Value Partners Investments - VPI INCOME POOL · 2015 2014 Cash flows from (used) in operating...

Financial Statements of

VPI INCOME POOL

Years ended December 31, 2015 and 2014

MANAGEMENT REPORT

Management’s Responsibility for Financial Reporting The accompanying financial statements have been prepared by the management of Value Partners Investments Inc. (Value Partners), the Manager of the Value Partners Pools (the Pools), and approved by the Board of Directors of Value Partners. Management is responsible for the information and representations contained in these financial statements. The Board of Directors of Value Partners is responsible for reviewing and approving the financial statements and overseeing management’s performance of its financial reporting responsibilities. An Audit Committee comprised of two independent Directors is appointed by the Board of Directors to review the financial statements, the adequacy of internal controls, the audit process and financial reporting with management and the external auditors. The Audit Committee reports to the Board of Directors prior to the approval of the audited financial statements.

Value Partners maintains appropriate processes to ensure that relevant and reliable financial information is produced. The financial statements have been prepared in accordance with International Financial Reporting Standards and include certain amounts that are based on estimates and judgments. The significant accounting policies which management believes are appropriate for the Pools, are described in note 3 of the financial statements. KPMG LLP are the external auditors of the Pools. The external auditors have audited the financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the unitholders their opinion on the financial statements. Their report is set out below. On behalf of Value Partners Investments Inc. Manager of the Pools Paul Lawton Dean Bjarnarson Chief Operating Officer and Secretary Chief Financial Officer

INDEPENDENT AUDITORS' REPORT

To the Unitholders of VPI Income Pool

We have audited the accompanying financial statements of VPI Income Pool which comprise the statements of financial position as at December 31, 2015 and December 31, 2014, the statements of comprehensive income, changes in financial position and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

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

Auditors’ Responsibility

Our responsibility is to express an opinion on these 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the 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 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 financial statements present fairly, in all material respects, the financial position of VPI Income Pool as at December 31, 2015 and 2014, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

Chartered Professional Accountants

February 18, 2016 Winnipeg, Canada

VPI INCOME POOL Statements of Financial Position (In thousands of dollars, except for unit amounts) As at December 31, December 31, 2015 2014

Assets Financial assets at fair value through profit or loss $ 430,312 $ 270,538 Cash 21,391 12,118 Accrued dividends receivable 717 143 Accrued interest receivable for distribution purposes 3,224 1,617 Subscriptions receivable 11,400 4,067 $ 467,044 $ 288,483

Liabilities Accounts payable and accrued liabilities $ 85 $ 73 Redemptions payable 149 286 Management fees payable (notes 4 and 5) 695 465 Forward currency contracts 601 – Distributions payable 10,684 3,737 Due to brokers 4,500 4,882 16,714 9,443 Net assets attributable to

holders of redeemable units $ 450,330 $ 279,040 Net assets attributable to holders of redeemable

units per series: Series A $ 384,155 $ 241,949 Series B 27,851 23,199 Series F 38,324 13,892

Net assets attributable to holders of redeemable

units per unit: Series A $ 11.23 $ 11.35 Series B 10.37 10.55 Series F 11.01 11.15

Number of redeemable units outstanding:

Series A 34,205 21,322 Series B 2,685 2,198 Series F 3,482 1,246

The accompanying notes form an integral part of these financial statements.

VPI INCOME POOL Statements of Comprehensive Income (In thousands of dollars, except for unit amounts) Years ended December 31, 2015 and 2014 2015 2014 Investment income:

Interest income for distribution purposes $ 13,668 $ 7,232 Dividend income 4,302 1,826 Foreign exchange gain on cash 8 12 Other changes in fair value on financial assets and financial

liabilities at fair value through profit or loss: Net realized gain on sale of investments 11,845 3,577 Net realized loss on forward currency contracts (2,306) – Change in unrealized appreciation (depreciation)

in value of investments (7,493) 8,314 Change in unrealized depreciation in forward

currency contracts (601) – 19,423 20,961

Expenses:

Administration 113 101 Audit fees 17 14 Independent review committee fees 7 8 Security holder reporting costs 165 108 Custodian fees 17 8 Filing fees 34 18 Legal fees 5 8 Management fees (notes 4 and 5) 6,865 3,771 Registered plan fees 9 6 Trustee fees 5 5 Withholding taxes 425 222 Transaction costs 60 34 7,722 4,303

