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Caisse Centrale (76AV)

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Tuesday 02 April, 2013

Caisse Centrale

Annual Financial Report

RNS Number : 3371B
Caisse Cent. Desjardins Du Quebec
02 April 2013
 

DESJARDINS GROUP

ANNUAL COMBINED FINANCIAL STATEMENTS

2012

(audited)

 

 

 

 

 

Finance Division

 

 

Table of contents

REPORTS

·    Annual report by the Audit and Inspection Commission                                                                                    3

·    Management's responsibility for financial reporting                                                                                          4

·    Independent auditor's report                                                                                                                             5

 

COMBINED
FINANCIAL
STATEMENTS

·    Combined Balance Sheets                                                                                                                                6

·    Combined Statements of Income                                                                                                                       7

·    Combined Statements of Comprehensive Income                                                                                             8

·    Combined Statements of Changes in Equity                                                                                                      9

·    Combined Statements of Cash Flows                                                                                                             10

 

NOTES TO THE
COMBINED FINANCIAL
STATEMENTS

·    Note 1   - Information on Desjardins Group                                                                                                        11

·    Note 2   - Significant accounting policies                                                                                                           11

·    Note 3   - Future accounting changes                                                                                                                30

·    Note 4   - Carrying amount of financial instruments                                                                                           32

·    Note 5   - Fair value of financial instruments                                                                                                      34

·    Note 6   - Securities                                                                                                                                            37

·    Note 7   - Loans and allowance for credit losses                                                                                              42

·    Note 8   - Securitization and other transferred financial assets                                                                        43

·    Note 9   - Segregated funds                                                                                                                               44

·    Note 10 - Property, plant and equipment and investment property                                                                    46

·    Note 11 - Other assets - Other                                                                                                                          47

·    Note 12 - Deposits                                                                                                                                              47

·    Note 13 - Covered bonds                                                                                                                                   47

·    Note 14 - Insurance and investment contract liabilities                                                                                      48

·    Note 15 - Other liabilities - Other                                                                                                                        55

·    Note 16 - Subordinated bonds                                                                                                                           56

·    Note 17 - Derivative financial instruments and hedging activities                                                                      57

·    Note 18 - Significant acquisitions and disposals                                                                                                64

·    Note 19 - Capital stock                                                                                                                                       65

·    Note 20 - Share capital                                                                                                                                       66

·    Note 21 - Accumulated other comprehensive income                                                                                       67

·    Note 22 - Non-controlling interests                                                                                                                     67

·    Note 23 - Net income (loss) on securities at fair value through profit or loss                                                   68

·    Note 24 - Other income - Other and Non-interest expense - Other                                                                  68

·    Note 25 - Income taxes on surplus earnings                                                                                                     69

·    Note 26 - Defined benefit plans                                                                                                                          72

·    Note 27 - Commitments, guarantees and contingent liabilities                                                                            75

·    Note 28 - Leases                                                                                                                                                78

·    Note 29 - Financial instrument risk management                                                                                                78

·    Note 30 - Interest rate sensitivity and maturity matching                                                                                   79

·    Note 31 - Capital management                                                                                                                            81

·    Note 32 - Segmented information                                                                                                                       83

·    Note 33 - Related party disclosures                                                                                                                   86

·    Note 34 - Subsequent event                                                                                                                              87

 

 



 

 

ANNUAL REPORT BY 

THE AUDIT AND INSPECTION

COMMISSION

 

The role of the Audit and Inspection Commission (AIC) is to support the Board of Directors of the Fédération des caisses Desjardins du Québec (the Federation) in its oversight responsibilities for Desjardins Group. Its mandate consists primarily of analyzing the financial statements, their presentation and the quality of the accounting principles adopted, risk management relating to financial reporting, internal control systems, internal audit and external independent audit processes, the procedures applied to these audits, and the management of regulatory compliance.

The AIC reviews Desjardins Group's interim and annual financial statements, related press releases, and the interim and annual versions of Management's Discussion and Analysis. The AIC ensures that management has designed and implemented an effective internal control system with respect to the organization's business processes, financial reporting, asset protection, fraud detection, and regulatory compliance. It also ensures that management has set up systems to manage the main risks that may influence the financial results of the caisse network and Desjardins Group. The AIC reviews the information resulting from this financial governance process on a quarterly basis.

Also examined are files that document the caisse network's transformation, including the financial position of the caisses, particular situations detected in the caisses, any follow-up completed, credit losses and how certain accounting policies and practices, such as the management method for the collective allowance, are applied. The AIC ensures that the action plan for caisse network audits and inspections conducted by the Desjardins Group Monitoring Office is carried out. It also reviews comment letters, inspection reports including corrective actions and any follow-up performed. At the end of the fiscal year, the AIC reviews the Monitoring Office's annual report, which presents the results of the year's oversight activities for the caisse network as well as the highlights of the fiscal year.

The external independent auditor is under the authority of the AIC. To fulfil its responsibilities in this regard, the AIC ensures and preserves the external independent auditor's independence by authorizing all its services unrelated to auditing, by recommending its appointment or the continuance of its engagement, by setting and recommending auditor compensation and by conducting annual auditor evaluations. In addition, the AIC supervises the work of the external independent auditor and examines its audit proposal, its mandate, its annual strategy, its reports, its letter to management, and management's comments. Desjardins Group has a policy that governs the awarding of contracts for related services. This policy addresses the following issues: (a) services that can or cannot be performed by the external independent auditor, (b) governance procedures that must be followed before mandates can be awarded, and (c) responsibilities of the key players involved. Accordingly, the AIC receives a quarterly report on the contracts awarded to the external independent auditor by each of the Desjardins Group entities.

The AIC ensures the independence of internal audit, for which the Desjardins Group Monitoring Office is responsible. The AIC analyzes the annual internal audit strategy as well as the internal audit team's responsibilities, performance, objectivity and staffing. The AIC reviews the internal audit team's summary reports and, if necessary, takes appropriate follow-up action. When doing so, the AIC meets with the head of internal audit at Desjardins Group to discuss any major issues submitted to management.

With respect to relations with the Autorité des marchés financiers (AMF), the AIC reviews and follows up on the inspection reports issued by the AMF, as well as the financial reports that are submitted each quarter to the AMF.

The AIC meets privately with the external independent auditor, the Senior Executive Vice-President of Desjardins Group and General Manager of the Federation, the Senior Vice-President of Finance and Chief Financial Officer of Desjardins Group, the Chief Monitoring Officer of Desjardins Group and AMF representatives. It reports to the Board of Directors on a quarterly basis and, if necessary, makes recommendations. Lastly, to comply with sound corporate governance practices, the AIC annually reviews the degree of efficiency and effectiveness with which it has performed the tasks set out in its charter.

The AIC is made up of five independent directors and four observers. These observers are the chairs of the audit committees of Desjardins Financial Security Life Assurance Company, Desjardins General Insurance Group Inc. and Desjardins Securities Inc., and a caisse general manager who sits on the Federation's Board of Directors. None of the AIC members receives compensation from Desjardins Group, either directly or indirectly, for services other than those rendered as a member of the Board of Directors of the Federation or other Desjardins Group entity, including committees.

All members of the AIC possess the knowledge required to read and interpret the financial statements of a financial institution, according to the criteria established in the AIC's charter. With significant changes being made to requirements in terms of accounting and financial disclosure, the members of the AIC participated in a number of training activities during the year. These activities focused in particular on the new International Financial Reporting Standards (IFRS) which took effect in January 2011 and on the impact of changes to the normative and regulatory frameworks to which corporate governance is subject.

The AIC held 13 meetings and its members attended two training sessions in fiscal 2012. During the year, Andrée Lafortune, FCPA, FCA, left the Commission and Benoît Turcotte became a member. As at December 31, the five independent directors who are members of the AIC are                     Annie P. Bélanger, Donat Boulerice, André Gagné, CPA, CGA, Pierre Levasseur and Benoît Turcotte. The observers are Serge Hamelin,                     Roger Desrosiers, FCPA, FCA, Jean-Yves Leblanc and Alain Dumas, FCPA, FCA.

André Gagné, cpa, cga

Chair

 

Montreal, Quebec

February 19, 2013

MANAGEMENT'S RESPONSIBILITY

FOR FINANCIAL REPORTING

 

The Combined Financial Statements of Desjardins Group and all information contained in this Management's Discussion and Analysis are the responsibility of the management of the Fédération des caisses Desjardins du Québec (the Federation), whose duty is to ensure reporting integrity and accuracy.

The Combined Financial Statements have been prepared in accordance with International Financial Reporting Standards and in accordance with the accounting requirements of the Autorité des marchés financiers, as applicable. The Combined Financial Statements necessarily contain amounts established by management based on estimates which it deems fair and reasonable. These estimates include valuations of the insurance and investment contract liabilities performed by the actuaries of the insurance segments. All financial information in the Annual Report is consistent with the audited Combined Financial Statements.

Federation management is responsible for the accuracy of Desjardins Group's Combined Financial Statements and related information, as well as the accounting systems from which they are derived, which it ensures through controls over transactions and related accounting practices. The controls in place include an organizational structure that ensures effective segregation of duties, a code of ethics, hiring and training standards, policies and procedure manuals, as well as the application of regularly updated control methods for adequate supervision of operations. The internal control system is backed by a professional team from the Desjardins Group Monitoring Office with full and unrestricted access to the Audit and Inspection Commission. Management has also implemented a financial governance structure based on best market practices to ensure the effectiveness of the disclosure controls and procedures over the financial information presented in the annual and interim filings of Desjardins Group.

The Autorité des marchés financiers conducts an inspection of certain components of Desjardins Group under its authority on a regular basis.

The Board of Directors of the Federation approves the financial information contained in the Desjardins Group Annual Report by relying on the recommendation of the Audit and Inspection Commission (AIC). To this effect, the AIC is mandated by the Board to review the Combined Financial Statements of Desjardins Group as well as the Management's Discussion and Analysis. In addition, the AIC, comprising directors who are neither management nor employees of Desjardins Group, exercises an oversight role to ensure that management has developed and implemented adequate control procedures and systems to ensure quality financial reporting with all the required disclosures within the required timeframes.

The Combined Financial Statements have been audited by the independent auditor appointed by the Board of Directors, PricewaterhouseCoopers LLP, whose report follows. The independent auditor may meet with the members of the AIC at any time to discuss its audit and any questions related thereto, notably the integrity of the financial information provided and the quality of internal control systems.

 

Monique F. Leroux, c.m.,fcpa, fca                                                                         

Chair of the Board, President and Chief Executive Officer

Desjardins Group

 

 

Daniel Dupuis, cpa, ca  

Senior Vice-President, Finance

and Chief Financial Officer

Desjardins Group                                                                                                          

 

 

Lévis, Québec

February 21, 2013

 

 



 

 

 

 

INDEPENDENT

AUDITOR'S REPORT

 

 

TO the members of the

Fédération des caisses

Desjardins du Québec

We have audited the accompanying combined financial statements of Desjardins Group, which comprise the combined balance sheets as at   December 31, 2012 and 2011, and the combined statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2012 and 2011, and the accompanying notes, including a summary of significant accounting policies and other explanatory information.

MANAGEMENT'S RESPONSIBILITY FOR THE COMBINED FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of combined financial statements that are free from material misstatement, whether due to fraud or error.

AUDITOR'S RESPONSIBILITY

Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

OPINION

In our opinion, the combined financial statements present fairly, in all material respects, the financial position of Desjardins Group as at                 December 31, 2012 and 2011, and its financial performance and its cash flows for the years ended December 31, 2012 and 2011 in accordance with International Financial Reporting Standards (IFRS).

