance Corporation. In the event of default, the College s cash accounts are insured up $300,000 ( $300,000). The College s investment policy operates within the constraints of the investment guidelines issued by the MTCU and puts limits on the bond portfolio including portfolio composition limits, issuer type limits, bond quality limits, aggregate issuer limits, corporate sector limits and general guidelines for geographic exposure. All fixed income portfolios are measured for performance on a quarterly basis and monitored by management on a monthly basis. The guidelines permit the College s funds to be invested in bonds issued by the Government of Canada, a Canadian province or a Canadian municipality having a rating of A or better, or corporate investments having a rating of A (R-1) or better. The maximum exposure to investment credit risk is outlined in Note 4. Page 26 of 35

30 20. FINANCIAL INSTRUMENT RISK MANAGEMENT (continued) Credit risk (continued) Accounts receivable and long-term receivable are ultimately due from students. Credit risk is mitigated by financial approval processes before a student is enrolled and the highly diversified nature of the student population. The College measures its exposure to credit risk based on how long the amounts have been outstanding. An impairment allowance is set up based on the College s historical experience regarding collections. The amounts outstanding at year end were as follows: Past Due Total Current 1-30 days days days days Government receivables $ 850,000 $ 850,000 $ - $ - $ - $ - Student receivables 15,587,500 13,450, , , ,500 1,250,000 Other receivables 1,100,000 1,000, ,000 Gross receivables 17,537,500 15,300, , , ,500 1,350,000 Less: impairment allowances (1,000,000) (1,000,000) Net receivables $ 16,537,500 $ 15,300,000 $ 250,000 $ 100,000 $ 537,500 $ 350,000 The amount of other receivables aged greater than 90 days relates to reimbursements of expenses from an on campus vendor that the College will receive upon completion of renovations to existing retail space. The amount is 110 days past due as there were delays in the project. As there are no indications that the College will not be able to recover the balance, an impairment allowance has not been recognized. Student receivables not impaired are collectible based on the College s assessment and past experience regarding collection rates. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk App. #6. Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of market factors. Market factors include three types of risk: currency risk, interest rate risk and equity risk. The College s investment policy operates within the constraints of the investment guidelines issued by the MTCU. The policy s application is monitored by management, the investment managers and the board of governors. Diversification techniques are utilized to minimize risk. The Policy limits the investment in any one corporate issuer to a maximum of 10% of the College s total fixed income bonds. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Currency risk Currency risk relates to the College operating in different currencies and converting non-canadian earnings at different points in time at different foreign College levels when adverse changes in foreign currency College rates occur. The College does not have any material transactions or financial instruments denominated in foreign currencies. Page 27 of 35

31 20. FINANCIAL INSTRUMENT RISK MANAGEMENT (continued) Currency risk (continued) There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Interest rate risk App. #6 Interest rate risk is the potential for financial loss caused by fluctuations in fair value or future cash flows of financial instruments because of changes in market interest rates. The College is exposed to this risk through its interest bearing investments, bank loans and term debt. The College mitigates interest rate risk on its term debt through a derivative financial instrument that exchanges the variable rate inherent in the term debt for a fixed rate (see Note 11). Therefore, fluctuations in market interest rates would not impact future cash flows and operations relating to the term debt. The College s bond portfolio has interest rates ranging from 0.5% to 3.5% with maturities ranging from April 5, 2015 to June 30, At March 31, 2013, a 1% App. #6 fluctuation in interest rates, with all other variables held constant, would have an estimated impact on the fair value of bonds and the interest rate swap of $850,000 and $225,000 respectively. A 1% fluctuation in interest rates would have an estimated impact on interest expense related to the College s bank loans of $27,000 and a $68,000 impact on interest income related to the College s long-term receivable. The College s term debt as described in Note 11 would not be impacted as the inherent variable rate of the debt has been fixed with the use of the aforementioned derivative interest rate swap. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Equity risk Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. The College is exposed to this risk through its equity holdings within its investment portfolio. At March 31, 2013, a 10% movement in the stock markets with all other variables held constant would have an estimated effect on the fair values of the College s equities of $430,000. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Page 28 of 35

