QUINTESSENTIAL CREDIT UNION LIMITED - … Credit Union Limited is incorporated under the Credit...

QUINTESSENTIAL CREDIT UNION LIMITED

FINANCIAL STATEMENTS

AS AT DECEMBER 31, 2011

WILKINSON^^


TABLE OF CONTENTS

AS AT DECEMBER 31, 2011

INDEPENDENT AUDITORS' REPORT

FINANCIAL STATEMENTS

Balance Sheet

Statement of Changes in Members' Equity

Statement of Comprehensive Income

Statement of Cash Flows

Notes to Financial Statements

Schedule I - Schedule of Administrative Expenses

Page

1

2

3

4

5

6-54

55

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WILKINSON^^Integrity, Knowledge, Solutions

INDEPENDENT AUDITORS' REPORT

To the Members of

QuintEssential Credit Union Limited

Report on the Financial Statements

We have audited the accompanying financial statements of QuintEssential Credit Union Limited, whichcomprise the balance sheet as at December 31, 2011, December 31, 2010 and January 1, 2010 and thestatements of changes in members' equity, comprehensive income and cash flows for the years endedDecember 31, 2011 and December31, 2010, and a summaryof significant accounting policies and otherexplanatory' information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements inaccordance with International Financial Reporting Standards and for such internal control asmanagement determines is necessary to enable the preparation of financial statements that are free frommaterial misstatement, whether due to fraud or error.

Auditor's Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe financial statements. The procedures selected depend on the auditor's judgment, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud orerror. In making those risk assessments, the auditor considers internal control relevant to the entity'spreparation and fair presentation of the financial statements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe entity's internal control. An audit also includes evaluating the appropriateness of accounting policiesused and the reasonableness of accounting estimates made by management, as well as evaluating theoverall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position ofQuintEssential Credit Union Limited as at December 31, 2011, December 31, 2010 and January 1, 2010and the results of its financial performance and its cash flows for the year ended December 31, 2011 andDecember 31, 2010 in accordance with International Financial Reporting Standards.

** ™h^~i>£tPBELLEVILLE, Canada Chartered AccountantsMarch 5,2012 Licensed Public Accountants

WILKINSON &. COMPANY LLP - CHARTERED ACCOUNTANTS

Telephone 613-966-5105 • Toll Free 1-888-728-3890 • Fax 613-962-7072P.O. Box 757, 139 Front Street, Belleville, Ontario K8N 5B5 • www.wilkinson.net


BALANCE SHEET AS AT DECEMBER 31, 2011

ASSETS

Cash and short-term deposits - Note 3Income taxes recoverable

Investments - Note 4

Loans to members - Note 5

Property, plant and equipment - Note 7Intangible assets - Note 8Investment property - Note 9Other assets - Note 10

Deferred tax asset - Note 13

LIABILITIES

Income taxes payableMembers' deposits - Note 11Accounts payable and accrued liabilities - Note 12Deferred commercial revenueDeferred tax liability - Note 13Members' shares - Note 14

MEMBERS* EQUITY

RETAINED EARNINGS

ACCUMULATED OTHER

COMPREHENSIVE INCOME (LOSS)

COMMITMENTS - Note 21

APPROVED Q# BEHALF OF THE BOARD

d Director

Director

January 1,2011 2010 2010

S $ $(Note 24) (Note 24)

8,832,971 5,984,879 6,651,6928,858

6,506,195 6,858,826 6,596,20071,668,744 67,504,736 66,077,629

2,290,263 2,413,325 2,585,321871,550 961,444 242,552

23,480 46,960 60,139504,655 488,530 441,126

9,100

90,706,716 84,258,700 82,663.759

28,070 91,74781,788,362 75,719,369 74,463,314

1,102,533 925,866 954,67636,275 30,051 30.887

114,800 63,000554,172 683,737 826,340

83,596,142 77,450,093 76,366,964

7,099,647

10,927

7,110,574

6,799,478

9,129

6,808.607

6,344,425

(47,630)

6,296,795

90,706,716 84,258.700 82,663,759

The accompanying notes form an integral part of these financial statements

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QUINTESSENTIAL CREDIT UNION LIMITEDSTATEMENT OF CHANGES IN MEMBERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2011

Balance at January 1, 2010

Net income for year

Change in unrealized gains on available-for-saleinvestments

Balance at December 31, 2010

Net income for year

Change in unrealized gains on available-for-saleinvestments

Balance at December 31,2011

Accumulated

Other

ComprehensiveIncome (loss)

$

(Note 24)

Retained

Earnings$

(Note 24)

Total

S

(47,630) 6,344,425 6,296,795

455,053 455,053

56,759

9,129 6,799,478

300,169

1,798

10,927 7,099,647

56,759

6,808,607

300,169

1,798

7,110,574


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STATEMENT OF COMPREHENSIVE INCOME


2011

REVENUE

2010

$(Note 24)

Interest on members' loans - Note 15

Investment income

4,052,703152,958

4,011,217115,876

4,205,661 4,127,093

INTEREST AND LOAN RELATED EXPENSES

Interest on members' deposits - Note 11Impairment losses - Note 6

1,363,39981,065

1,324,46746,104

1,444,464 1,370,571

GROSS FINANCIAL MARGIN 2,761,197 2,756,522

OTHER INCOME - Note 16 1,199,067 1,275,063

EXPENSES

Administrative - Schedule I

Depreciation of property, plant and equipment and intangiblesDepreciation of investment propertyDeposit Insurance Corporation of Ontario AssessmentInterest adjustment due to financial instruments standardsSalaries and employee benefits