 

 

 

PricewaterhouseCoopers LLP

CPA auditor, CA, public accountancy permit No. A115888

Montreal, Quebec, February 21, 2013



 

 

 



 

COMBINED BALANCE SHEETS







As at

As at

(in millions of Canadian dollars)

Notes

December 31, 2012

December 31, 2011

ASSETS






Cash and deposits with financial institutions


$

1,669

$

1,356

Securities

6 and 8





Securities at fair value through profit or loss



21,986


22,479

Available-for-sale securities



18,326


18,726




40,312


41,205

Securities borrowed or purchased under reverse repurchase agreements



4,377


4,959

Loans

7 and 8





Residential mortgages



85,931


79,686

Consumer, credit card and other personal loans



18,520


17,985

Business and government



28,544


27,948




132,995


125,619

Allowance for credit losses

7


(419)


(465)




132,576


125,154

Segregated fund assets

9


6,132


5,427

Other assets






Clients' liability under acceptances



841


676

Derivative financial instruments

17


2,238


3,059

Amounts receivable from clients, brokers and financial institutions



970


1,274

Investment property

10


512


597

Property, plant and equipment

10


1,312


1,218

Deferred tax assets

25


758


856

Other

11


5,009


4,356




11,640


12,036

TOTAL ASSETS


$

196,706

$

190,137

LIABILITIES AND EQUITY






Liabilities






Deposits

12





Individuals


$

84,415

$

82,486

Business and government



43,033


39,104

Deposit-taking institutions



2,176


1,813




129,624


123,403

Other liabilities






Acceptances



841


676

Commitments related to securities sold short



4,977


5,341

Commitments related to securities lent or sold under repurchase agreements



7,983


8,500

Derivative financial instruments

17


1,222


1,593

Amounts payable to clients, brokers and financial institutions



2,504


3,762

Insurance and investment contract liabilities

14


17,777


17,008

Segregated fund liabilities

9


6,141


5,427

Defined benefit plan liabilities

26


1,746


2,102

Deferred tax liabilities

25


342


431

Other

15


4,427


4,517




47,960


49,357

Subordinated bonds

16


3,081


3,350

Total liabilities



180,665


176,110

Equity






Capital stock

19


3,322


2,210

Share capital

20


80


78

Undistributed surplus earnings



1,317


1,261

Accumulated other comprehensive income

21


694


1,044

Reserves



10,216


9,032

Equity - Group's share



15,629


13,625

Non-controlling interests

22


412


402

Total equity



16,041


14,027

TOTAL LIABILITIES AND EQUITY


$

196,706

$

190,137

The accompanying notes are an integral part of the Combined Financial Statements.

On behalf of the Board of Directors of the Fédération des caisses Desjardins du Québec,

Monique F. Leroux, c.m., fcpa, fca                                                                                                                                Denis Paré, ll.l., d.d.n.

Chair of the Board                                                                                                                                                                Vice-Chair of the Board

 



 

COMBINED STATEMENTS OF INCOME




For the years ended December 31


(in millions of Canadian dollars)

Notes

       2012

                2011

Interest income






Loans


$

5,474

$

5,462

Securities



391


428




5,865


5,890

Interest expense






Deposits



1,851


1,818

Subordinated bonds and other



166


151




2,017


1,969

Net interest income



3,848


3,921

Net premiums

14


5,126


4,851

Other income






Deposit and payment service charges



499


512

Lending fees and credit card service revenues



517


483

Brokerage, investment fund and trust services



700


676

Net income on securities at fair value through profit or loss

23


674


1,706

Net income on available-for-sale securities



268


299

Net other investment income



236


264

Other

24


610


493




3,504


4,433

Total income



12,478


13,205

Provision for credit losses

7


241


237

Claims, benefits, annuities and changes in insurance and investment contract liabilities

14


4,397


5,292

Non-interest expense






Salaries and fringe benefits



2,882


2,782

Premises, equipment and furniture, including depreciation



415


428

Service agreements and outsourcing



228


270

Communications



271


247

Other

24


1,964


1,896




5,760


5,623

Operating surplus earnings



2,080


2,053

Income taxes on surplus earnings

25


489


471

Surplus earnings before member dividends (1)



1,591


1,582

Provision for member dividends



279


320

Tax recovery on provision for member dividends

25


(73)


(90)

Net  surplus earnings for the year after member dividends


$

1,385

$

1,352

of which:






Group's share


$

1,310

$

1,314

Non-controlling interests' share

22


75


38

(1) The Group's share of "Surplus earnings before member dividends" is presented in Note 32, "Segmented information".

The accompanying notes are an integral part of the Combined Financial Statements.



 

COMBINED STATEMENTS OF COMPREHENSIVE INCOME




For the years ended December 31


(in millions of Canadian dollars)

Notes

       2012

                2011

Net surplus earnings for the year after member dividends


$

1,385

$

1,352

Other comprehensive income, net of income taxes

25





Net unrealized gains on available-for-sale securities



46


245

Reclassification of gains on available-for-sale securities to the

    Combined Statements of Income



(104)


(138)




(58)


107

Net gains (losses) on derivative financial instruments designated as

    cash flow hedges



(166)


424

Reclassification of gains on derivative financial instruments designated as

    cash flow hedges to the Combined Statements of Income

17


(125)


(105)




(291)


319

Total other comprehensive income



(349)


426

Comprehensive income for the year


$

1,036

$

1,778

of which:






    Group's share


$

962

$

1,742

Non-controlling interests' share



74


36

The accompanying notes are an integral part of the Combined Financial Statements.

 


COMBINED STATEMENTS OF CHANGES IN EQUITY


For the years ended December 31


Capital

Undistributed surplus earnings

Accumulated other comprehensive income
(Note 18
and 21)

Reserves

Equity - Group's share

Non-controlling interests
(Notes 18 and 22)

Total equity

(in millions of Canadian dollars)

Capital stock
(Note 19)

Share capital
(Note 20)

Stabilization reserve

Reserve for future member dividends

General reserve

Total reserves

Balance as at December 31, 2010

$

2,129

$

70

$

996

$

617

$

419

$

446

$

7,150

$

8,015

$

11,827

$

329

$

12,156

 

Net surplus earnings for the

   year after member dividends


---


---


1,314


---


---


---


---


---


1,314


38


1,352

 

Other comprehensive income

   for the year


---


---


---


428


---


---


---


---


428


(2)


426

 

Total comprehensive income

   for the year


---


---


1,314


428


---


---


---


---


1,742


36


1,778

 

Net change in capital stock


81


---


---


---


---


---


---


---


81


---


81

 

Issuance of share capital


---


62


---


---


---


---


---


---


62


14


76

 

Redemption of share capital


---


(54)


---


---


---


---


---


---


(54)


---


(54)

 

Remuneration on
permanent shares


---


---


(91)


---


---


---


---


---


(91)


---


(91)

 

Income tax recovery
on remuneration on
permanent shares


---


---


25


---


---


---


---


---


25


---


25

 

Dividends


---


---


(2)


---


---


---


---


---


(2)


(8)


(10)

 

Transfer from undistributed

  surplus earnings (to reserves)


---


---


(1,017)


---


241


15


761


1,017


---


---


---

 

Impact of acquisition and disposal


---


---


---


(1)


---


---


---


---


(1)


73


72

 

Other


---


---


36


---


---


---


---


---


36


(42)


(6)

 

Balance as at December 31, 2011

$

2,210

$

78

$

1,261

$

1,044

$

660

$

461

$

7,911

$

9,032

$

13,625

$

402

$

14,027

 

Net surplus earnings for the

   year after member dividends


---


---


1,310


---


---


---


---


---


1,310


75


1,385

 

Other comprehensive income

   for the year


---


---


---


(348)


---


---


---


---


(348)


(1)


(349)

 

Total comprehensive income

   for the year


---


---


1,310


(348)


---


---


---


---


962


74


1,036

 

Issuance of F capital shares


1,026


---


---


---


---


---


---


---


1,026


---


1,026

 

F capital share issuance costs


(1)


---


---


---


---


---


---


---


(1)


---


(1)

 

Other net change in capital

   stock


87


---


---


---


---


---


---


---


87


---


87

 

Issuance of share capital


---


2


---


---


---


---


---


---


2


---


2

 

Remuneration on
permanent shares


---


---


(95)


---


---


---


---


---


(95)


---


(95)

 

Income tax recovery
on remuneration on
permanent shares


---


---


25


---


---


---


---


---


25


---


25

 

Redemption of share capital


---


---


---


---


---


---


---


---


---


(52)


(52)

 

Dividends


---


---


(2)


---


---


---


---


---


(2)


(6)


(8)

 

Transfer from undistributed

  surplus earnings (to reserves)


---


---


(1,184)


---


151


20


1,013


1,184


---


---


---

 

Other


---


---


2


(2)


---


---


---


---


---


(6)


(6)

 

Balance as at December 31, 2012

$

3,322

$

80

$

1,317

$

694

$

811

$

481

$

8,924

$

10,216

$

15,629

$

412

$

16,041

 

The accompanying notes are an integral part of the Combined Financial Statements.

 


COMBINED STATEMENT OF CASH FLOWS


For the years ended December 31


(in millions of Canadian dollars)

                 2012

           2011

Cash flows from (used in) operating activities






Operating surplus earnings


$

2,080

$

2,053

Non-cash adjustments:






Depreciation of property, plant and equipment and investment property



177


171

Net change in insurance and investment contract liabilities



769


1,959

Provision for credit losses



241


237

Net realized gains on available-for-sale securities



(175)


(168)

Other



175


67

Change in operating assets and liabilities:






Securities at fair value through profit and loss



493


(918)

Securities borrowed or purchased under reverse repurchase agreements



582


2,075

Loans



(7,663)


(7,592)

Derivative financial instruments, net amount



59


(874)

Deposits



6,221


9,406

Commitments related to securities sold short



(364)


(2,203)

Commitments related to securities lent or sold under repurchase agreements



(517)


(2,108)

Other



(1,823)


705

Income tax paid on surplus earnings



(389)


(281)

Payment of member dividends



(303)


(298)




(437)


2,231

Cash flows from (used in) financing activities






Issuance of subordinated bonds



---


479

Redemption of subordinated bonds



(300)


---

Sale of debt securities and subordinated bonds to third parties on the market



28


63

Issuance of F capital shares



1,026


---

F capital share issuance costs



(1)


---

Other net change in capital stock



87


81

Remuneration on permanent shares, net of income tax recovery



(70)


(66)

Issuance of preferred shares - Group's share



---


62

Issuance of preferred shares - Non-controlling interests' share



---


14

Redemption of preferred shares - Group's share



---


(54)

Redemption of preferred shares - Non-controlling interests' share



(52)


---

Dividends paid - Group's share



---


(2)

Dividends paid - Non-controlling interests' share



(6)


(8)




712


569

Cash flows from (used in) investing activities






Purchase of available-for-sale securities



(35,716)


(28,954)

Proceeds from disposals of available-for-sale securities



34,883


24,479

Proceeds from maturities of available-for-sale securities



1,201


1,902

Business acquisition



(71)


(256)

Proceeds from the disposal of interests, net of cash and cash equivalents sold



---


(51)

Acquisitions of property, plant and equipment and investment property



(322)


(267)

Proceeds from the disposals of property, plant and equipment and investment property



63


82




38


(3,065)

Net increase (decrease) in cash and cash equivalents



313


(265)

Cash and cash equivalents at beginning of year



1,356


1,621

Cash and cash equivalents at end of year


$

1,669

$

1,356

Supplemental information on cash flows from operating activities






Interest paid


$

1,965

$

1,891

Interest and dividends received



5,995


5,940

The accompanying notes are an integral part of the Combined Financial Statements.

 

 



 

NOTES TO THE COMBINED

FINANCIAL STATEMENTS

 

NOTE 1 - INFORMATION ON DESJARDINS GROUP

Nature of operations

Desjardins Group is made up of the Desjardins caisses in Quebec and Ontario, the Fédération des caisses Desjardins du Québec (the Federation) and its subsidiaries, the Fédération des caisses populaires de l'Ontario and the Fonds de sécurité Desjardins. A number of the subsidiaries are active across Canada. The various business segments in which Desjardins Group operates are described in Note 32, "Segmented information". The address of the head office is 100 Des Commandeurs Street, Lévis, Quebec, Canada.

Basis of presentation of the Combined Financial Statements

As an integrated financial services group, Desjardins Group is a complete economic entity. The Combined Financial Statements of Desjardins Group have been prepared to present the financial position, the financial performance and the cash flows of this economic entity. The Desjardins caisses collectively control the Federation, whose mission is to determine the strategic priorities and coordinate the operations of Desjardins Group. The role of the Federation is also to protect the interests of Desjardins Group members and to promote the development of the Group.