Increase in net assets attributable to holders of redeemable units $ 11,701 $ 16,658 Increase in net assets attributable to holders of redeemable

units per series: Series A $ 9,956 $ 14,515 Series B 808 1,552 Series F 937 591

Increase in net assets attributable to holders of redeemable

units per unit: Series A $ 0.36 $ 0.94 Series B 0.33 0.87 Series F 0.37 1.00


VPI INCOME POOL Statements of Changes in Financial Position (In thousands of dollars and units) Years ended December 31, 2015 and 2014 Series A Series B Series F Total 2015 2014 2015 2014 2015 2014 2015 2014 Net assets attributable to holders of

redeemable units, beginning of year $ 241,949 $ 108,863 $ 23,199 $ 14,183 $ 13,892 $ 1,587 $ 279,040 $ 124,633

Increase in net assets attributable to holders of redeemable units 9,956 14,515 808 1,552 937 591 11,701 16,658

Redeemable unit transactions:

Proceeds from redeemable units issued 169,305 143,767 8,867 10,588 26,890 12,640 205,062 166,995 Reinvestment of distributions to holders of redeemable units 16,737 6,893 1,350 704 1,831 325 19,918 7,922 Redemption of redeemable units (37,569) (25,366) (5,016) (3,120) (3,291) (863) (45,876) (29,349) 148,473 125,294 5,201 8,172 25,430 12,102 179,104 145,568

Distributions to holders of redeemable units: Net investment income (8,216) (4,229) (781) (468) (1,138) (244) (10,135) (4,941) Net realized gain on investments (8,007) (2,494) (576) (240) (797) (144) (9,380) (2,878) Total distributions paid to holders of

redeemable units (16,223) (6,723) (1,357) (708) (1,935) (388) (19,515) (7,819)

Net increase in net assets attributable to holders of redeemable units 142,206 133,086 4,652 9,016 24,432 12,305 171,290 154,407

Net assets attributable to holders of redeemable units, end of year $ 384,155 $ 241,949 $ 27,851 $ 23,199 $ 38,324 $ 13,892 $ 450,330 $ 279,040

Increase (decrease) in redeemable units outstanding:

Beginning of year 21,322 10,146 2,198 1,417 1,246 150 24,766 11,713 Issued 14,663 12,817 826 1,012 2,363 1,145 17,852 14,974 Issued on reinvestment of distributions 1,472 612 128 67 164 29 1,764 708 Redeemed (3,252) (2,253) (467) (298) (291) (78) (4,010) (2,629)

Redeemable units outstanding, end of year 34,205 21,322 2,685 2,198 3,482 1,246 40,372 24,766

Weighted average units outstanding, during the period 27,526 15,435 2,442 1,784 2,540 592


VPI INCOME POOL Statements of Cash Flows (In thousands of dollars) Years ended December 31, 2015 and 2014 2015 2014 Cash flows from (used) in operating activities:

Increase in net assets attributable to holders of redeemable units $ 11,701 $ 16,658

Adjustments for: Foreign exchange gain on cash (8) (12) Net realized gain on sale of investments (11,845) (3,577) Transaction costs 60 34 Change in unrealized depreciation (appreciation)

in value of investments 7,493 (8,314) Change in unrealized depreciation in forward

currency contracts 601 – Purchase of investments (337,921) (291,695) Proceeds from sale of investments 182,439 149,875 Dividends receivable (574) (143) Interest receivable for distribution purposes (1,607) (589) Management fees payable 230 258 Other payables and accrued expenses (370) 4,882 Net cash used in operating activities (149,801) (132,623)

Cash flows from (used) in financing activities:

Distributions paid to holders of redeemable units, net of reinvested distributions 7,350 (1,954)

Proceeds from redeemable units issued 197,729 168,859 Redemption of redeemable units (46,013) (29,147) Net cash from financing activities 159,066 137,758

Foreign exchange gain on cash 8 12 Net increase in cash 9,273 5,147 Cash, beginning of year 12,118 6,971 Cash, end of year $ 21,391 $ 12,118 Supplementary information: Dividends received, net of withholding tax $ 3,303 $ 1,461 Interest received 12,061 6,643