32 20. FINANCIAL INSTRUMENT RISK MANAGEMENT (continued) Liquidity risk App. #6 Liquidity risk is the risk that the College will not be able to meet all cash outflow obligations as they come due. The College mitigates this risk by monitoring cash activities and expected outflows through extensive budgeting and maintaining investments that may be converted to cash in the nearterm if unexpected cash outflows arise. The follow table sets out the contractual maturities (representing undiscounted contractual cash-flows of financial liabilities): 2013 Within 6 months to 6 months 1 year 1-5 years > 5 years Accounts payable $ 37,485,000 $ - $ - $ - Bank loans 100, , ,016 1,599,980 Term debt 545, ,400 4,363,200 12,846,000 $ 38,130,402 $ 645,402 $ 5,163,216 $ 14,445,980 Derivative financial liabilities mature as described in Note 11. There have been no significant changes from the previous year in the exposure to risk or policies, procedures and methods used to measure the risk. Page 29 of 35

33 Appendices to Financial Statements NOTE: These appendices are for explanatory purposes and do not form part of the overall financial statements under PSAB. Colleges are not required to present explanatory appendices. Appendices Topic #1 Accounting for Controlled Enterprises, Joint Ventures and Significantly Influenced Entities under PSAB for Government NPOs PS 4250 Reporting Controlled and Related Entities by Not-for-Profit Organizations provides guidance on how colleges should account for controlled and significantly influenced enterprises as well as joint ventures. For each type of relationship, PS 4250 provides the following guidance: For controlled enterprises: Consolidation; or Extensive disclosure of enterprise For controlled profit-oriented enterprises: Consolidation; or Modified equity method For significantly influenced enterprises: Disclosure of the relationship with no recognition of economic interest in the college s financial statements For Joint Ventures: Proportionate consolidation; or Modified equity method The modified equity method accounts for the college s interest in the enterprise by taking the college s investment in the enterprise and adding/subtracting the college s share of income/loss each period, however the enterprise s accounting principles are not adjusted to conform to those of the college. For example, if the enterprise follows International Financial Reporting Standards or accounting standards for not-for-profit organizations, the basis of accounting is not adjusted in the allocation of income/loss to conform with PSAB for Government NPOs. The significant differences in accounting policies should be disclosed (PS (c)). PS 4250 specifies that colleges may adopt different policies for reporting different enterprises. For example, a college may consolidate one controlled enterprise and disclose another; however, PS states that similar types of controlled organizations should be reported in the same manner. Appendices Topic #2 Subsequent Disposition of Investments After Adoption of PS 3450 Per , when a financial instrument in the fair value category is derecognized (Ie. Upon disposition), the cumulative amount of remeasurement gains and losses previously reported is reversed out of accumulated remeasurement gains/(losses) and recognized in the statement of operations. To more fully illustrate the example in these financial statements, the following is a reconciliation of the amounts reported in the statement of operations and accumulated remeasurement gains and losses for the year-ended March 31, 2013: Amortized cost of bond immediately prior to PS 3450 adoption (03/31/12) $ 150,000 Fair value of bond upon adoption of PS 3450 and designation into fair value category 185,000 Amount included in accumulated remeasurement gains upon adoption of PS ,000 Fair value of bond at time of disposition (say 03/15/13) $ 192,500 Page 30 of 35