As Desjardins caisses and the Federation are financial services cooperatives, these Combined Financial Statements differ from the consolidated financial statements of a group with a traditional organizational structure. Consequently, the financial statements of Desjardins Group are a combination of the accounts of the Desjardins caisses, the caisses populaires of Ontario, the Federation, the Fédération des caisses populaires de l'Ontario and the entities controlled by them, namely the Federation's subsidiaries and the Fonds de sécurité Desjardins. The capital stock of Desjardins Group represents the aggregate of the capital stock issued by the caisses, the Federation and the Fédération des caisses populaires de l'Ontario.

 

NOTE 2  -  SIGNIFICANT ACCOUNTING POLICIES

A)        GENERAL INFORMATION

Statement of compliance

Pursuant to An Act Respecting Financial Services Cooperatives (the Act), these Combined Financial Statements have been prepared by Desjardins Group's management in accordance with Canadian generally accepted accounting principles (GAAP) and the accounting requirements of the Autorité des marchés financiers (AMF) in Québec, which do not differ from GAAP.

The International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), constitute GAAP for Desjardins Group. Some numbers from fiscal 2011 were reclassified to be consistent with the presentation of the Combined Financial Statements for fiscal 2012. This reclassification did not affect Desjardins Group's results or total assets and liabilities.These Combined Financial Statements for the year ended      December 31, 2012, were approved by the Board of Directors of Desjardins Group, which is the Board of Directors of the Federation, on February 21, 2013.

The significant measurement and presentation rules applied to prepare these Combined Financial Statements are described below.

 

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

A)        GENERAL INFORMATION (continued)

Scope of the group

The scope of these Combined Financial Statements of Desjardins consists of the operations of the Desjardins caisses in Quebec and Ontario, the Federation, the Fédération des caisses populaires de l'Ontario and the entities controlled by them, namely the Federation's subsidiaries and the Fonds de sécurité Desjardins. The main subsidiaries of the Federation are as follows: Caisse centrale Desjardins, which acts as Desjardins Group's treasurer and financial agent on the Canadian and international markets; Capital Desjardins inc., which issues securities on capital markets and invests the proceeds therefrom in securities issued by the Desjardins caisses; Desjardins Trust Inc., which is active in asset custody and trust services; Desjardins Technology Group Inc., which is responsible for the development and the maintenance of Desjardins Group's technology systems and applications; and Desjardins Financial Corporation Inc. This last subsidiary encompasses the operations of Desjardins Asset Management Inc., which is a group of investment experts that manages the assets from the insurance subsidiaries and other managed items entrusted to it by other subsidiaries of Desjardins Group; Desjardins General Insurance Group Inc., which offers property and casualty insurance products; Desjardins Financial Security Life Assurance Company, which offers life and health insurance products and financial services; Western Financial Group Inc., a financial services company operating in western Canada; and Desjardins Securities Inc., which offers securities brokerage products and services.

The financial statements of all Group entities have been prepared for the same reference period using similar accounting policies. All intercompany balances, income and expenses as well as gains and losses on internal transactions have been eliminated.

Non-controlling interests

Non-controlling interests represent the share in profit or loss as well as net assets not held by Desjardins Group. They are presented separately in the Combined Statements of Income, the Combined Statements of Comprehensive Income and in equity, in the Combined Balance Sheets.

Associates

Desjardins Group's investments in associates are accounted for using the equity method, whereby the value of securities held is replaced by Desjardins Group's share of the equity and profit or loss of the investee. Desjardins Group's investments in associates include the goodwill (net of any impairment) determined upon acquisition. An associate is an entity over which Desjardins Group has significant influence. These investments are presented under "Other assets - Other" in the Combined Balance Sheets.

Joint ventures

Desjardins Group's interests in joint ventures are also accounted for using the equity method. A joint venture is an entity whose economic activity is undertaken under the joint control of the joint venturers pursuant to a contractual arrangement.

Special purpose entities

Desjardins Group includes in its Combined Financial Statements the operations of the distinct legal structures specifically created to manage a transaction or a group of similar transactions (special purpose entities), even if it has no equity interest in these entities, provided that it exercises control in substance based on the following criteria:

·     The activities of the entity are being conducted exclusively on behalf of Desjardins Group, such that Desjardins Group benefits from the entity's operations.

·     Desjardins Group has the decision-making and management powers needed to obtain the majority of the benefits of the ongoing activities of the entity. These powers are characterized by the ability to dissolve the entity, to modify its statutes or to formally veto any modification thereto.

·     Desjardins Group has the ability to obtain the majority of the benefits of the entity and therefore may be exposed to risks incident to the entity's activities. These benefits may take the form of the right to receive some or all of the profit or loss of the entity, measured on an annual basis, or a share of its net assets, or the right to sell one or more assets or to receive the majority of the residual assets in the event of liquidation.

·     Desjardins Group retains the majority of the risks taken by the entity in order to obtain benefits from its activities; this would be the case if Desjardins Group remained exposed to the initial losses on the asset portfolio held by the entity.

SIGNIFICANT JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of combined financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions, which are described in the following significant accounting policies with respect to consolidation of special purpose entities, fair value measurement of financial instruments, derecognition of financial assets and liabilities, allowance for credit losses, objective evidence of impairment of available-for-sale securities, impairment of non-financial assets, insurance and investment contract liabilities, provisions, income taxes on surplus earnings, provision for member dividends, employee benefits and goodwill.

Presentation and functional currency

These Combined Financial Statements are expressed in Canadian dollars, which is also the functional currency of Desjardins Group. Dollar amounts presented in the tables of the Notes to the Combined Financial Statements are in millions of dollars, unless otherwise stated.

 

 

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

B)        FINANCIAL ASSETS AND LIABILITIES

Financial assets mainly consist of securities, loans and derivative financial instruments, whereas financial liabilities mainly include deposits and derivative financial instruments.

Financial assets and liabilities are recognized on the date Desjardins Group becomes a party to their contractual provisions, namely the date of acquisition or issuance of the financial instrument. Regular-way purchases and sales of financial assets are recognized on a trade-date basis.

Classification and measurement

Financial assets and liabilities are classified based on their characteristics and the intention of management upon their acquisition.

The classification of financial assets can be summarized as follows:

Categories

Classes

Recognition

Initial

Subsequent

Financial assets

At fair value through

profit or loss (i)

Held for trading (ii)

Fair value

Fair value

Designated as at fair value through profit or loss (iii)

Fair value

Fair value

Loans and receivables (iv)

Fair value

Amortized cost

Available for sale (v)

Fair value

Fair value

Held to maturity (vi)

Fair value

Amortized cost

(i)   Financial assets classified in the "At fair value through profit or loss" category include financial assets "Held for trading" and financial assets "Designated as at fair value through profit or loss". Therefore:

·     Changes in fair value of financial assets classified in this category are recorded in profit or loss under "Net income on securities at fair value through profit or loss".

·     Interest and dividend income from the financial assets classified in the "At fair value through profit or loss" category of the Personal Services and Business and Institutional Services segment and the Other category is recognized under "Interest income - Securities" and, for the other segments, such income is mainly recognized under "Net income on securities at fair value through profit or loss" using the effective interest method.

(ii)  Financial assets classified as "Held for trading" include the following:

·     Securities acquired for resale purposes in the near term and securities that are part of a portfolio of securities that are managed together and for which there is evidence of an actual pattern of short-term profit-taking

·     Derivative financial instruments

Derivative financial instruments designated as fair value or cash flow hedging items cannot be classified in this category. Section Q) "Derivative financial instruments and hedging activities", specifies the nature of the recognition of derivative financial instruments designated as part of a hedging relationship.

(iii)  Financial assets classified as "Designated as at fair value through profit or loss" are essentially securities designated as such by management upon initial recognition, on an instrument-by-instrument basis. Management may designate a financial instrument as at fair value through profit or loss upon initial recognition when one of the following conditions is met:

·     The designation eliminates or significantly reduces a measurement or recognition inconsistency.

·     The assets are part of a group of financial assets or financial assets and liabilities that are managed and whose performance is evaluated on a fair value basis.

·     The financial instrument contains one or more embedded derivatives that significantly modify the cash flows and that would otherwise be separated from their host contract.

Desjardins Group's financial assets classified in this category comprise certain investments made in connection with derivative instruments that are not designated as part of a hedging relationship, thereby significantly reducing an accounting mismatch. For securities that are designated in this category to eliminate or significantly reduce an accounting mismatch and that back the life insurance actuarial liabilities and the property and casualty insurance provisions for claims, see Note 14 "Insurance and investment contract liabilities", for more information.

(iv) Securities classified in the "Loans and receivables" category are non-derivative financial assets with fixed or determinable income that are not quoted in an active market and that are not held for sale upon their acquisition or their granting. Securities in this category include "Cash and deposits with financial institutions", "Securities borrowed or purchased under reverse repurchase agreements", "Loans", "Clients' liability under acceptances" and "Amounts receivable from clients, brokers and financial institutions" and other assets.

Outstanding securities classified in the "Loans and receivables" category are initially recognized at fair value in the Combined Balance Sheets and, at subsequent reporting dates, they are measured at amortized cost using the effective interest method. Income recognized on securities classified in the "Loans and receivables" category is presented under "Interest income - Loans" in the Combined Statements of Income when it is recognized by the Personal Services and Business and Institutional Services segment and the Other category. Income for the other segments is recognized under "Other income - Other" in the Combined Statements of Income.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

B)        FINANCIAL ASSETS AND LIABILITIES (continued)

(v)  Securities classified in the "Available for sale" category are non-derivative financial assets that are initially designated as available for sale or that are not classified in the "At fair value through profit or loss", "Held to maturity" or "Loans and receivables" categories. Available-for-sale securities can be sold further to or in view of fluctuations in interest rates, exchange rates, prices of equity instruments or changes in financing sources or terms, or to meet the liquidity needs of Desjardins Group.

Gains and losses resulting from changes in fair value, except for impairment losses and foreign exchange gains and losses, are recognized in the Combined Statements of Comprehensive Income under "Net unrealized gains on available-for-sale securities" until the financial asset is derecognized. Premiums and discounts on the purchase of available-for-sale securities are amortized over the life of the security using the effective interest method and recognized in combined profit or loss.

(vi) Securities classified in the "Held to maturity" category are non-derivative financial assets with fixed or determinable payments and fixed maturity that management has the intention and ability to hold to maturity. These securities are recognized at amortized cost using the effective interest method. Desjardins Group held no instruments in this category at the reporting dates.

The classification of financial liabilities can be summarized as follows:

Categories

Classes

Recognition

Initial

Subsequent

Financial liabilities

At fair value through          profit or loss (i)

Held for trading (ii)

Fair value

Fair value

Designated as at fair value through profit or loss (iii)

Fair value

Fair value

     At amortized cost (iv)

Fair value

Amortized cost

(i)   Financial liabilities classified in the "At fair value through profit or loss" category include financial liabilities "Held for trading" and financial liabilities "Designated as at fair value through profit or loss". Therefore:

·     Changes in fair value of financial liabilities classified in this category are recorded in profit or loss under "Net income on securities at fair value through profit or loss".

·     Interest expense related to financial liabilities classified in the "At fair value through profit or loss" category is recognized under "Net income on securities at fair value through profit or loss" using the effective interest method.

(ii)  Financial liabilities classified as "Held for trading" are debt securities issued with the intention to repurchase them in the near term and securities that are part of a portfolio of securities that are managed together and for which there is evidence of an actual pattern of short-term profit-taking, such as "Commitments related to securities sold short". Derivative financial instruments are also classified as "Held for trading". Derivative financial instruments designated as fair value or cash flow hedging items cannot be classified in this category. Section Q) "Derivative financial instruments and hedging activities", specifies the nature of the recognition of derivative financial instruments designated as part of a hedging relationship.

(iii)  Financial liabilities classified as "Designated as at fair value through profit or loss" have been designated as such by management upon initial recognition, on an instrument-by-instrument basis. Management may designate a financial instrument as at fair value through profit or loss upon initial recognition when one of the following conditions is met:

·     The designation eliminates or significantly reduces a measurement or recognition inconsistency.

·     The liabilities are part of a group of financial liabilities or financial assets and liabilities that are managed and whose performance is evaluated on a fair value basis.

·     The financial instrument contains one or more embedded derivatives that significantly modify the cash flows and that would otherwise be separated from their host contract.