INCOME BEFORE INCOME TAX EXPENSE

INCOME TAX EXPENSE

1,454,144 1,544,455290,601 252,684

23,480 15,65367,467 60,039

9,006 (6,956)1,755,373 1,612,347

3,600,071 3,478,222

360,193 553,363

Current - Note 13

Deferred - Note 13

8,22451,800

26,21072.100

60,024 98.310

NET INCOME FOR YEAR

OTHER COMPREHENSIVE INCOME - net of tax

300,169

1,798

455,053

56,759

COMPREHENSIVE INCOME FOR YEAR 301,967 511,812


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STATEMENT OF CASH FLOWS


OPERATING ACTIVITIES

Comprehensive income for yearAdjustment for items which do not affect cash -

Depreciation of property, plant and equipment and intangible assetsDepreciation of investment propertyLosson disposal of property, plant andequipmentDeferred income tax expense

Change in non-cash working capital -Increase in other assets

Increase (decrease) in income taxespayable/recoverableIncrease(decrease) in accounts payable and accrued liabilitiesIncrease (decrease) in deferred commercial revenue

CASH FLOWS PROVIDED FROMOPERATING ACTIVITIES

INVESTING ACTIVITIES

Purchase of property, plant and equipment and intangible assets(Increase) decrease in loans to members(Increase) decrease in investments

2011

S

301,967

290,601

23,4803,783

51,800

671,631

(16,125)(36,928)176,668

6,224

801,470

(81,429)(4,164,008)

352,631

2010

$

(Note 24)

511,812

252,68415,653

1,06572,100

853,314

(47,404)(63,677)(28,810)

(837)

712,586

(803,119)(1,427,107)

(262,625)

CASH FLOWS USED IN INVESTING ACTIVITIES

FINANCING ACTIVITIES

Increase in members' depositsDecrease in members' share deposits

CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES

NET INCREASE (DECREASE) IN CASH ANDEQUIVALENTS FOR YEAR

CASH AND EQUIVALENTS - BEGINNING OF YEAR

CASH AND EQUIVALENTS - END OF YEAR

(3,892,806) (2,492,851)

REPRESENTED BY:

Cash

Short-term deposits

6,068,993(129,565)

5,939,428

2,848,092

5,984,879

8,832,971

5,382,9713,450,000

8,832,971


1,256,055(142^603)

1,113,452

(666,813)

6,651,692

5,984,879

5,034,879950,000

5,9S4,879

WILKINSON^^

QUINTESSENTIAL CREDIT UNION LIMITEDNOTES TO FINANCIAL STATEMENTS


1. NATURE OF BUSINESS OPERATIONS

(a) Reporting Entity

QuintEssential Credit Union Limited is incorporated under the Credit Union and CaissePopulaires Act, 1994 ("The Act"). It is a Credit Union incorporated under the laws of Ontario,providing financial and banking services to its members in the Quinte area and is a member ofCentral 1 Credit Union and Deposit Insurance Corporation of Ontario. Products and servicesoffered to its members include mortgages, personal loans, commercial loans, chequing andsavings accounts, term deposits, tax-free savings accounts (TFSA), registered retirement savingsplans (RRSP), registered retirement income funds (RRIF), mutual funds, automated bankingmachines (ABM), debit and credit cards, internet banking and telephone banking. The CreditUnion head office is located at 293 Sidney Street, Belleville, Ontario.

These financial statements have been authorized for issue by the Board of Directors on March 5,2012.

(b) Basis of Presentation

These financial statements have been prepared in accordance with International FinancialReporting Standards (IFRS) as issued by the International Accounting Standards Board (theIASB). This is the first time that the Credit Union has prepared its financial statements inaccordance with IFRS, having previously prepared its financial statements in accordance withCanadian Generally Accepted Accounting Principles (Canadian GAAP). Details of how thetransition from pre-changeover Canadian GAAP to IFRS has affected the financial position,financial performance and cash flows are disclosed in Note 24.

These financial statements were prepared under the historical cost convention, as modified by therevaluation of fair value through profit and loss financial assets.

The Credit Union's functional and presentation currency is the Canadian dollar.

The preparation of financial statements in compliance with IFRS requires management to makecertain critical accounting estimates. It also requires management to exercise judgment inapplying the Credit Union's accounting policies. The areas involving a higher degree ofjudgment or complexity, or areas where assumptions and estimates are significant to the financialstatements are disclosed in Note 2.

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NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31,2011

2. ACCOUNTING POLICIES

The Credit Union follows International Financial Reporting Standards (IFRS), as issued by theInternational Accounting Standards Board (IASB). Those accounting policies considered to beparticularly significant are as follows:

(a) Accounting Estimates

The Credit Union makes estimates and assumptions about the future that affect the reportedamounts of assets and liabilities. Estimates and judgments are continually evaluated and basedon historical experience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. In the future, actual experience may differfrom these estimates and assumptions.