34 Appendices to Financial Statements Appendices Topic #2 Subsequent Disposition of Investments After Adoption of PS 3450 (continued) Breakdown of entry required to recognize disposition of bond (assuming prior entries made to bring bond to value of $185,000 upon adoption of PSAB): Increase in Value DR Bond value (in-year increase in value) 7,500 CR Accumulated remeasurement gains (in-year increase in value) 7,500 Disposition DR Cash proceeds (fair value at time of sale) 192,500 DR Accumulated remeasurement gains (total gains) 42,500 CR Long-term investments (value before disposition) 192,500 CR Gain on disposal of investment (remainder) 42,500 Appendices Topic #3 Applying the Transitional Provisions of PS Financial Instruments PS states that the provisions of the section are applied as of the date of adoption (April 1, 2012 in the case of the colleges adopting PSAB for Government NPOs) with no restatement of prior periods. Essentially, the financial instruments (including investments) of colleges are accounted for under pre-changeover GAAP (sections 3855 and 3861) for the statements of financial position as at April 1, 2011 and March 31, 2012 and for the statement of operations for the year-ended March 31, Financial instruments are categorized into prechangeover GAAP classifications (available for sale, held for trading, etc.) with the applicable recognition and measurement standards. When a college applies the transitional provisions of (b)(iii) in adjusting the carrying value of financial instruments upon initial adoption, the adjustment is recognized in opening accumulated remeasurement gains/(losses) at the beginning of the fiscal year in which 3450 is initially adopted (April 1, 2012). For financial instruments previously measured as available for sale and hedged instruments with fair value fluctuations recognized directly in net assets (such as an interest rate swap in these example financial statements), this component of net assets is adjusted to accumulated remeasurement gains/(losses) as of the initial adoption of PS 3450 (April 1, 2012) as an adjustment to accumulated remeasurement gains/(losses). For financial instruments previously measured as held for trading, no adjustment is made to accumulated remeasurement gains/(losses) for the accumulated effect of fair value fluctuations in net assets prior to the adoption of PS Subsequent to the adoption of the standard, further fluctuations in fair value from the carrying amount ascribed to the instrument as of the date of adoption of PS 3450 (April 1, 2012) are recognized in accumulated remeasurement gains/(losses). The effects of adopting PS 3450, such as the introduction of the concept of the statement of remeasurement gains and losses as well as the comprehensive guidance relating to the recognition, measurement, disclosure and presentation of financial instruments is not an effect of adopting PSAB for Government NPOs initially as the standard is not effective upon adoption of PSAB for Government NPOs initially on April 1, The effective transition date for PS 3450 is April 1, 2012, therefore the effect of its provisions are a change in accounting policy, not a change due to the adoption of a new accounting framework. Page 31 of 35

35 Appendices to Financial Statements Appendices Topic #3 Applying the Transitional Provisions of PS Financial Instruments (continued) Note that the transitional provisions of PS 3450 allow for early adoption prior to the effective date of the standard, April 1, However, colleges may not early adopt PS 3450 as the colleges date of transition to PSAB for Government NPOs is April 1, 2012, the same date of the standard. The effects of adopting PS 3450 Financial Instruments have been included in Note 3 Change in Accounting Policy, not Note 2 First Time Adoption of Public Sector Accounting Standards. Appendices Topic #4 Reconciliation of Adjustment to Expenses upon Adoption of PSAB for Government NPOs This reconciliation has been provided to explain the adjustment to salaries and benefit expense for the year ended March 31, 2012 upon adoption of PSAB for Government NPOs. As most Colleges presently disclose the various components of retirement benefits and compensated absences separately, this table illustrates the componentized effect of PSAB for Government NPOs adoption: PSAB for Pre-Changeover GAAP Government NPOs Net Effect Vesting sick leave Balance as at April 1, 2011 $ 900,000 $ 1,200,000 Balance as at March 31, ,000 1,110,000 Difference $ (125,000) $ (90,000) 35,000 Non-vesting sick leave Balance as at April 1, 2011 $ - $ 2,300,000 Balance as at March 31, ,300,000 Difference $ - $ 1,000,000 1,000,000 Post-employment benefits Balance as at April 1, 2011 $ 1,300,000 $ 1,410,000 Balance as at March 31, ,325,000 1,440,000 Difference $ 25,000 $ 30,000 5,000 Net increase to expenses upon adoption of PSAB $ 1,040,000 Note that these example financial statements present the adjustments to the vesting sick leave, non-vesting sick leave and post-employment benefits individually to ease the understanding of how PSAB for Government NPOs affects colleges. As these liabilities are typically presented as a single line item on the statement of financial position, this presentation is not a requirement. Appendices Topic #5 Disclosure Requirements of PS 3450 and Financial Instrument Classification PS requires Colleges to disclose financial instruments by classification category (fair value, amortized cost, etc.). However, as PS 3450 is applied prospectively without the reclassification of financial instruments for the comparative period of March 31, 2012, the same financial instrument categories do not exist, as discussed in Appendices Topic #6. Therefore, the financial instrument categories available under prechangeover Canadian GAAP have been used to meet the disclosure requirements of the standard. Page 32 of 35