Desjardins Group held no instruments in this category at the reporting dates.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

B)        FINANCIAL ASSETS AND LIABILITIES (continued)

(iv) Financial liabilities that are not classified in the "At fair value through profit or loss" category are classified in the "At amortized cost" category. Financial liabilities measured at amortized cost include "Deposits", "Acceptances", "Commitments related to securities lent or sold under repurchase agreements", "Amounts payable to clients, brokers and financial institutions", "Subordinated bonds" and other liabilities.

Financial liabilities classified in the "At amortized cost" category are initially recognized at fair value in the Combined Balance Sheets and, at subsequent reporting dates, they are measured at amortized cost using the effective interest method. Interest expense on securities classified in the "At amortized cost" category is recognized in profit or loss under "Interest expense" for the Personal Services and Business and Institutional Services segment and the Other category. Income for the other segments is mainly recognized under "Net income on securities at fair value through profit or loss" in the Combined Statements of Income.

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

There is little subjectivity in the determination of the fair value of financial instruments, especially securities, obtained from quoted prices on active markets.

If there are no quoted prices on active markets, the fair value is determined using either models based on observable market data or models that are not based on observable market data. When no quoted prices are available, the fair value is estimated using present value or other valuation methods, which are influenced by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates, which reflect varying degrees of risk, including liquidity risk, credit risk, and risks related to interest rates, exchange rates, and price and rate volatility. Due to the need to use estimates and make judgments when applying many valuation techniques, fair value estimates for identical or similar assets may differ between entities. Fair value reflects market conditions on a given date and for this reason cannot be representative of future fair values. It also cannot be considered as being realizable in the event of immediate settlement of these instruments.

Loans

Changes in interest rates and in the creditworthiness of borrowers are the main causes of changes in the fair value of loans held by Desjardins Group, which results in a favourable or unfavourable difference compared to their carrying amount. The fair value of loans is estimated by discounting expected cash flows using market interest rates charged for similar new loans at the reporting date. The fair value of impaired loans is assumed to be equal to their carrying amount.

Deposits

The fair value of deposits with floating-rate features or with no stated maturity is assumed to be equal to their carrying amount. The fair value of fixed-rate deposits is determined by discounting expected cash flows using market interest rates currently being offered for deposits with substantially the same term.

Subordinated bonds

The fair value of subordinated bonds is based on the market rates for similar issues or debt securities, or on the rates currently offered to Desjardins Group for debt securities with the same remaining term.

Derivative financial instruments

The fair value of derivative financial instruments is determined using pricing models that incorporate the current market prices and the contractual prices of the underlying instruments, the time value of money, yield curves and volatility factors. The fair value of derivative financial instruments is presented without taking into account the impact of legally enforceable master netting agreements. Note 17, "Derivative financial instruments and hedging activities", specifies the nature of the derivative financial instruments held by Desjardins Group.

Financial instruments whose fair value equals their carrying amount

The carrying amount of certain financial instruments that mature within the next 12 months is a reasonable approximation of their fair value. These financial instruments include the following items: "Cash and deposits with financial institutions", "Clients' liability under acceptances", "Amounts receivable from clients, brokers and financial institutions", "Acceptances" and "Amounts payable to clients, brokers and financial institutions".

Transaction costs

Transaction costs for financial instruments are capitalized and then amortized over the life of the instrument using the effective interest method, except if such instruments are classified or designated as part of the "At fair value through profit or loss" category, in which case these costs are expensed as incurred.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

B)        FINANCIAL ASSETS AND LIABILITIES (continued)

Offsetting of financial assets and liabilities

Financial assets and liabilities are presented on a net basis when there is a legally enforceable right to set off the recognized amounts and Desjardins Group intends to settle on a net basis or to realize the asset and settle the liability simultaneously.

Derecognition of financial assets and liabilities

A financial asset is derecognized when the contractual rights to the cash flows from the asset expire or when the contractual rights to the cash flows from the financial asset and substantially all risks and rewards of ownership of the asset are transferred to a third party.

When the cash flows from a financial asset have been transferred but Desjardins Group has retained substantially all the risks and rewards of ownership of the financial asset, it recognizes a separate asset and a separate liability presented in the Combined Balance Sheets under "Other assets - Other" and "Other liabilities - Other", respectively, which represents the rights and obligations created or retained in the asset transfer. If control of the financial asset is retained, Desjardins Group continues to recognize the asset in the Combined Balance Sheets to the extent of its continuing involvement in said asset.

When a financial asset is derecognized in its entirely, a gain or a loss is recognized in the Combined Statements of Income for an amount equal to the difference between the carrying amount of the asset and the value of the consideration received.

A financial liability is derecognized when the related obligation is discharged, cancelled or expires.

C)        CASH AND DEPOSITS WITH FINANCIAL INSTITUTIONS

"Cash and deposits with financial institutions" includes cash and cash equivalents. Cash equivalents consist of deposits with the Bank of Canada, deposits with financial institutions-including net amounts receivable related to cheques and other items in the clearing process-as well as the net amount of cheques and other items in transit. These financial instruments mature in the short term, are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. They are classified as "Loans and receivables".

D)        SECURITIES

Securities are instruments classified based on their characteristics and management's intention under the various categories presented in section            B), "Financial assets and liabilities", above.

Securities borrowed or purchased under reverse repurchase agreements

Securities borrowed for a securities or cash consideration or purchased under reverse repurchase agreements are not recognized in the Combined Balance Sheets, as substantially all the risks and rewards of ownership of these securities have not been transferred.

When the consideration for the borrowed securities is paid in cash, the cash pledged as collateral is derecognized from "Cash and deposits with financial institutions" in the Combined Balance Sheets, and an asset representing the right to receive the securities is recognized under "Securities borrowed or purchased under reverse repurchase agreements".

Reverse repurchase agreements are accounted for as collateralized lending transactions. The consideration paid for the securities acquired, including accrued interest, is recognized under "Securities borrowed or purchased under reverse repurchase agreements".

When the consideration for the borrowed securities is paid in securities, the securities pledged as collateral are not derecognized, as substantially all the risks and rewards of ownership of these securities have not been transferred.

The fair value of securities borrowed for a securities or cash consideration or purchased under reverse repurchase agreements is presented in the notes as financial assets held as collateral. In addition, when the securities received can subsequently be resold or repledged as collateral, the fair value of securities borrowed or purchased under reverse repurchase agreements is presented in Note 27, "Commitments, guarantees and contingent liabilities", as financial assets held as collateral that can be sold or repledged.

Securities lent or sold under repurchase agreements

Securities lending transactions or securities sold under repurchase agreements (to be repurchased at a subsequent date) do not result in the derecognition of securities in the Combined Balance Sheets, as substantially all the risks and rewards of ownership of these securities have not been transferred. These transactions are treated as collateralized financings since the party that pays the consideration takes possession of the securities pledged as collateral for the financing.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

D)        SECURITIES (continued)

Securities lent or sold under repurchase agreements (continued)

When the consideration received for the securities lent is paid in cash, the cash received as collateral is recognized under "Cash and deposits with financial institutions" in the Combined Balance Sheets, and a liability representing the obligation to return the securities is recognized under "Commitments related to securities lent or sold under repurchase agreements".

Repurchase agreements are accounted for as collateralized borrowing transactions. The consideration received for the securities sold, including accrued interest, is therefore recognized under "Cash and deposits with financial institutions" in the Combined Balance Sheets, and a liability representing the obligation to return the securities is recognized under "Commitments related to securities sold under repurchase agreements". The difference between the price received and the repurchase price is recognized as interest expense.

When the consideration received for the securities lent is paid in securities, the securities held as collateral are not recognized, as substantially all the risks and rewards of ownership of these securities have not been transferred.

The carrying amount of securities lent or sold under repurchase agreements is presented in Note 27, "Commitments, guarantees and contingent liabilities", as financial assets pledged as collateral. When the consideration received for the securities lent is paid in securities and these securities can be pledged as collateral or sold, the fair value of the securities received is presented in Note 27, "Commitments, guarantees and contingent liabilities", as financial assets held as collateral.

Securities sold short

Securities sold short as part of trading activities, which represent Desjardins Group's obligation to deliver securities that it did not possess at the time of sale, are recognized as liabilities at their fair value. Realized and unrealized gains and losses on these securities are recognized in the Combined Statements of Income under "Net income on securities at fair value through profit or loss". Securities sold short are classified in the "Securities at fair value through profit or loss - Held for trading" category.

E)        LOANS

Loans, including advances to policyholders, are recorded at amortized cost using the effective interest method, net of the allowance for credit losses.

The fees collected and the direct costs related to the origination, restructuring, and renegotiation of loans are treated as being integral to the yield of the loan, unless the terms and conditions were changed in such a way that the transaction is treated as the granting of a new loan, in which case fees and direct costs are recorded in profit or loss for the year. Collateral is obtained if deemed necessary, based on an assessment of the borrower's creditworthiness. Collateral normally takes the form of assets such as cash, government securities, shares, receivables, inventory or capital assets.

F)        IMPAIRMENT OF FINANCIAL ASSETS

At the reporting date, Desjardins Group assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

Allowance for credit losses

Evidence of impairment results from a loss event that occurred after the loan was granted but before the reporting date and that has an impact on the estimated future cash flows of loans.

The impairment of a loan or a group of loans is determined by estimating the recoverable amount of these financial assets. The allowance is equal to the difference between this estimate and the carrying amount. This allowance is presented in deduction of assets under "Allowance for credit losses". To determine the estimated recoverable amount of a loan, Desjardins Group discounts the estimated future cash flows at the effective interest rate inherent to the loan. When the amounts and timing of future cash flows cannot be estimated with reasonable accuracy, the estimated recoverable amount is determined using either the fair value of the securities underlying the loan, net of expected costs of realization, or the observable market price for the loan. The security may vary depending on the type of loan.

The allowance resulting from this impairment is established using two components: individual allowances and collective allowance.

Individual allowances

Desjardins Group first reviews its loan portfolios on a loan-by-loan basis to assess credit risk and determine if there is any objective evidence of impairment for which a loss should be recognized in the Combined Statements of Income. Loan portfolios for which an individual allowance has not been established are then included in groups of assets having similar credit risk characteristics and are subject to a collective allowance.

There is objective evidence of impairment when a loan is considered impaired. A loan is classified as an impaired loan when one of the following conditions is met:

§ There is reason to believe that a portion of the principal or interest cannot be collected.

§ The interest or principal repayment is contractually 90 days past due, unless the loan is fully secured and in the process of collection.

§ The interest or principal is more than 180 days past due.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

F)        IMPAIRMENT OF FINANCIAL ASSETS (continued)

A loan is considered past due when the borrower has failed to make a payment by the contractual due date.

When a loan becomes impaired, the interest previously accrued but not collected is capitalized to the loan. Payments received subsequently are recorded as a deduction of the principal. A loan ceases to be considered impaired when principal and interest payments are up to date and there is no doubt as to the collection of the loan or when it is restructured, in which case it is treated as a new loan, and there is no doubt as to the collection of principal and interest.

Assets foreclosed to settle impaired loans are recognized on the date of the foreclosure at their fair value less costs to sell. Any difference between the carrying amount of the loan and the fair value recorded for the acquired assets is recognized under "Provision for credit losses".

A loan classified as "Loans and receivables" is written off when all attempts at restructuring or collection have been made and the likelihood of future recovery is remote. When a loan is written off completely, any subsequent payments are recorded under "Provision for credit losses" in the Combined Statements of Income. Credit card balances are written off completely when no payment has been received at the end of a 180-day period.

Changes in the individual allowance for credit losses due to the passage of time are recognized under "Interest income - Loans", while those that are due to a revision of expected receipts are recognized under "Provision for credit losses" in the Combined Statements of Income.

Collective allowance

Loan portfolios for which an individual allowance has not been established are included in groups of financial assets with similar credit characteristics and are subject to a collective allowance.

The method used by Desjardins Group to determine the collective allowance takes into account the risk parameters of the various loan portfolios, in particular through the integration of sophisticated credit risk models. These collective allowance impairment models take into account certain factors such as probabilities of default (loss frequency), loss given default (extent of losses) and gross exposures at default. These parameters, which are based on historical losses, are determined according to the category and the risk rating of each loan. The measurement of the collective allowance also depends on management's assessment of current credit quality trends with respect to the business segments, the impact of changes to its credit policies and economic conditions. The collective allowance on the loans of the life and health insurance subsidiaries is, however, included in the policy reserves, under "Insurance and investment contract liabilities".