The effect of a change in an accounting estimate is recognized prospectively by including it inthe statement of comprehensive income in the period of the change, if the change effects thatperiod only; or in the period of the change and future periods, if the change affects both.

The estimates and assumptions that have a significant risk of causing material adjustment to thecarrying amounts of assets and liabilities within the next financial year are discussed below:

(i) Fair Value of Financial Instruments

The Credit Union determines the fair value of financial instruments that are not quoted inan active market, using valuation techniques. Those techniques are significantly affectedby the assumptions used, including discount rates and estimates of future cash flows. Inthat regard, the derived fair value estimates cannot always be substantiated by comparisonwith independent markets and, in many cases, may not be capable of being realizedimmediately.

The methods and assumptions applied, and the valuation techniques used, for Financialinstruments that are not quoted in an active market are disclosed in Note 4.

(ii) Members' Loan Loss Provision

In determining whether an impairment loss should be recorded in the statement ofcomprehensive income the Credit Union makes judgment on whether objective evidenceof impairment exists individually for financial assets that are individually significant.Where this does not exist, the Credit Union uses its judgment to group members' loanswith similar credit risk characteristics to allow a collective assessment of the group todetermine any impairment loss.

In determining the collective loan loss provision, management uses estimates based onhistorical loss experienced for assets with similar credit risk characteristics and objectiveevidence of impairment, with the exception of commercial loans which are based onsystem loss due to the lack of history available. Further details on the estimates used todetermine the allowance for impaired loans collective provision are provided in Note 6.

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2. ACCOUNTING POLICIES (Cont'd)

(iii) Income Taxes

The Credit Union periodically assesses its liabilities and contingencies related to incometaxes for all years open to audit based on the latest information available. For matterswhere it is probable that an adjustment will be made, the Credit Union records its bestestimate of the tax liability including the related interest and penalties in the current taxprovision. Management believes they have adequately provided for the probable outcomeof these matters; however, the final outcome may result in a materially different outcomethan the amount included in the tax liabilities.

(b) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, current accounts and short-term deposits withother financial institutions with an original term of 90 days or less.

Cash and cash equivalents are classified as loans and receivables and are carried at amortizedcost, which is equivalent to fair value.

(c) Short-Term Deposits and Liquidity Reserves

Short-term deposits held with Central 1 are classified as loans and receivables and thereforeinitially measured at fair value, plus transaction costs and are subsequently measured atamortized cost, which approximates fair value. Liquidity reserves are classified as loans andreceivables and are recorded initially at fair value plus transaction costs and are subsequentlymeasured at amortized cost using the effective interest method, which approximates its fair value.

(d) Investment in Central 1 Credit Union and Credit Union of Ontario CooperativeAssociation (CUCO Co-op)

Central 1 Class A shares, which are subject to a rebalancing mechanism, are classified asavailable-for-sale (AFS), which are carried at fair value where fair value in these circumstanceswill be equal to (or in case of potential impairment, less than) Par Value. Central 1 Class Eshares the par value does not equal the redemption value and they are not subject to arebalancing mechanism, AFS at cost accounting will be applied to these shares. The investmentin Class B shares in CUCO Co-op are classified as available-for-sale and are initially recorded atfair value plus transaction costs and are subsequently carried at fair value with the change inunrealized gains and losses going through the statement of other comprehensive income, net oftax.

(e) Members' Deposits

Members' deposits are classified as other liabilities. Deposits from members include demanddeposits, term deposits, tax-free savings accounts, registered retirement savings plans andregistered retirement income funds and are the Credit Union's main source of funding. Members'deposits are initially measured at fair value, net of transition costs, and are subsequentlymeasured at amortized cost using the effective interest method with the exception of theEscalator Step-up deposits which are to be recorded using the effective yield method.

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(f) Loans to Members

All members' loans are non-derivative financial assets with fixed or determinable payments thatare not quoted in an active market and have been classified as loans and receivables.

Members' loans are initially measured at fair value, net of loan origination fees and inclusive oftransaction costs incurred.

Members' loans are subsequently measured at amortized cost, using the effective interest ratemethod, less any impairment losses.

Loans to members are reported at their recoverable amount representing the aggregate amount ofprincipal, less any allowance or provision for impaired loans. Interest is accounted for on theaccrual basis for all loans. Accrued interest is included in other assets.

If there is objective evidence that an impairment loss on members' loans carried at amortized costhas incurred, the amount of the loss is measured as the difference between the loans carryingamount and the present value of expected cash flows discounted at the loans original effectiveinterest rate. Short-term balances are not discounted.

The Credit Union first assesses whether objective evidence of impairment exists individually forfinancial assets that are individually significant. For all other members' loans, where interest orprincipal are contractually past 90 days due, they are recognized as specific accounts impaired inaccordance with DICO by-law #6.

If it is determined that no objective evidence of impairment exists for an individually assessedfinancial asset, whether significant or not, the asset is included in a group of financial assets withsimilar credit risk characteristics and that group of financial assets is collectively assessed forimpairment. Assets that are individually assessed for impairment and for which an impairmentloss is or continues to be recognized are not included in a collective assessment of impairment.The expected future cash outflows for a group of financial assets with similar credit riskcharacteristics are estimated based on historical loss experience, with the exception ofcommercial loans which are based on system loss due to the lack of history available.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can berelated objectively to an event occurring after the impairment was recognized, the previouslyrecognized impairment loss is reversed. Any subsequent reversal of impairment loss isrecognized in net income.