36 Appendices to Financial Statements Appendices Topic #6 Financial Instrument Risk Management Disclosure The risks, risk management policies and specific situations included in these financial statements for Note 20 Financial Instrument Risk Management are not comprehensive, and Colleges must carefully determine what risks they are exposed to and the policies and factors that are utilized to mitigate them. This list of disclosures is not exhaustive and Colleges may have significant risks relating to financial instruments not contemplated by these example financial statements. The investment policies and risk mitigations disclosed in Note 20 are based on situations, policies and procedures a college may encounter or have in effect under reasonable circumstances, but is not intended to be interpreted as an endorsement or recommendation of specific risk management policies or procedures for Colleges to follow. Below is further explanatory discussion of the risk disclosures presented in these example financial statements. Changes to Risk and Risk Management Policies PS (c) requires disclosure of any changes from the prior period in a College s exposure to financial instrument risks and how they arise as well as its objectives, policies and processes for managing the risk and the methods used to measure the risk. For example, this would include a change in a College s investment policy such as changing the limits imposed on its investment portfolio from a maximum of 10% equities to 5%. Credit risk Each College must consider their own policies and procedures in evaluating the collectability of accounts receivable. PS requires aging disclosure of: (a) Financial assets that are past due at the financial statement date but not impaired. It is desirable to include explanatory discussion as to why past due financial assets are not impaired. (b) Financial assets that are individually determined to be impaired as at the financial statement date, including the factors the College considered in determining they are impaired. This would include a discussion of the College s policy in determining how student accounts are written off, as well as discussion of other significant receivables impaired as at the financial statement date. Additionally, the carrying value of financial instruments in these example financial statements approximates the maximum exposure to credit risk. For example, the fair value of equities is the maximum amount that the College may lose due to future impairment. Carrying value would not approximate the maximum exposure to credit risk in situations such as financial instruments that have been discounted (Ie. A grant receivable to be collected over 15 years) as the maximum exposure would be the undiscounted future contractual cash flows, not the discounted value of the instrument recognized in the financial statements. If this were the case, the College should disclose that there is a difference between the carrying value of financial instruments and their maximum exposure to credit risk. Interest rate risk The example PSAB College utilizes a derivative to mitigate the risk relating to interest rate fluctuations on in its term debt. For Colleges that do not utilize a derivative on financial liabilities with variable interest rates, a sensitivity analysis should be disclosed showing the effect on operations and cash flows if a reasonable fluctuation in interest rates had occurred in the current year (say 1%). In determining the factor to apply to financial instruments at year-end relating to interest rate and other market sensitivity analysis, a College should consider the economic environments in which it operates. A reasonably possible change does not involve remote or worst case scenarios or stress tests. Page 33 of 35

37 Appendices to Financial Statements Appendices Topic #6 Financial Instrument Risk Management Disclosure (continued) Interest rate risk (continued) Note that the items included in the maturity analyses as referenced in Note 20 equal the carrying value in the financial statements. If a College s financial statements include long-term financial instruments that are carried at a discounted value (Ie. A grant receivable to be collected over 15 years), the maturity analysis would differ in that the contractual cash flows would be presented on a non-discounted basis. Appendices Topic #7 Transitional Exemptions and Exceptions upon Adoption of PSAB for Government NPOs The transitional exemptions included in the example financial statements include those that are most likely to apply to the specific circumstances of the College sector. Each College must carefully assess which exemptions apply to their specific circumstances. Below is a summary of the exemptions available under PS First Time Adoption by Government Organizations (see paragraphs ): Retirement and Post-employment Benefits PS 3250 requires entities to calculate relevant liabilities using prescribed methodologies that can differ materially from pre-changeover Canadian GAAP. Preparing figures in compliance with these standards as at the date of adoption of PSAB for Government NPOs requires an actuarial valuation. However, a first-time adopter may elect to delay application of these provisions relative to the discount rate used until the date of their next actuarial valuation or within three years of the transition date to PSAB for Government NPOs, whichever is sooner. If a first-time adopter uses this election, it shall apply it to all plans. This exemption will likely not impact the Colleges as actuarial valuations for post-employment and compensated absence benefits as at April 1, 2011 and March 31, 2012 have been requested by the College Employer Council on behalf of the Colleges of Ontario. Additionally, differences exist between pre-changeover Canadian GAAP and PSAB for Government NPOs in relation to the treatment of actuarial gains/losses. Pre-changeover GAAP requires an accounting policy choice of either recognizing actuarial gains/losses immediately or amortizing them into income using the corridor method. PSAB for Government NPOs gives no accounting choice and requires actuarial gains/losses to be amortized into income over the employee groups estimated average remaining service lives. To simplify the transition to PSAB for Government NPOs and this difference, entities are permitted to recognize all cumulative actuarial gains and losses as the date of transition to Public Sector Accounting Standards directly in accumulated surplus / deficit. Actuarial gains and losses after the date of transition to PSAB for Government NPOs are to be accounted for in accordance with Sections PS 3250 and PS If a first-time adopter uses this election, it shall apply it to all plans. This exemption simplifies the adoption of PSAB for Government NPOs as Colleges would otherwise be required to split the cumulative actuarial gains and losses from the inception of the plan until the date of transition to PSAB for Government NPOs into a recognized portion and an unrecognized portion, which would be onerous. Business Combinations PS Additional Areas of Consolidation requires entities to apply the purchase method in accounting for business combinations. These requirements can differ materially from pre-changeover Canadian GAAP, especially for business combinations occurring before the College s adoption of 1582 Business Combinations. This exemption allows entities to not apply the provisions of PS 2510 to business combinations occurring before the date of adoption of PSAB for Government NPOs, with the exception of PS which requires purchases premiums arising from the purchase of businesses to be recognized as an expense in the period of acquisition. If an entity restates any business combination to comply with Section PS 2510, it restates all subsequent business combinations from the date of the business combination. Page 34 of 35