The allowance related to off-balance sheet exposures, such as letters of guarantee and certain unrecognized credit commitments, is recognized under "Other liabilities - Other" in the Combined Balance Sheets and under "Provision for credit losses" in the Combined Statements of Income.

Available-for-sale securities

Securities classified in the "Available for sale" category are monitored on a regular basis to determine whether there is any objective evidence that they are impaired. In measuring the decline in value, Desjardins Group takes into account many facts specific to each investment and all the factors that could indicate that there has been impairment. Factors considered include, but are not limited to, a significant or prolonged decline in the fair value, significant financial difficulties of the issuer, a breach of contract, the increasing probability that the issuer will enter bankruptcy or a restructuring, and the disappearance of an active market for the financial asset in question. Management also uses its judgment to determine when to recognize an impairment loss.

Debt securities classified in the "Available for sale" category are individually assessed by Desjardins Group to determine whether there is any objective evidence of impairment. However, the impairment loss represents the cumulative loss measured as the difference between amortized cost and current fair value, less any impairment loss previously recognized. Future interest income is calculated on the reduced carrying amount using the same interest rate as the one used to discount future cash flows in order to measure the impairment loss. When, during a subsequent period, the fair value of a debt security increases and that increase can be objectively related to a credit event occurring after the impairment loss had been recognized in profit or loss, the impairment loss is reversed through profit or loss.

For equity securities classified in the "Available for sale" category, the objective evidence would also include a "significant" or "prolonged" decline in the fair value below cost. When evidence of impairment exists, the cumulative loss (measured as the difference between acquisition cost and current fair value, less any impairment loss previously recognized) is transferred out of other comprehensive income, in the Combined Statements of Comprehensive Income, and recognized in the Combined Statements of Income. Impairment losses on equity securities are not reversed through profit or loss, and increases in fair value occurring subsequent to impairment are recorded directly in other comprehensive income, in the Combined Statements of Comprehensive Income. Any impairment loss on securities previously impaired is directly recognized in profit or loss.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

G)       SECURITIZATION

As part of its liquidity and capital management strategy, Desjardins Group participates in the National Housing Act Mortgage-Backed Securities Program. Under this program, Desjardins Group bundles residential mortgage loans guaranteed by Canada Mortgage and Housing Corporation (CMHC) into mortgage-backed securities (NHA MBSs) and transfers them to the Canada Housing Trust (CHT). Afterwards, Desjardins Group may not transfer or sell these assets or pledge them as collateral, as they have been sold to the CHT, and it may not repurchase them before maturity. However, as part of these transactions, Desjardins Group retains substantially all the risks and rewards related to these securities, in particular prepayment and reinvestment risks. Consequently, these loans continue to be recognized in the Combined Balance Sheets. Furthermore, Desjardins Group treats these transfers as collateralized financing transactions and recognizes a liability. This liability, which is equal to the consideration received from CMHC for the sale of NHA MBSs that do not meet the derecognition criteria, is presented under "Deposits - Business and government" in the Combined Balance Sheets. The CHT funds these purchases by issuing Canada Mortgage Bonds (CMBs) to investors. The legal guarantee of third parties holding CMBs is limited to the transferred assets.

The terms and conditions of the program require that interest rate swaps be entered into by the CHT and Desjardins Group in order to receive all cash flows related to the mortgage loans underlying the NHA MBSs every month. Desjardins Group pays the CHT an amount corresponding to the interest payable to the holders of CMBs, the difference between these amounts being considered as excess interest margin. As part of these swaps, Desjardins Group must also create a separate account for reinvestment purposes (principal reinvestment account) for any principal payment received on mortgage loans in order to meet the obligations related to the repayment of CMBs at maturity.

Some securitization transactions entered into before January 1, 2010, resulted in derecognition, as Desjardins Group elected to prospectively apply the derecognition requirements. At the time of transfer, these transactions were therefore recognized as sales, and Desjardins Group retains certain interests in excess interest margins, which are retained interests, and it assumes the responsibility of managing the transferred mortgage loans and the principal reinvestment account. The assets and liabilities representing the retained interests and obligations are recognized upon the transfer of loans under "Other assets - Other" and "Other liabilities - Other" in the Combined Balance Sheets. These transactions will mature no later than December 31, 2014.

No loss is expected on the mortgage loans as they are guaranteed by CMHC. Income related to securitization transactions is recognized under "Other income - Other", "Interest income - Securities" and "Interest income - Loans". 

H)        PROPERTY, PLANT AND EQUIPMENT AND INVESTMENT PROPERTY

Property, plant and equipment

Property, plant and equipment consists of land, buildings, computer hardware, furniture, fixtures and other items as well as leasehold improvements. These assets are recognized at cost less any accumulated depreciation and any accumulated impairment losses, and are depreciated over their expected useful life using the straight-line method.

The depreciable amount of an item of property, plant and equipment is determined after deducting its residual value less costs to sell. The useful life of property, plant and equipment is generally equal to its expected useful life.

The depreciation expense for property, plant and equipment is recognized under "Non-interest expense - Premises, equipment and furniture, including depreciation" in the Combined Statements of Income.

Investment property

Investment properties are buildings or land held to earn rentals or for capital appreciation.

Investment properties are recognized at cost less accumulated depreciation and are depreciated over their useful life using the straight-line method. Transfers to or from the "Investment property" category are made only when there is a change in use. Upon a transfer of property, plant and equipment from the "Investment property" category to the "Buildings" category, the cost remains the same and continues to be the carrying amount.If a building held and occupied by Desjardins Group becomes an investment property, it is recorded using the accounting policies applicable to investment properties.

The depreciation expense for investment properties is recognized under "Net other investment income" in the Combined Statements of Income.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

H)        PROPERTY, PLANT AND EQUIPMENT AND INVESTMENT PROPERTY (continued)

Depreciation

Property, plant and equipment and investment property are depreciated using the following depreciation periods:


Depreciation periods

Land

Non-depreciable

Buildings/Investment property

5 to 80 years

Computer equipment

2 to 10 years

Furniture, fixtures and other

3 to 10 years

Leasehold improvements

Expected term of the lease

When an item of property, plant and equipment is made up of several significant parts having different useful lives or providing economic benefits according to different patterns, each part is recognized separately and is depreciated over its own depreciation period.

Derecognition

Property, plant and equipment and investment property are derecognized upon disposal or when they are permanently withdrawn from use and no future economic benefits are expected. Gains and losses on the disposal or sale of buildings are recognized in the Combined Statements of Income for the year in which they are realized under "Premises, equipment and furniture, including depreciation" for property, plant and equipment and under "Net other investment income" for investment property.

Impairment

Property, plant and equipment and investment properties are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Assessing whether such events or circumstances exist is subject to management's judgment.

I)         GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed in a business combination accounted for using the acquisition method.

At the acquisition date, each item of goodwill is allocated to one or more cash-generating units (CGU or group of CGUs) that are expected to benefit from the combination. The group of CGUs must not be larger than a business segment. A CGU is the smallest identifiable group of assets that generates cash inflows that are independent from the cash inflows from other groups of assets. Subsequent to initial measurement, goodwill is measured at cost less any impairment loss.

Intangible assets

Intangible assets include acquired and internally generated intangible assets and are initially recognized at cost. The cost of an intangible asset acquired as part of a business combination corresponds to its fair value at the date of acquisition. Subsequent to initial recognition, intangible assets are measured at cost less any accumulated amortization and any impairment losses. Expenditures related to internally generated intangible assets, except for development costs, are recognized in profit or loss as incurred.

Desjardins Group assesses whether the useful life of an intangible asset is finite or indefinite. Intangible assets with finite useful lives include mainly software and are amortized using the straight-line method over their estimated useful lives, which do not exceed seven years.

Gains or losses resulting from the derecognition of an intangible asset are determined as the difference between the net proceeds of disposal and the net carrying amount of the asset. They are recognized under "Non-interest expense - Other" in the Combined Statements of Income upon derecognition of the asset.

J)        IMPAIRMENT OF NON-FINANCIAL ASSETS

Desjardins Group assesses at the reporting date whether there is an indication that an asset may be impaired. An impairment loss is recognized when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs to sell and its value in use, which corresponds to the present value of the recoverable future cash flows. Any impairment loss recognized in the Combined Statements of Income represents the excess of the carrying amount of the asset over the recoverable amount. Impairment losses on that asset may be subsequently reversed and are recognized in the Combined Statements of Income in the year in which they occur.

Estimating the recoverable amount of a non-financial asset to determine if it is impaired also requires that management make estimates and assumptions, and any change in these estimates and assumptions could impact the determination of the recoverable amount of non-financial assets and, therefore, the outcome of the impairment test.



 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

J)        IMPAIRMENT OF NON-FINANCIAL ASSETS (continued)

Goodwill

Goodwill is tested for impairment once a year and when events or changes in circumstances indicate that the carrying amount may not be recoverable.

The goodwill impairment test is performed based on the recoverable amount of each CGU (or each group of CGUs) to which goodwill is allocated.

The recoverable amount represents the higher of the fair value less costs to sell and the value in use. Fair value represents the best estimate of the amount obtainable from the sale, less costs to sell, in an arm's-length transaction between knowledgeable and willing parties. The value in use is calculated using the most appropriate method, generally by discounting estimated future cash flows.

When the recoverable amount is less than the carrying amount, an impairment loss is recognized in the Combined Statement of Income for the year and is first recorded as a reduction of the goodwill allocated to the CGU (or group of CGUs) and then as a reduction of the other identifiable assets of the CGU (or group of CGUs) pro rata on the basis of their carrying amount in the unit. Nevertheless, the allocation of the impairment loss to the assets of the CGU (or group of CGUs) must not result in their carrying amount being lower than the highest of the following amounts: the fair value of the assets less costs to sell, their value in use, and zero.

Goodwill impairment losses cannot be reversed.

K)        ACCEPTANCES AND CLIENTS' LIABILITY UNDER ACCEPTANCES

The potential liability of Desjardins Group under acceptances is recorded as a liability in the Combined Balance Sheets. Recourse against the client, in the event of a call on any of these commitments, is recorded as an equivalent offsetting asset. These financial instruments are classified in the "Loans and receivables" category.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

L)        CLASSIFICATION OF INSURANCE AND INVESTMENT CONTRACTS

Insurance contracts are contracts under which a significant insurance risk is transferred upon the contract's issuance. An insurance risk is transferred when the insurance subsidiaries agree to compensate the policyholder if an uncertain future event specified in the contract adversely affects the policyholder. All contracts that do not meet the definition of an insurance contract under IFRS are classified as investment contracts or service contracts, where appropriate. Investment contracts are contracts that comprise a financial risk but no significant insurance risk. Contracts that transfer a significant insurance risk issued by the insurance subsidiaries have been classified as insurance contracts, in accordance with IFRS 4, "Insurance Contracts". Otherwise, contracts issued by the insurance subsidiaries have been classified either as investment contracts in accordance with International Accounting Standard (IAS) 39, "Financial Instruments: Recognition and Measurement", or as service contracts in accordance with IAS 18, "Revenue".

Once a contract has been classified as an insurance contract, it continues to be an insurance contract over its remaining life, even if the insurance risk decreases significantly during that period. However, an investment contract may be reclassified as an insurance contract after its issuance if the insurance risk becomes significant.

M)       INSURANCE AND INVESTMENT CONTRACT LIABILITIES

Insurance and investment contract liabilities include the contract liabilities of the life and health insurance subsidiaries and the property and casualty insurance subsidiaries.

Life and health insurance contract liabilities

Life and health insurance contract liabilities consist of actuarial liabilities, provisions for benefits, dividends and experience refunds, and policyholder deposits.

The calculation of the insurance contract liabilities of the life and health insurance subsidiaries requires that assumptions be made with respect to the timing of many factors such as death, disability, investment income, inflation, policy cancellations, expenses, income taxes, premiums, commissions and participating policyholders' dividends as well as the amounts they represent. To predict underwriting experience, the life and health subsidiaries use best estimate assumptions. Some of these assumptions refer to events that are likely to occur in the distant future and they may need to be changed. 