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FOR THE YEAR ENDED DECEMBER 31,2011


(g) Bad Debts Written Off

Bad debts are written off from time to time as determined by management and approved by theBoard of Directors when it is reasonable to expect that that recovery of the debt is unlikely. Baddebts are written off against the allowance for impairment, if a provision for impairment hadpreviously been recognized. If no allowance had been recognized, the write offs are recognizedas expenses in net income.

(h) Property, Plant and Equipment

Property, plant and equipment is initially recorded at cost and subsequently measured at cost lessaccumulated depreciation and any accumulated impairment (losses), with the exception of landwhich is not depreciated. Depreciation is recognized in net income over the estimated useful lifeof the assets as follows:

Asset Basis Rate

Building Straight-line and 15-25 years andDeclining balance 4% and 5%

Furniture and equipment Declining balance 20%Computer equipment Declining balance 40%Fence and sign Declining balance 10%Paving Declining balance 8%

Depreciation is calculated using one-half of the stated rate in the year of addition for decliningbalance assets and monthly for straight-line assets.

Depreciation methods, useful lives and residual values are reviewed annually and adjusted ifnecessary.

(i) Intangible Assets

Intangible assets consist of computer software which are not integral to the computer hardwareowned by the Credit Union, which includes banking system software. Software is initiallyrecorded at cost and subsequently measured at cost less accumulative amortization and anyaccumulated impairment losses. Software is amortized on a 100% declining balance basis andthe banking system software is amortized on a 10 year straight-line basis.

Amortization is calculated using one-half of the stated rate in the year of addition for decliningbalance assets and monthly for straight-line assets.

(j) Investment Property

The Credit Union's investment property consists of solar panels held to earn income from feed-intariffs. Investment property is initially recorded at cost and subsequently measured at cost lessaccumulated depreciation and any accumulated impairment losses. Solar panels are depreciatedon a 50% declining balance basis using one-half of the stated rale in the year of addition.

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(k) Income Taxes

Income tax expense comprises of current and deferred tax. Current tax and deferred tax arerecognized in comprehensive income except to the extent that it relates to a businesscombination, or items recognized directly in equity or in comprehensive income.

Current income taxes are recognized for the estimated income taxes payable or receivable ontaxable income or loss for the current year and any adjustment to income taxes payable in respectof previous years. Current income taxes are determined using tax rates and tax laws that havebeen enacted or substantively enacted by the year-end date.

Deferred tax assets and liabilities are recognized where the carrying amount of an asset orliability differs from its tax base, except for taxable temporary differences arising on the initialrecognition of goodwill and temporary differences arising on the initial recognition of an asset orliability in a transaction which is not a business combination and at the time of the transactionaffects neither accounting or taxable profit or loss.

Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporarydifferences is restricted to those instances where it is probable that future taxable profit will beavailable against which the deferred tax asset can be utilized. Deferred tax assets are reviewed ateach reporting date and are reduced to the extent that it is no longer probable that the related taxbenefit will be realized.

The amount of the deferred tax asset or liability is measured at the amount expected to berecovered from or paid to the taxation authorities. This amount is determined using tax rates andtax laws that have been enacted or substantively enacted by the year-end date and are expected toapply when the liabilities / (assets) are settled / (recovered).

(1) Provisions

Provisions are recognized for liabilities of uncertain timing or amount that have arisen as a resultof past transactions, including legal, equitable or constructive obligations. The provision ismeasured at the best estimate of the expenditure required to settle the obligation at the reportingdate.

(m) Group Registered Retirement Savings Plan

The Credit Union participates in an defined contribution employer group RRSP plan. The CreditUnion recognizes contributions as an expense in the year to which they relate.

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(n) Accounts Payable and Other Payables

Liabilities for trade creditors and other payables are classified as other financial liabilities andinitially measured at fair value net of any transaction costs directly attributable to the issuance ofthe instrument and subsequently carried at amortized cost using the effective interest ratemethod.

(o) Members' Shares

Members' shares issued by the Credit Union are classified as equity only to the extent that theydo not meet the definition of a financial liability or financial asset.

Shares that contain redemption features subject to the Credit Union maintaining adequateregulatory capital are accounted for using the partial treatment requirements of IFRIC 2Members' Shares in Co-operative Entities and Similar Instruments.

(p) Patronage Distributions

Patronage distributions are recognized in net income when circumstances indicate the CreditUnion has a constructive obligation it has little or no discretion to avoid, and it can make areasonable estimate of the amount required to settle the obligation.

(q) Revenue Recognition

Loan Interest

Interest income from loans is accounted for on the accrual basis, except on loans classified asimpaired. When a loan is classified as impaired, recognition of interest, in accordance with theterms of the original loan agreement, ceases except when, in management's opinion the loan isfully secured, then interest is continued to be recorded on the accrual basis. Interest received onan impaired loan is recognized in net income only if there is no doubt as to the collectibility ofthe carrying value of the loan; otherwise, the interest received is credited to the principal.

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(r) Revenue Recognition (Cont'd)

Fee and Other Income

Fee and other income is recorded as income according to the underlying standard agreement orwhen services are rendered to the member with exception of commercial loan fees which areamortized over the term of the loan.