38 Appendices to Financial Statements Appendices Topic #7 Transitional Exemptions and Exceptions upon Adoption of PSAB for Government NPOs (continued) Investments in Government Business Enterprises and Business Partnerships PS 3070 Investments in Government Business Enterprises requires investments in government business enterprises to be accounted for using the modified equity method, wherein the proportionate share of income of the business enterprise is recognized in the entity s financial statements by increasing/decreasing the investment in the enterprise. No adjustment is made to the basis of accounting for the controlled entity (see Appendices topic #1). Pre-changeover Canadian GAAP had differing standards depending on the nature of the entity. For example, a joint venture could be accounted for using the proportionate consolidation method instead of the equity method. This exemption allows the modified equity method in Section PS 3070 to be applied on a prospective basis from the date of transition. The investment in a government business enterprise balance reflected in the opening statement of financial position is based on the asset and liability balances reflected in the government business enterprise financial statements on the date of transition as calculated under pre-changeover Canadian GAAP. However, if a first-time adopter restates any investment in government business enterprises to comply with Section PS 3070, it restates all subsequent investments in government business enterprises from the date of the investment in a government business enterprise. Tangible Capital Assets PS 3150 Tangible Capital Assets has provisions relating to the impairment and write-down of tangible capital assets that can differ materially from pre-changeover Canadian GAAP. This exemption allows entities to apply these provisions prospectively from the date of adoption of PSAB for Government NPOs, rather than reassessing all tangible capital assets initially recognized in the opening statement of financial position for write-down under these provisions. Note that this exemption is not relevant to adopters of PSAB plus the 4200 series of standards since these types of entities are transitioning from section 4430 Capital Assets Held by Not-for-Profit Organizations to section PS 4230, which are virtually identical standards. Appendices Topic #8 Miscellaneous Differences Between PSAB for Government NPOs and Pre-Changeover GAAP Statement of Cash Flows PS 1201 requires the statement of cash flow to contain an additional section - capital, whereas pre-changeover GAAP only required operating, financing and investing. This section should contain cash disbursements relating the acquisition of tangible capital assets and cash receipts for the intended purpose of acquiring tangible capital assets. Gains/losses upon disposition of tangible capital assets remain as a non-cash adjusting item in the operating section. Acknowledgement of Responsibility for Financial Statement Preparation PS 1201 requires an explicit statement either within the financial statements or accompanying them that the college is responsible for the preparation of the financial statements. Some colleges and NPOs currently present this in the form of a narrative that accompanies the financial statements indicating the roles and responsibilities of the college in preparing the financial statements. This could also be included in the notes to the financial statements. Retrospective vs. Retroactive Application of Accounting Standards Note that these illustrative financial statements use the term retroactive application as opposed to retrospective as this is the terminology used within PSAB for Government NPOs. Page 35 of 35

39 For more information, please contact: AUDIT AND ASSURANCE Burlington Bruce Nicholson Patricia Gonsalves Sault Ste. Marie Armand Capisciolto Gabriel Stefanizzi Mississauga Robert Wilkes Marcus Sconci Marc Priestley Sudbury Alicia Croskery Tony McGregor North Bay Dean Decaire Thunder Bay Walter Flasza Ania Berezowski