Actuarial liabilities represent the amounts which, together with estimated future premiums and net investment income, will provide for all the life and health insurance subsidiaries' commitments regarding estimated future benefits, policyholder dividends, taxes (other than taxes on surplus earnings) and related expenses. The appointed actuary of each life and health insurance subsidiary is required to determine the actuarial liabilities needed to meet its future commitments. The actuarial liabilities of the life and health insurance subsidiaries are determined using the Canadian Asset Liability Method (CALM), in accordance with Canadian accepted actuarial practices.

Under CALM, the determination of the actuarial liabilities of the life and health insurance subsidiaries is based on an explicit projection of cash flows using current best estimate assumptions for each cash flow component and each significant contingency. Investment returns are based on projected investment income using the current asset portfolios and projected reinvestment strategies. Each non-economic assumption is adjusted by a margin for adverse deviation. With respect to investment returns, the provision for adverse deviation is established by using yield scenarios. These scenarios are established using a deterministic model that includes testing prescribed by Canadian actuarial standards. The provision for minimum guarantees on segregated fund products is established using stochastic modelling. The period used for the projection of cash flows is the policy lifetime for most insurance contracts. For certain types of contracts, a shorter projection period may be used. This period is, however, limited to the term of the liability over which the life and health insurance subsidiaries are exposed to significant risk without the ability to adjust policy premiums or charges related to the contracts.

Property and casualty insurance contract liabilities

Property and casualty insurance contract liabilities consist of unearned premiums and provisions for claims and adjustment expenses.

Unearned premiums represent the portion of premiums remaining to be earned at the reporting date. The property and casualty subsidiaries are exposed to pricing risk to the extent that unearned premiums could be insufficient to cover future costs related to policies. Future claim costs, related costs, investment income and expected income related to unearned premiums are regularly assessed.

The calculation of the provisions for claims and adjustment expenses related to the property and casualty insurance subsidiaries' insurance policies takes into consideration assumptions based on characteristics of the business lines, settlement history and other relevant factors. The estimating methods used to make this calculation are based on best estimate assumptions, taking into account currently known data, which are regularly reviewed and updated. Additional information on the main actuarial assumptions and their sensitivity to changes is presented in Note 14, "Insurance and investment contract liabilities".

The provisions for claims and adjustment expenses include individual loss estimates for each claim reported. In addition, a provision is established for adjustment expenses, changes related to reported claims, and incurred but not reported claims, based on previous experience and portfolio contracts. These estimates are regularly reviewed and updated, and any resulting adjustment is recognized in the Combined Statement of Income for the year in which the revision occurs. The provision for claims and adjustment expenses is reported on a discounted basis using the underlying asset rate, with a margin for adverse deviation. 

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

M)       INSURANCE AND INVESTMENT CONTRACT LIABILITIES (continued)

Investment contract liabilities

Investment contract liabilities are recognized at amortized cost using the effective interest method. Amounts received from clients are initially recognized in the Combined Balance Sheets as liabilities under "Insurance and investment contract liabilities". Subsequently, new amounts received from clients and withdrawals are directly recorded as adjustments to "Insurance and investment contract liabilities", in the Combined Balance Sheets.

Discretionary participation features

Certain insurance contracts of the life and health insurance subsidiaries contain a discretionary participation feature that allows the policyholder to participate in the profitability related to the contracts in question. These contracts give the policyholder the contractual right to receive additional benefits as supplement to guaranteed benefits. The life and health subsidiaries elected not to recognize the participating portion of these contracts separately. The cumulative amount of surplus earnings attributable to these contracts is presented under "Non-controlling interests" in the Combined Balance Sheets.

Reinsurance

The life and health insurance subsidiaries enter into reinsurance treaties for contracts with coverage in excess of certain maximum amounts that vary based on the nature of the activities. In addition, they purchase additional reinsurance protection with respect to large-scale catastrophic events.

To reduce the risk related to extensive claims, the property and casualty insurance subsidiaries enter into reinsurance treaties with more than one reinsurer to limit their exposure to a maximum amount per claim or per catastrophe.

These reinsurance treaties do not release the insurance subsidiaries from their obligations toward their policyholders.

Premium income from insurance contracts and expenses related to claims, benefits and changes in insurance contract liabilities associated with contracts under reinsurance treaties are presented net of amounts ceded to reinsurers in the Combined Statements of Income. In addition, the share of reinsurers in the insurance contract liabilities is presented as an asset in the Combined Balance Sheets under "Other assets - Other".

The resulting reinsurance asset is tested annually for impairment. If there is objective evidence that a reinsurance asset is impaired, following an event that occurred after initial recognition, the insurance subsidiaries reduce the carrying amount of that asset to its recoverable amount, and recognize the resulting loss in the Combined Statements of Income under "Claims, benefits, annuities and changes in insurance and investment contract liabilities".

N)        SEGREGATED FUNDS

Certain insurance contracts allow policyholders to invest in segregated funds held by one of the life and health insurance subsidiaries for their benefit. All risks and rewards of ownership of these investments accrue to the policyholders, even though these investments are held by the life and health insurance subsidiary. Accordingly, the assets and liabilities of segregated funds are presented on a separate line in the Combined Balance Sheets. Segregated fund assets are measured and recognized at fair value at the reporting date, which is determined using the methods described earlier in section B) "Financial assets and liabilities". In addition, if a segregated fund controls a mutual fund in which it has invested, then such mutual fund is consolidated in the segregated fund assets. A liability corresponding to the sum of the interests of the policyholders in the segregated fund assets and the consolidated share of non-controlling mutual fund holders is also recognized separately.

O)       SUBORDINATED BONDS

Subordinated bonds are bonds subordinated in right of payment to claims of depositors and certain other creditors. Subordinated bonds are classified in the "Financial liabilities at amortized cost" category.

P)        PROVISIONS

Provisions are liabilities of uncertain timing or amount. A provision is recognized when Desjardins Group has an obligation (legal or constructive) as a result of a past event, the settlement of which should result in an outflow of resources embodying economic benefits, and when a reliable estimate can be made of the amount of the obligation. The amount of the obligation is discounted where the effect of the time value of money is material.

Provisions are based on management's best estimate of the amounts required to settle the obligation on the reporting date, taking into account relevant risks and uncertainties. As these estimates are forward-looking in nature, management must use its judgment to forecast the timing and amount of future cash flows. Actual results may differ significantly from these forecasts.

Charges to and reversals of provisions are recognized in profit or loss and presented under the items corresponding to the nature of the future expenditures covered.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

Q)       DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Derivative financial instruments

Derivative financial instruments are financial contracts whose value depends on assets, interest rates, foreign exchange rates, and other financial indexes. The vast majority of derivative financial instruments are negotiated by mutual agreement between Desjardins Group and the counterparty and include forward exchange contracts, currency swaps, interest rate swaps, credit default swaps, total return swaps, forward rate agreements, and currency, interest rate and stock index options. Other transactions are carried out as part of regulated trades and mainly consist of futures. The types of contracts used are defined in Note 17, "Derivative financial instruments and hedging activities".

Derivative financial instruments, including embedded derivatives which are required to be recognized separately, are recorded on the Combined Balance Sheets at fair value.

Embedded derivative financial instruments are separated from their host contract and accounted for as derivatives if: (a) the economic characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host contract; (b) the embedded derivative has the same terms as a separate instrument; (c) the hybrid instrument or contract is not measured at fair value with changes in fair value recognized in combined profit or loss. Embedded derivatives that are required to be recognized separately are measured at fair value, and changes in their fair value are recognized under "Net income on securities at fair value through profit or loss" in the Combined Statements of Income.

Desjardins Group uses derivative financial instruments for trading purposes or for asset-liability management purposes.

The derivative financial instruments held for trading purposes are used to meet the needs of members and clients and to allow Desjardins Group to generate income on its own trading activities. These derivative financial instruments are recognized at fair value in the Combined Balance Sheets, and changes in their fair value are recognized under "Net income on securities at fair value through profit or loss" in the Combined Statements of Income.

The derivative financial instruments held for asset-liability management purposes are used to manage current and expected risks related to market risk. These instruments enable Desjardins Group to transfer, modify or reduce the interest rate and foreign currency exposures of assets and liabilities recorded on the Combined Balance Sheets, as well as firm commitments and forecasted transactions.

Hedging activities

Desjardins Group mainly designates its derivative financial instruments as part of a fair value or cash flow hedging relationship.

When derivative financial instruments are used to manage assets and liabilities, Desjardins Group must determine, for each derivative, whether or not hedge accounting is appropriate. To qualify for hedge accounting, a hedging relationship must be designated and documented at its inception. Such documentation must address the specific strategy for managing risk, the asset, liability or cash flows that are being hedged as well as the measure of hedge effectiveness. Consequently, the effectiveness of each hedging relationship must be assessed, regularly and on an individual basis, to determine with reasonable assurance whether the relationship is effective and will continue to be effective. The derivative financial instrument must prove highly effective to offset changes in the fair value or the cash flows of the hedged item attributable to the risk being hedged.

Desjardins Group may also use derivative financial instruments as an economic hedge for certain transactions in situations where the hedging relationship does not qualify for hedge accounting or where it elects not to apply hedge accounting. In such circumstances, derivative financial instruments are classified as "Held for trading", and realized and unrealized gains and losses are recognized in the Combined Statements of Income under "Net income on securities at fair value through profit or loss".

The designation of a derivative financial instrument as a hedging item is discontinued in the following cases: the hedged item is sold or matures, the derivative financial instrument is repurchased or matures, the hedge is no longer effective, or Desjardins Group terminates the designation of the hedge or no longer expects the forecasted transaction to occur.

Hedging instruments that meet the strict hedge accounting conditions are recognized as follows:

Fair value hedges

Fair value hedge transactions involve mostly the use of interest rate swaps to hedge the changes in fair value of a fixed-rate financial instrument caused by a change in interest rates on the market. The change in fair value of hedging derivative financial instruments offsets the change in fair value of hedged items. Desjardins Group uses fair value hedge strategies for its securities, loan and deposit portfolios.

In a fair value hedge transaction, changes in the fair value of the hedging derivative financial instrument are recognized under "Net income on securities at fair value through profit or loss" in the Combined Statements of Income, as well as changes in fair value of the hedged asset or liability attributable to the hedged risk. The gain or loss attributable to the hedged risk is applied to the carrying amount of the hedged item. When the changes in fair value of the hedging derivative financial instrument and the hedged item do not entirely offset each other, the resulting amount, which represents the ineffective portion of the relationship, is recognized in "Net income on securities at fair value through profit or loss" in the Combined Statements of Income.

When a fair value hedging relationship is discontinued, hedge accounting is discontinued prospectively. The hedged item is no longer adjusted to reflect the fair value impact of the designated risk. Adjustments previously recorded in the hedged item are amortized using the effective interest method and are recognized in net interest income, in the Combined Statements of Income, following the underlying instrument, over the remaining life of the hedged item, unless the hedged item ceased to exist, in which case the adjustments for the impact of the designated risk are immediately recognized under "Net income on securities at fair value through profit or loss" in the Combined Statements of Income.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

Q)       DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (continued)

Hedging activities (continued)

Cash flow hedges

Cash flow hedge transactions involve mostly the use of interest rate swaps to hedge the changes in future cash flows from a floating-rate financial instrument. Hedging derivative financial instruments reduce the variability of future cash flows from the hedged item. Desjardins Group uses cash flow hedge strategies for its loan, deposit and securities portfolios.

In a cash flow hedge transaction, gains and losses resulting from changes in the fair value of the effective portion of the derivative financial instrument are recognized in other comprehensive income under "Net gains (losses) on derivative financial instruments designated as cash flow hedges" until the hedged item is recognized in the Combined Statements of Income, at which time such changes are recognized in net interest income in the Combined Statements of Income, following the underlying instrument. The ineffective portion of cash flow hedge transactions is immediately recognized in the Combined Statements of Income under "Net income on securities at fair value through profit or loss".

When a cash flow hedging relationship no longer qualifies for hedge accounting, Desjardins Group discontinues hedge accounting prospectively. Gains or losses recognized in other comprehensive income are amortized to net interest income, in the Combined Statements of Income, following the underlying instrument, over the expected remaining life of the hedging relationship that was discontinued. If a designated hedged item is sold or matures before the related derivative financial instrument ceases to exist, all gains or losses are immediately recognized in profit or loss under "Net income on securities at fair value through profit or loss".