Investment Income

For investments classified as loans and receivables, interest is recorded on an accrual basis and isincluded in interest income.

For investments classified as available-for-sale, income is recognized in other comprehensiveincome, net of tax, when the investments are adjusted to their fair market values. When thefinancial asset is disposed, the realized gain or loss is recognized in income by being transferredfrom other comprehensive income.

(s) Foreign Currency Translation

Foreign currency accounts are translated into Canadian dollars as follows:

At the transaction date, each asset, liability, revenue and expense denominated in a foreigncurrency is translated into Canadian dollars by the use of the exchange rate in effect at that date.At the year-end date, unsettled monetary assets and liabilities are translated into Canadian dollarsby using the exchange rate in effect at the year-end date and the related translation differencesare recognized in net income. Exchange gains and (losses) arising on the retranslation ofmonetary available-for-sale financial assets are treated as a separate component of the change infair value and recognized in net income. Exchange gains and (losses) on non-monetaryavailable-for-sale financial assets form part of the overall gain or loss recognized in respect ofthat financial instrument.

Non-monetary assets and liabilities that are measured at historical cost are translated intoCanadian dollars by using the exchange rate in effect at the date of the initial transaction and arenot subsequently restated. Non-monetary assets and liabilities that are measured at fair value or arevalued amount are translated into Canadian dollars by using the exchange rate in effect at thedate the value is determined and the related translation differences are recognized in net incomeor other comprehensive income consistent with where the gain or loss on the underlying nonmonetary asset or liability has been recognized.

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(t) Funds Held in Trust

Concentra Financial Services Association is the trustee for the TFSA, RRSP and RRIF accountsoffered to members. Under the trust agreement, members' contributions and earnings aredeposited in the Credit Union. Payment to members on withdrawal is made by the Credit Unionon behalf of the trust company.

(u) Standards, Amendments and Interpretations Not Yet Effective

Certain new standards, amendments and interpretations have been published that are mandatoryfor the Credit Union's accounting periods beginning on or after January 1, 2012 or later periodsthat the Credit Union has decided not to early adopt. The standards, amendments andinterpretations that will be relevant to the Credit Union are:

i. IFRS 9 Financial Instruments is part of the IASB's wider project to replace IAS 39 'FinancialInstruments: Recognition and Measurement'. IFRS 9 retains but simplifies the mixedmeasurement model and establishes two primary measurement categories for financial assets,amortized cost and fair value. The basis of classification depends on the entity's businessmodel and the contractual cash flow characteristics of the financial asset. The standard is

effective for annual periods beginning on or after January 1, 2013. The Credit Union is in theprocess of evaluating the impact of the new standard.

ii. IFRS 13 Fair Value Measurement defines fair value, provides guidance on the measurementof fair value, and requires disclosures about fair value measurements. IFRS 13 does notdetermine when an asset, a liability or an entity's own equity instrument is measured at fairvalue. Rather, the measurement and disclosure requirements of IFRS 13 apply when anotherIFRS requires or permits the item to be measured at fair value (with limited exceptions). Thestandard is effective for annual periods beginning on or after January 1, 2013. The CreditUnion is in the process of evaluating the impact of the new standard.

Certain new standards, amendments and interpretations have been published that are mandator)'for the Credit Union's accounting periods beginning on or after January 1, 2012 or later periodsthat the Credit Union has decided to early adopt. The Credit Union has early adopted theamendments to IFRS 1 which replaces references to a fixed dale of'1 January 2004' with 'the dateof transition to IFRSs'. This eliminates the need for the Credit Union to restate derecognitiontransactions that occurred before the date of transition to IFRSs. The amendment is effective for

year-ends beginning on or after July 1, 2011, however, the Credit Union has early adopted theamendment. The impact of the amendment and early adoption is that the Credit Union onlyapplied IAS 39 derecognition requirements to transactions that occurred after the date oftransition.

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3. CASH AND SHORT-TERM DEPOSITS

2011 2010

S

15

January 1,2010

$

Cash 5,382,971 5,034,879 3,690,008

Short-term depositsRedeemable within 90 daysRedeemable after 90 days

3,400,00050,000

50,000900,000

2,961,684

3,450,000 950.000 2,961,684

8,832,971 5,984,879 6,651,692

All deposits are callable and have terms of less than one year. Fixed rate term deposits bear interestat rates ranging from 0.33% to 1.14% (2010 - 0.33% to 1.04%). The average effective yield on short-term deposits is 0.95% (2010 - 0.83%). The carrying value of cash and short-term deposits is equalto fair value.

The Credit Unions and Caisse Populaires Act, 1994 requires that the Credit Union maintain adequateliquidity, details of which are disclosed in Note 19 to these financial statements.

4. INVESTMENTS

The following table provides information on the investments by type of security and issuer. Themaximum exposure to credit risk would be the fair value as detailed below.

Investments in Central 1 Credit Union (Central 1)

Shares - CUCO

Liquidity reserves - Central 1Class "E" shares - Central 1

2011

$

5,433,410373,300

2010

2,241

5,894,351373,300

January 1,2010

$

98,9415,682,147

276,600

Class "A" shares - Central 1 316,327 194,639 193,256

CUCO Co-op Class "B" investment shares2176100 Ontario Limited (ABCP LP)

6,123,037383,158

6,464,531

394,295

6,250,944

345,256

6,506,195 6,858,826 6,596,200

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4. INVESTMENTS (Cont'd)

In 2011, income on the investments in Central 1amounted to $80,643 (2010 - $66,107).

Central 1 Credit Union

The shares in Central 1 are required as a condition of membership and are redeemable uponwithdrawal of membership or at the discretion of the Board of Directors of Central 1. In addition, themember credit unions are subject to additional capital calls at the discretion of the Board ofDirectors.

Class A Central 1 shares are subject to an annual rebalancing mechanism and are issued andredeemable at par value. There is no separately quoted market value for these shares, however, fairvalue is determined to be equivalent to the par value due to the fact transactions occur at par value ona regular and recurring basis.

Class E Central 1 shares are issued with a par value of $0.01 per share however are redeemable at$100 per share at the option of Central 1. There is no separately quoted market value for these sharesand the fair value could not be measured reliably. Fair value cannot be measured reliably as thetiming of redemption of these shares cannot be determined, therefore, the range of reasonable fairvalue estimates is significant and the probabilities of the various estimates cannot be reasonablyassessed. Therefore, they are recorded at cost. The Credit Union is not intending to dispose of anyCentral 1 shares as the services supplied by Central 1 are relevant to the day to day activities of theCredit Union.

Dividends on these shares are at the discretion of the Board of Directors of Central 1.

Central 1 Liquidity Reserve Deposits

QuintEssential Credit Union Limited is a member of Central 1. As a condition of maintainingmembership in Central 1 in good standing, the Credit Union is required to maintain on deposit inCentral l's liquidity pool an amount equal to 6% of its total assets, adjusted at each calendar monthend. The deposits can be withdrawn only through the reduction in the balance of the Credit Union'sown assets or upon withdrawal of membership. At December 31, 2011, the Credit Union helddiscount deposits with Central 1 representing its liquidity reserve deposits which bear interest at ratesranging from 1.03% to 1.74% (2010 - 1.01% - 1.50%) and mature between January 2012 and March2013.

The liquidity reserve deposits in Central 1 are classified as loans and receivables and are initiallymeasured at fair value plus transaction costs and are subsequently measured at amortized cost, whichapproximates fair value.

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4. INVESTMENTS (Cont'd)

CUCO Co-op Class B Investment Shares

In June 2011, credit unions approved the restructuring of Credit Union Central of Ontario Limited(CUCO) to discontinue as a regulated financial institution under the ACT and to continue as a cooperative under the Canada Co-operatives Act; and to purchase the investment portfolio and certainother assets and liabilities of the ABCP 2008 Limited Partnership (LP) by August 17, 2011. CUCOofficially became CUCO Co-op on August 17, 2011. Credit unions who were members of CUCOwere now members of CUCO Co-op, and as a result, the CUCO shares were continued as CUCOCo-op shares.

On August 31, 2011, CUCO Co-op and the LP fulfilled the terms of a purchase agreement and theLP's assets were sold to CUCO Co-op in exchange for Class B Investment shares. On September 2,2011, the LP distributed to each credit union such credit union's proportionate share of CUCO Co-opClass B Investment shares. As a result of the asset sale to the CUCO Co-op and this distribution, theLP then had no assets. On October 24, 2011, the Board of LP approved a resolution to dissolve thelimited partnership as it has ceased operations and disposed of all assets. The combination of stepsrestructured the Credit Union's holding in the assets, creating a new investment, and unlocked apotential tax shelter on any future gains in the value.

The Credit Union received 136,091,083 Class B Investment shares in CUCO Co-op. The CreditUnion has classified this new investment as available-for-sale (AFS) with fair value accounting beingapplied. For investments classified as AFS with fair value accounting being applied, unrealizedgains and losses are included in other comprehensive income, net of tax, until realized when thecumulative gain or loss is transferred to income.

The investment in the LP was written up at August 31, 2011 by $12,363 (2010 - written up $67,570).The value of the LP at August 31 was $393,393 which was the value that was transferred to theinvestment in CUCO Co-op Class B Investment shares on September 2, 2011. Throughout the year,the Credit Union received $13,265 in distributions from the LP (2010 - $18,531).

The CUCO Co-op provided a fair value of the Class B Investment Shares as at December 31, 2011.The Credit Union's proportionate share of the fair value amounted to $383,158 (2010 - LP value$395,295), and as a result, the investment in the CUCO Co-op was written down by $12,235. Onedistribution was received totaling $2,356 from the CUCO Co-op representing a return on capital onthe CUCO Co-op membership shares (formerly CUCO shares). The Board of the CUCO Co-oprecognized that these funds represented the value of the company in its stale immediately prior to therestructuring and that it made sense to crystallize and return the value to the CUCO Co-op members.The number of CUCO Co-op membership shares held by the Credit Union did not change. This wasthe final distribution related to CUCO Co-op membership shares so the carrying value was adjustedto zero and a gain on disposal in the amount of $115 was realized.