R)        FINANCIAL GUARANTEES

A financial guarantee is a contract or an indemnification agreement that contingently requires Desjardins Group entities to make payments to the guaranteed party following a loss resulting from the default by a specified third party to make a payment upon maturity in accordance with the original or modified provisions of the borrowing instrument.

Financial guarantees are initially recognized in the Combined Financial Statements at fair value at the date the guarantee is issued. After initial recognition, the guarantee is measured at the higher of the following amounts:

(i)   The amount initially recorded less, when appropriate, cumulative amortization of costs recognized in profit or loss

(ii)  The best estimate of the expenditure required to settle any financial obligation resulting from the guarantee

The obligations related to financial guarantees issued by Desjardins Group are presented under "Other liabilities - Derivative financial instruments". The carrying amount of guarantees does not reflect the maximum potential amount of future payments under guarantees. Therefore, Desjardins Group continues to consider these guarantees as off-balance sheet credit instruments.

S)        RESERVES

Reserves included in equity are mainly from the caisses. They are based on the balance of the reserves as at December 31 of the prior year and the surplus earnings distribution plans for such year, which must be approved by the general meeting of each caisse within the first four months following    year-end.

The stabilization reserve consists of amounts appropriated by the caisses and the Federation. Amounts appropriated to the stabilization reserve are essentially used for the payment of interest on permanent shares when the surplus earnings of a caisse are not sufficient.

The reserve for future member dividends is made up of amounts appropriated by the caisses. This reserve allows them to manage over time the impact of changes in annual surplus earnings on the payment of member dividends.

The general reserve is essentially made up of amounts appropriated by the caisses, the Federation, the Fonds de sécurité Desjardins and Caisse centrale Desjardins. This reserve can be used only to eliminate a deficit and cannot be divided amongst members nor used to pay member dividends.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

T)        REVENUE RECOGNITION

Revenues are recognized to the extent that it is probable that the economic benefits will flow to Desjardins Group and that they can be measured reliably. In addition to the items mentioned in section B), "Financial assets and liabilities", the specific recognition criteria that follow must also be met before revenues can be recognized.

Net interest income

Interest income and expense are mainly earned or incurred by the Personal Services and Business and Institutional Services segment and the Other category. They are recognized using the effective interest method for all financial instruments measured at amortized cost, for all interest-bearing financial assets classified in the "Available for sale" category and for financial instruments classified in the "At fair value through profit or loss" category.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts future cash payments or receipts through the expected life of the financial instrument or, when appropriate, over a shorter period to obtain the net carrying amount of the financial asset and the financial liability.

When calculating the effective interest rate, Desjardins Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes transaction costs and income between parties to the contractas well as premiums or discounts. Transaction costs and income that form an integral part of the effective rate of the contract, such as file setup fees and finders' fees, are assimilated to supplemental interest.

Premiums

Gross premiums on insurance contracts of the life and health insurance subsidiaries are recognized as revenues when they become due. As soon as these premiums are recognized, an actuarial provision is established and recognized in liabilities under "Insurance and investment contract liabilities". Premiums are presented, net of premiums ceded under reinsurance treaties, under "Net premiums" in the Combined Statements of Income.

Gross premiums on insurance contracts of the property and casualty insurance subsidiaries are recognized as revenues proportionately over the life of the insurance contracts. Premiums are presented, net of premiums ceded under reinsurance treaties, under "Net premiums" in the Combined Statements of Income. The portion of the premiums remaining to be earned at the reporting date is presented in liabilities under "Insurance and investment contract liabilities", in the Combined Balance Sheets.

Service charges, commissions, brokerage fees and other

Desjardins Group earns revenues from service charges, commissions and brokerage fees as a result of the broad range of products and services it provides its members and clients.

Service charges, commissions and brokerage fees are recognized once the service has been provided or the product has been delivered. Income from service charges is recognized under "Deposit and payment service charges" and "Brokerage, investment fund and trust services" in the Combined Statements of Income.

Loan syndication fees are recognized as revenues when the syndication agreement is signed unless the yield on the loan retained by Desjardins Group is less than the yield of other comparable lending institutions that participate in the financing. In such instances, an appropriate portion of the fees is deferred using the effective interest method.

Commissions and costs arising from the negotiation, or the participation thereto, of a transaction on behalf of a third party-such as the arrangement of share or other securities acquisitions or business purchases or sales-are recognized at the outcome of the underlying transactions.

Fee income is recorded under "Lending fees and credit card service revenues" in the Combined Statements of Income.

Portfolio management fees and fees for other services are recognized based on the applicable service contracts, pro rata over the period during which the service is provided. Portfolio management income is recognized under "Other income - Other" in the Combined Statements of Income.

Asset management fees related to investment funds are recognized pro rata over the period during which the service is provided. The same principles are applied to wealth management, financial planning and custodial services that are provided on an ongoing basis over a long period of time. Asset management income is recorded under "Other income - Other" in the Combined Statements of Income.



 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

U)        ASSETS UNDER MANAGEMENT AND UNDER ADMINISTRATION

Assets under management and under administration are held by and for the benefit of clients. These assets under management and under administration are therefore excluded from the Combined Balance Sheets of Desjardins Group. Income from these management services is recognized under "Other income - Other" in the Combined Statements of Income when the service is provided.

V)        FOREIGN CURRENCY TRANSLATION

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the reporting date. Non-monetary assets and liabilities measured at historical cost are translated at the exchange rate prevailing at the transaction date, while those that are measured at fair value are translated at the exchange rate prevailing at the date fair value was determined. Income and expenses are translated at the average exchange rate for the year. Realized and unrealized gains and losses resulting from the translation are recognized in the Combined Statements of Income under "Other income - Other". However, unrealized gains and losses on non-monetary financial instruments classified as "Available for sale", and gains and losses on derivatives designated as cash flow hedges are presented in other comprehensive income in the Combined Statements of Comprehensive Income.

W)       LEASES

In a finance lease, the lessor transfers to the lessee substantially all the risks and rewards inherent to the asset. This type of lease is analyzed as financing granted to the lessee to purchase the asset. In contrast, in an operating lease, the lessor retains substantially all the risks and rewards inherent to the leased asset. Desjardins Group mainly enters into operating leases. The recognition of operating leases depends on the position of Desjardins Group, namely as a lessor or as a lessee.

Lessor

Initial indirect costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset, which is recognized as property, plant and equipment by the lessor and depreciated on a straight-line basis over the lease period. The asset is amortized without consideration to residual value, and all lease payments are recognized in profit or loss on a straight-line basis over the lease period. These lease payments are recognized under "Net other investment income".

Lessee

The asset is not recognized as an asset by the lessee. Lease payments made under operating leases are recognized on a straight-line basis over the lease period under "Premises, equipment and furniture, including depreciation", in the Combined Statements of Income.

X)        INCOME TAXES ON SURPLUS EARNINGS

The income tax expense on surplus earnings comprises the current income tax expense and the deferred tax expense. Income taxes on surplus earnings are recognized in the Combined Statements of Income unless they relate to items that were recognized outside profit or loss directly in the Combined Statements of Comprehensive Income or the Combined Statements of Changes in Equity. In such case, income taxes on surplus earnings are also recognized outside profit or loss.

The calculation of income taxes on surplus earnings is based on the expected tax treatment of the transactions. To determine the current and deferred portions of income taxes on surplus earnings, assumptions must be made concerning the dates on which deferred income tax assets and liabilities will be reversed. If Desjardins Group's interpretation differs from that of the taxation authorities or if the reversal dates do not correspond with the forecasted dates, the provision for income taxes on surplus earnings may increase or decrease in subsequent years.

CURRENT INCOME TAXES

Current income tax assets and liabilities for the current year and prior years are measured based on the amount expected to be paid to or recovered from the taxation authorities. Tax rates and tax laws applied to determine these amounts are those that have been enacted or substantively enacted at the reporting date.

Deferred income taxes

Deferred taxes are recognized, using the balance sheet liability method, for all temporary differences existing at the reporting date between the tax basis of assets and liabilities and their carrying amount in the Combined Balance Sheets.

Deferred tax liabilities are recognized for all taxable temporary differences, except in the following cases:

(i)   When the deferred tax liability arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction which is not a business combination and which, at the time of the transaction, affects neither accounting profit nor taxable profit (or tax loss)

(ii)  For taxable temporary differences associated with investments in subsidiaries, when the date at which the temporary difference reverses can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future

 



 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

X)        INCOME TAXES ON SURPLUS EARNINGS (continued)

Deferred income taxes(continued)

Deferred tax assets are recognized for all deductible temporary differences, tax loss carryforwards and unused tax credits, to the extent that it is probable that a taxable profit will be available against which these deductible temporary differences, tax loss carryforwards and unused tax credits can be utilized, except in the following cases:

(i)   When the deferred tax asset associated with the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction which is not a business combination and which, at the time of the transaction, affects neither accounting profit nor taxable profit (or tax loss)

(ii)  For deductible temporary differences associated with investments in subsidiaries, associates and joint ventures. Deferred tax assets are recognized only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and that a taxable profit will be available against which the temporary difference can be utilized

The carrying amount of a deferred tax asset is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it becomes probable that a future taxable profit will be available to recover them.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Current and deferred taxes related to items recognized directly in equity are recognized in equity and not in profit or loss.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to set off current tax assets against current tax liabilities, and if these deferred taxes relate to the same taxable entity and the same taxation authority.

Y)        PROVISION FOR MEMBER DIVIDENDS

The board of directors of each caisse recommends for approval the surplus earnings distribution plan at the annual general meeting of members, which is held in the four months following year-end. The amount of member dividends to be paid is part of this plan. The amount of the provision is estimated based on, among other things, the surplus earnings recorded for the year by the caisses, taking into consideration the financial framework for the appropriation of surplus earnings in relation with the Desjardins Group Capitalization Plan, which sets capitalization targets. The difference between the amount of member dividends actually paid, in cash or in shares, following the general meetings held by the caisses, and the estimated amount of the provision is charged to combined profit or loss for the year in which the payments are made.

The allocation basis of member dividends depends on the interest recorded on loans and deposits, the average outstanding amount of Desjardins investment funds, guaranteed market-linked investments, Accord D loans obtained by the member through the caisse, and the various service charges collected from the member depending on the services used. The surplus earnings distribution plan takes into account a program under which members may elect to receive their dividends in the form of shares, in which case the value is greater than the equivalent dividends paid in cash. Whether paid in shares or cash, member dividends are recognized under "Provision for member dividends" in the Combined Statements of Income. The caisses can pay out member dividends when legal and regulatory requirements have been met. The provision for member dividends is mainly allocated to the Personal Services and Business and Institutional Services segment.



 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)

Z)        EMPLOYEE BENEFITS

Short-term benefits

Short-term benefits are benefits payable within 12 months after the reporting date, other than termination benefits, such as salaries and commissions, social security contributions and certain bonuses. An expense is recorded for these short-term benefits in the period during which the services giving right to them were rendered.

Post-employment benefits

Pension plans

Desjardins Group offers to a majority of its employees pension plans and supplemental pension plans, which provide pension benefits in excess of statutory limits. Most of the pension plans represent defined benefit group pension plans of which the risks are shared by the Desjardins Group participating entities. In addition, the main pension plan is funded by both employee and employer contributions, which are determined based on the financial position and the funding policy of the plan.

Defined benefit pension plans are plans for which Desjardins Group has formally committed to a level of benefits and therefore assumes actuarial and, when the plans are funded, investment risks. Benefits are calculated on the basis of the number of years of membership in the pension plans and take into consideration the average salary of the employee's five most highly paid years. Since the terms of the plans are such that future changes in salary levels will have an impact on the amount of future benefits, the cost of the benefits and the fair value of the defined benefit plan obligation are generally actuarially determined using the projected unit credit method. These calculations are made based on management's best estimate assumptions concerning the expected rate of return of the plans' investments and the plan obligation discount rate, and also, but to a lesser extent, salary increases, the retirement age of employees, the mortality rate and the rate of increase in pension benefits. A complete actuarial valuation is performed each year by a qualified actuary.

Actuarial gains (losses) result from the difference between the actual return on plan assets and the expected return for funded plans, the changes made to the actuarial assumptions used to determine the defined benefit plan obligation and the experience gains or losses on this obligation. Any net actuarial gain or loss exceeding 10% of the greater of the value of the defined benefit plan obligation and the fair value of plan assets at the end of the previous year is amortized over the expected average remaining working lives of the plan members.