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5. LOANS TO MEMBERS

Commercial loans and mortgagesPersonal loans

Residential mortgage loans

Allowance for impaired loans - Note 6

2011

$

10,631,39115,277,942

45,950,512

71,859,845

(191,101)

2010

7,647,62615,758,08244,270,385

67,676,093(171,357)

January 1,2010

$

7,437,47617,071,69541,772,007

66,281,178(203,549)

71,668,744 67,504,736 66,077,629

Break-down of loans

Variable interest rates

Fixed interest rates

17,498,774

54,169,97018,284,71949,220,017

19,697,67546,379,954

71,668,744 67,504,736 66,077,629

Average effective interest rates on the members' loans are:

Variable interest rate loans and mortgagesFixed interest rate loans and mortgages

Terms and Conditions

Members' loans can have either a variable or fixed rate of interest and a significant majority maturewithin five years, some have a seven-year term.

Variable rate loans are based on a "prime rate" formula, ranging from prime minus 3% to prime plus13.90%o. The rate is determined by the type of security offered and the members' creditworthiness.The Credit Union's prime rate at December 31, 2011 was 4%.

2011 2010

% %

5.95 5.57

5.79 6.19

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5. LOANS TO MEMBERS (Cont'd)

The interest rate offered on fixed rate loans being advanced al December 31, 2011 range from 2.3%to 18%. The rate offered to a member varies with the type of security offered and the member'scredit worthiness.

Personal loans consist of consumer instalment loans, lines of credit and other personal loans. Theseloans may be repaid in full or in part at any time without notice or penalty. Personal loans may beamortized over a maximum of 7 years, unless collateralized by real property in which case theamortization period can be up to 20 years. Interest rates on personal loans and other advances maybe fixed for a maximum 5 years.

The Credit Union mitigates its credit risk exposure with respect to personal loans by limiting the totalunsecured personal loans to each member to $20,000, by performing a thorough credit analysis priorto approval of the loan and by obtaining collateral when necessary.

As at December 31, 2011, conventional mortgage advances may be made up to a maximum of 80%of the appraised value of the property. Mortgages in excess of 80% of the value of the underlyingproperty are insured with Canadian Mortgage and Housing Corporation (CMUC) or GenworthFinancial (GE).

Mortgages are repaid in weekly, bi-weekly, monthly or bi-monthly instalment payments and aregenerally amortized over a maximum of 25 years. Mortgages may be prepaid at the mortgagor'soption by one lump sum payment per year not exceeding 15% of the original mortgage amount,and/or by increasing the monthly instalments once yearly by 25% of the previous instalment amount.Repayment in full prior to maturity is subject to a penalty equal to the greater of:

a) Three months' interest on the outstanding mortgage balance; andb) The interest rate differential between current market rate and effective interest rate

applied on the outstanding balance of the remaining term of the mortgage.

Interest rates on mortgages are at a variable rate or they may be fixed for a maximum of 5 years

Commercial loans consist of term loans, operating lines of credit and mortgages to individuals,partnerships and corporations, and have various repayment terms. They are secured by various typesof collateral, including mortgages on real property, general security agreements, charges on specificequipment, investments and personal guarantees. Commercial loans granted under the CanadianSmall Business Act can be amortized for any period, but the guarantee only applies for the first tenyears. In that ten year period should the loan default and a claim is filed after all recover)' efforts areexhausted, the federal government will pay up to 85% of the loss.

WILKINSON^^

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Average Yields to Maturity

Loans bear interest at both variableand fixed rates with the following average yields at:

2011 2010

Principal Yield Principal Yield

$ % $ %

Variable rate 17,689,875 5.73 18,439,649 5.63

Fixed rate due less than one year 8,530,035 5.78 1,782,603 6.59

Fixed rate due between one and

five years 45,639,935 5.50 47,453,841 5.95

71,859,845 67,676,093

Credit Quality of Loans

It is not practical to value all collateral as at the balance sheet date due to the variety of assets andconditions. A breakdown of the security held on a portfolio basis is as follows:

2011 2010

S $

Unsecured loans 1,550,827 1,437,957Commercial mortgages and loans under Canada

Small Business Financing Program 1,600,338 1,152,172Residential mortgages insured by CMHC or GE 21,014,002 19,970,580

24,165,167 22,560,709

Fair Value

The fair value of members' loans at December 31, 2011 was $77,249,000.

The estimated fair value of the variable rate loans is assumed to be equal to book value as the interestrates on these loans re-price to market on a periodic basis. The estimated fair value of fixed rateloans is determined by discounting the expected future cash flows at current market value rates forproducts with similar terms and credit risks.

Concentration of Risk

The Credit Union has an exposure to groupings of individual loans which concentrate risk and createexposure to particular segments as follows:

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Aggregate individual or related groups of members' loans which exceed 10% of the members' equity:

2011

Commercial loans 734,324

2010

810,224

January 1,2010

882,462

There were no residential or personal loans which exceeded 10% of the members' equity. Members'loans are with members substantially located in and around the Quinte region, Ontario.

6. ALLOWANCE FOR IMPAIRED LOANS

Total allowance for impaired loan provision comprises:

2011

January 1,2010 2010

$ $

Collective provisionIndividual specific provision

110,14480,957

84,41786,940

79,833123,716

Total provision 191,101 171,357

Movement in individual specific provision and collective provision for impairment:

2011

Balance at January 1, 2011Recoveries of loans previously written offProvision charged to earnings

Loans written off

Balance at December 31,2011

Residential

MortgageS

NIL

17,975(17,975)

NIL

NIL

Gross principal balance of individually impaired loans 487,387

Personal

$

125,7256,079

73,561

205,365(85,375)

119,990

146,187

Commercial

$

45,632

25,479

71,111

71,111

2,378

203,549

Total

171,357

24,054

81,065

276,476(85,375)

191,101

635,952

WILKINSON^^




6. ALLOWANCE FOR IMPAIRED LOANS (Cont'd)

2010

Residential

Mortgage$

NIL

Personal Commercial

S $

Balance at January 1, 2010Recoveries of loans previously written offProvision charged to earnings

163,4617,353

40,560

40,088

22

Total

$

203,5497,353

46,1045,544

Loans written off

NIL 211,374(85,649)

45,632 257,006(85,649)

Balance at December 31,2010 NIL 125,725 45,632 171,357

Gross principal balance of individually impaired loans 395,878 186,109 NIL 581,987

Analysis of individual loans that are impaired or potentially impaired based on age of repaymentsoutstanding.

Period of delinquencyLess than 30 days30 to 90 daysOver 90 days

December 31,2011Individual

Carrying SpecificValue Provision

S S

1,858,631 51,092187,915 9,393155,530 20,472

December 31

CarryingValue

S

869,158289.076

98.938

,2010Individual

SpecificProvision

S

44,311

42.629

January 1,

CarryingValue

$

947,250153,826130.415

2010

Individual

SpecificProvision

S

51,9214,987

66.808

Total loans in arrears

Total loans not in arrears

2,202,07669,657,769

80,957 1,257.17266,418,921

86,940 1,231,49165,049,688

123,716

Total Loans 71,859,845 67,676,093 66,281,179

Key Assumptions in Determining the Allowance for Impaired Loans Collective Provision

The Credit Union has determined the likely impairment loss on loans which have not maintained theloan repayments in accordance with the loan contract, or where there is other evidence of potentialimpairment such as industrial restructuring, job losses or economic circumstances. In identifying theimpairment likely from these events, the Credit Union estimates the potential impairment using theloan type, industry, geographical location, type of loan security, the length of time the loans are pastdue and the historical loss experience. The circumstances may vary for each loan over time,resulting in higher or lower impairment (losses). The methodology and assumptions used forestimating future cash flows are reviewed regularly by the Credit Union to reduce any differencesbetween loss estimates and actual loss experience.

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6. ALLOWANCE FOR IMPAIRED LOANS (Cont'd)

An estimate of the collective provision is based on the period of repayments that are past due.

For purposes of the collective provision, loans are classified into separate groups with similar riskcharacteristics, based on the type of product and type of security. The Credit Union has no historicalloss experience in their commercial portfolio to date. As a result, the system delinquency rates aspublished by DICO were used in the calculation of the commercial collective provision.

Loans with repayments past due but not regarded as individually impaired and considered indetermining the collective provision:

2011

6 to 29 days30 to 89 daysOver 90 davs


2010

6 to 29 days30 to 89 daysOver 90 davs


Residential

Mortgage

NIL

Residential

MortgageS

NIL

Personal

S

469,09081,113

550,203

Personal

476,49762,627

539,124

Commercial

S

NIL

Commercial

$

NIL

Total

S

469,09081,113

550,203

Total

$

476,49762,627

539.124

As at December 31, 2011, commercial loans with repayments past due not part of specific allowanceamounted to $Nil (2010 - $Nil).

In accordance with DICO by-law #6, all accounts greater than 90 days past due are specificallyallowed for and therefore would not be included in the calculation of the collective provision.

As at December 31, 2011, foreclosed assets held for sale amounted to SNil (2010 - $Nil).

WILKINSON^^




7. PROPERTY, PLANT AND EQUIPMENT

Cost

Balance at January 1, 2010Additions

Property, Plant and Equipment

Furniture Fence

and Computer andLand Building Equipment Equipment Sign

s s s s s

101,953 2,556,787 981,0637,505

505,40415,477

107,709

19,756

PavingS

24

Total

S

120,146 4,373,06242,738

Disposals (2,955) (2,955)

Balance on December 31, 2010Additions

Disposals

101,953 2,556,787 988,568

17,381(4.409)

517,92652,925

(21,027)

127,465 120,146 4,412,84570,306

(25.436)

Balance on December 3 1, 2011 101.953 2.556.787 1,001.540 549.824 127,465 120,146 4,457,715

Accumulated DepreciationBalance at January 1, 2010

Depreciation expense618,156

85,817730,344

50,894352,625

63,781

63,247

5,434

23,369

7,742

1,787,741

213,668Disposals (1,889) (1,889)

Balance on December 31, 2010Depreciation expenseDisposals

NIL 703.973

82,873781,238

43,133

(4,055)

414,51750,577

(17,597)

68,681

5,87831,111

7,1231,999,520

189,584(21,652)

Balance on December 31. 2011 NIL 786.846 820.316 447,497 74,559 38,234 2,167,452

Net book value

January 1,2010 101,953 1,938,631 250.719 152,779 44,462 96,777 2,585,321December 31, 2010 101,953 1.852.814 207,330 103,409 58,784 89,035 2,413,325December 31,2011 101,953 1,769,941 181,224 102,327 52,906 81,912 2,290,263

WILKINSON^^^

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