Past service cost is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits are already vested immediately following the introduction of, or changes to, a defined benefit plan, vested past service cost is recognized in profit or loss immediately.

Defined benefit assets or liabilities correspond to the present value of the obligation of these plans less the unrecognized past service cost, the fair value of pension plan assets and unamortized actuarial losses, plus unamortized actuarial gains. The value of any asset is limited to the total of actuarial losses, unrecognized past service cost and the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the pension plans.

Defined benefit pension plan liabilities are recognized under "Defined benefit plan liabilities" in the Combined Balance Sheets.

Other plans

Desjardins Group also offers medical, dental and life insurance coverage to retiring employees and their dependants through unfunded defined benefit plans. The main plan is a defined benefit group pension plan of which the risks are shared by the Desjardins Group participating entities. The terms of these plans are such that future changes in salary levels or health costs will have an impact on the amount of future benefits. The cost of these benefits is accrued over the service lives of employees according to accounting policies similar to those used for defined benefit pension plans.

Liabilities related to these other post-employment benefit plans are recognized under "Defined benefit plan liabilities" in the Combined Balance Sheets.

NOTE 3  -  FUTURE ACCOUNTING CHANGES

Accounting standards that have been issued but are not yet effective are listed below. Regulatory authorities have also stated that early adoption of these standards will not be permitted.

Date of application: January 1, 2013

IFRS 10, "CONSOLIDATED FINANCIAL STATEMENTS"

In May 2011, the IASB issued IFRS 10, "Consolidated Financial Statements", which defines the principle of control and establishes that control serves as the basis to determine which entities are included in the scope of consolidation. This new standard supersedes the requirements on consolidated financial statements included in IAS 27, "Consolidated and Separate Financial Statements", and SIC 12, "Consolidation - Special Purpose Entities".

Desjardins Group is currently assessing the impact of the adoption of this new standard, which must be applied retrospectively.

IFRS 11, "JOINT ARRANGEMENTS"

In May 2011, the IASB issued IFRS 11, "Joint Arrangements", which supersedes IAS 31, "Interests in Joint Ventures" and SIC 13, "Jointly Controlled Entities - Non-Monetary Contributions by Venturers". This standard establishes the principles for accounting for two types of joint arrangements, namely joint operations and joint ventures, and eliminates the possibility of recognizing joint ventures using the proportionate consolidation method.

The adoption of this new standard will have no impact on Desjardins Group since interests in joint ventures are already recognized using the equity method. This new standard must be applied retrospectively.

IFRS 12, "DISCLOSURE OF INTERESTS IN OTHER ENTITIES"

In May 2011, the IASB issued IFRS 12, "Disclosure of Interests in Other Entities", which expands disclosure requirements for interests held by an entity in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Some of the disclosures were already required by the current standards, while others are new, such as disclosures about significant judgments and assumptions the entity has made in determining the nature of its interests in another entity as well as the nature of, and risks associated with, its interests in other entities.

IFRS 12 is a new presentation standard that will have no impact on Desjardins Group's results or financial position. It must be applied retrospectively.

IFRS 13, "FAIR VALUE MEASUREMENT"

In May 2011, the IASB issued IFRS 13, "Fair Value Measurement", which defines fair value and sets out a single framework for measuring the fair value of all transactions and balances for which IFRS require or permit fair value measurement. This standard aims at improving the consistency between the various fair value concepts defined in various existing standards. In addition, IFRS 13 carries forward disclosure requirements concerning the fair value of financial instruments and expands the scope to all items measured at fair value.

With respect to fair value measurements, Desjardins Group does not expect the adoption of this new standard, which is applicable prespectively, to have a significant impact.

IAS 1, "PRESENTATION OF FINANCIAL STATEMENTS"

In June 2011, the IASB issued amendments to IAS 1, "Presentation of Financial Statements", which improve the presentation of items of other comprehensive income. The amendments require the presentation by nature of items of other comprehensive income by distinguishing those that will be reclassified to the statement of income in a subsequent period from those that will not.

IAS 1 is a presentation standard whose objective is to provide information to enable users to better understand financial statements. The amendments to this standard will have no impact on Desjardins Group's results or financial position. They must be applied retrospectively.

IAS 19, "EMPLOYEE BENEFITS"

In June 2011, the IASB issued an amended version of IAS 19, "Employee Benefits" (IAS 19(R)), which requires that the funding status of a defined benefit plan be entirely reflected in the Combined Balance Sheets. This change therefore eliminates the option to defer the recognition of actuarial gains and losses, known as the "corridor approach". All actuarial gains and losses will now be recognized immediately in other comprehensive income. The calculation of the interest cost recognized in the Combined Statements of Income is also amended. This interest cost will now be calculated by multiplying the net defined benefit plan asset or liability by the rate used to discount the obligation, and the difference between the actual return on plan assets and the amount recognized as interest cost will be recognized in other comprehensive income. In addition, all past service costs will now be directly recognized in profit or loss when they occur. Furthermore, the risk-sharing features between employers and employees for defined benefit plans will now be taken into account when determining the liability to be recognized in the Combined Balance Sheets and the expense to be recognized in the Combined Statements of Income. The presentation and recognition of changes in the defined benefit plan obligation and plan assets will therefore be modified, and disclosures about the characteristics of defined benefit plans and the risks to which an entity is exposed through its participation in such plans will be enhanced. Desjardins Group will have to apply this new standard retrospectively.

 

 

 

NOTE 3 - FUTURE ACCOUNTING CHANGES (continued)

Date of application: January 1, 2013 (continued)

IAS 19, "EMPLOYEE BENEFITS" (continued)

Accordingly, the main impact of Desjardins Group's adopting IAS 19(R), will be the recognition of unamortized actuarial losses and unrecognized past service cost under "Defined benefit plan liabilities" in the Combined Balance Sheets. This will result in a decrease in "Undistributed surplus earnings" (for more information, please refer to Note 26, "Defined benefits plans"). In addition, taking into account the risk-sharing features between employers and employees for the main group pension plan will result in a decrease in "Defined benefit plan liabilities" and a corresponding increase in "Undistributed surplus earnings". Desjardins Group is currently assessing the impact of the changes related to risk sharing. The impact of these amendments on capital ratios could be deferred and amortized on a straight-line basis over the period from January 1, 2013, to December 31, 2014, depending on whether Desjardins Group elects to use transitional provision stipulated for that purpose by the regulatory authorities.

IFRS 7, "FINANCIAL INSTRUMENTS: DISCLOSURES" - OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES

In December 2011, the IASB issued amendments to IFRS 7, "Financial Instruments: Disclosures". These amendments improve the disclosure requirements with respect to offsetting of financial assets and liabilities. The objective of these amendments is to help users of financial statements better evaluate the impact of netting agreements on the financial position of an entity and understand how an entity manages the credit risk associated with such agreements.

IFRS 7 is a presentation standard whose objective is to provide disclosures to enable the users, among other things, to better understand and evaluate the significance of financial instruments for the entity's financial position and performance. Since the amendments to this standard specifically concern disclosures, they have no impact on Desjardins Group's results or financial position. They must be applied retrospectively.

ANNUAL IMPROVEMENTS

In May 2012, the IASB issued amendments to several standards as part of its annual improvement process. Except for the amendment to IAS 32, "Financial Instruments: Presentation", these amendments are minor and will have no impact on Desjardins Group's results or financial position.

The amendment to IAS 32 specifies that the income tax consequences of dividends and remuneration on capital stock should now be recognized in accordance with IAS 12, "Income Taxes". Therefore, when certain conditions are met, the income tax consequences of dividends and remuneration on capital stock will have to be presented in profit or loss rather than in equity. This amendment will be applied retrospectively.

Accordingly, there will be no impact on Desjardins Group's financial position as at January 1 and December 31, 2012. However, certain comparative figures will have to be reclassified from the Combined Statement of Changes in Equity to the Combined Statement of Income for the year ended        December 31, 2012. "Income tax recovery on remuneration of permanent shares", in the Combined Statement of Changes in Equity, will decrease by     $25 million, and "Income taxes on surplus earnings", in the Combined Statement of Income, will decrease by a corresponding amount.

Date of application: January 1, 2014

IAS 32, "FINANCIAL INSTRUMENTS: PRESENTATION"

In December 2011, the IASB issued amendments to IAS 32, "Financial Instruments: Presentation", to clarify the criteria for offsetting a financial asset and a financial liability.

Desjardins Group is currently assessing the impact of the amendments to this standard, which must be applied prospectively.

Date of application: January 1, 2015

IFRS 9, "FINANCIAL INSTRUMENTS"

The IASB issued in November 2009 and amended in October 2010 the first phase of a project to replace IAS 39,"Financial Instruments: Recognition and Measurement". This standard defines a new way of classifying and measuring financial assets and liabilities. Financial assets will be classified in two categories (amortized cost and fair value through profit or loss) based on the entity's business model for managing its financial assets and the contractual cash flow characteristics of the financial assets. However, a new exposure draft issued in November 2012 proposes the introduction of a third financial instrument category for debt securities: fair value through other comprehensive income.

Financial liabilities will be classified in the same categories as those defined in IAS 39, but measurement of financial liabilities under the fair value option has been modified.

The impairment of financial asset methodology and hedging activities will be covered in future phases.

Desjardins Group is currently assessing the impact of the adoption of IFRS 9. The application of all phases of this standard is expected to be prospective.


 

 

NOTE 4  -  CARRYING AMOUNT OF FINANCIAL INSTRUMENTS

Classification and carrying amount of financial instruments

The following tables present the carrying amount of all financial assets and liabilities according to their classification in the categories defined in the financial instrument standards, as well as those designated in hedging relationships.


At fair value 

through profit or loss





As at December 31, 2012

Held for
trading

Designated as at fair value through profit or loss

Available
for sale

Loans and receivables, and financial liabilities at amortized cost 

Derivatives designated

as hedging instruments(2)

Total

Financial assets













Cash and deposits with financial institutions

$

---

$

---

$

---

$

1,669

$

---

$

1,669

Securities













Securities at fair value through profit or loss


8,994


12,992


---


---


---


21,986

Available-for-sale securities


---


---


18,326


---


---


18,326

Securities borrowed or purchased under reverse repurchase agreements


---


---


---


4,377


---


4,377

Loans(1)


---


---


---


132,576


---


132,576

Other financial assets













Clients' liability under acceptances


---


---


---


841


---


841

Derivative financial instruments


1,278


---


---


---


960


2,238

Amounts receivable from clients, brokers and financial institutions


---


---


---


970


---


970

Other


---


---


---


2,000


---


2,000

Total financial assets

$

10,272

$

12,992

$

18,326

$

142,433

$

960

$

184,983

Financial liabilities













Deposits

$

---

$

---

$

---

$

129,624

$

---

$

129,624

Other financial liabilities













Acceptances


---


---


---


841


---


841

Commitments related to securities sold short


4,977


---


---


---


---


4,977

Commitments related to securities lent or sold under repurchase agreements


---


---


---


7,983


---


7,983

Derivative financial instruments


986


---


---


---


236


1,222

Amounts payable to clients, brokers and financial institutions


---


---


---


2,504


---


2,504

Other


1


---


---


2,965


---


2,966

Subordinated bonds


---


---


---


3,081


---


3,081

Total financial liabilities

$

5,964

$

---

$

---

$

146,998

$

236

$

153,198

(1) For more information, see Note 7, "Loans and allowance for credit losses".

(2) For details on derivatives designated as hedging instruments, see Note 17, "Derivative financial instruments and hedging activities".

 



 

 

NOTE 4 - CARRYING AMOUNT OF FINANCIAL INSTRUMENTS (continued)

 


At fair value

through profit or loss





As at December 31, 2011

Held for
trading

Designated

as at fair

 value through

profit or loss

Available
for sale

Loans and receivables, and financial liabilities at amortized

 cost

Derivative designated
as hedging
instruments(2)

Total

Financial assets













Cash and deposits with financial institutions

$

---

$

---

$

---

$

1,356

$

---

$

1,356

Securities













Securities at fair value through profit or loss


9,494


12,985


---


---


---


22,479

Available-for-sale securities


---


---


18,726


---


---


18,726

Securities borrowed or purchased under reverse repurchase agreements


---


---


---


4,959


---


4,959

Loans(1)