VPI INCOME POOL Schedule of Investments (In thousands of dollars, except for unit amounts) December 31, 2015 Number of Coupon units, shares Maturity rate Average Fair % of or par value Description date % cost value net assets Bonds: Corporate bonds: 1,970,000 Bank of Nova Scotia 31-Aug-85 0.688 $ 1,638 $ 1,898 3,930,000 Black Press Group Ltd. ^ 28-Dec-18 10.000 4,012 3,930 14,088,000 BlackBerry Ltd. 13-Nov-20 6.000 22,873 23,876 731,000 Bombardier Inc. 15-Mar-22 5.750 795 713 2,085,000 Bombardier Inc. 15-Oct-22 6.000 2,324 2,045 5,544,000 Bombardier Inc. 15-Jan-23 6.125 6,418 5,352 22,309,000 Bombardier Inc. 15-Mar-25 7.500 26,388 21,849 2,206,000 Caisse Francaise de Financement Local 30-May-17 4.625 2,373 2,296 900,000 Canadian Imperial Bank of Commerce 10-Feb-17 1.151 900 899 610,000 Canadian Imperial Bank of Commerce^ 31-Aug-85 0.654 487 665 243,788 Canadian Pacific Railway Co. 1-Oct-24 6.910 297 295 1,079,000 Central 1 Credit Union 24-Nov-16 1.228 1,080 1,080 2,928,000 Central 1 Credit Union 1-Mar-17 1.283 2,928 2,927 2,848,000 Cogeco Cable Inc. 14-Feb-22 4.925 3,107 3,125 2,010,000 Cogeco Cable Inc. 26-May-23 4.175 2,054 2,108 5,571,000 Commerzbank AG 15-Dec-16 1.727 5,490 5,501 4,319,000 Commerzbank AG 19-Sep-23 8.125 5,438 6,908 2,910,163 Compass Diversified Holdings 6-Jun-21 4.250 3,165 4,037 3,831,000 Enbridge Inc. 13-Mar-17 1.292 3,815 3,793 533,000 Enbridge Inc. 2-Jun-17 0.866 655 725 3,726,000 GE Capital Canada Funding Co. 6-Feb-23 2.024 3,907 3,775 2,359,000 Heathrow Funding Ltd. 3-Jul-19 4.000 2,484 2,522 3,086,000 Honda Canada Finance Inc. 7-Apr-17 1.128 3,075 3,075 3,162,000 Honda Canada Finance Inc. 3-Dec-18 1.490 3,152 3,164 8,990,000 Kraft Canada Inc. 6-Jul-20 1.848 8,990 8,884 1,451,000 KRCX North Holdings LLC 13-Apr-18 5.990 1,583 1,579 5,416,000 Lloyds Bank PLC 16-Dec-21 10.125 6,409 5,816 425,000 Metropolitan Life Global Funding 25-Sep-17 1.866 428 427 6,707,000 Metropolitan Life Global Funding 10-Apr-19 2.300 7,329 9,323 9,726,000 Navient Corp. 25-Mar-21 5.875 11,998 12,075 10,421,806 Postmedia Network Inc. 16-Aug-17 8.250 10,575 10,052 4,218,000 Royal Bank of Canada 11-Feb-20 1.361 4,218 4,175 17,368,000 Royal Bank of Canada 23-Mar-20 1.223 17,368 17,263 930,000 Royal Bank of Canada 29-Jun-85 0.563 749 938 41,000 Royal Bank of Scotland Group 16-Mar-22 9.500 54 62 6,351,000 Royal Bank of Scotland Group 16-Mar-22 10.500 7,243 6,922 1,310,000 Royal Bank of Scotland Group 28-May-24 5.125 1,419 1,847 7,330,000 Royal Bank of Scotland Group 29-Apr-49 6.666 7,631 8,221 4,057,000 Royal Bank of Scotland Group 29-Nov-49 5.370 3,912 4,000 1,819,000 Shaw Communications Inc. 9-Nov-39 6.750 2,032 2,095 1,315,000 SLM Corp. 17-Jun-19 4.875 1,450 1,685 3,867,000 SLM Corp. 25-Jan-22 7.250 4,432 5,043 10,859,000 SLM Corp. 25,Jan-23 5.500 12,094 12,125 493,000 SNC-Lavalin Group Inc. 3-Jul-19 6.190 565 558 451,000 Stantec Inc. 10-May-18 4.757 482 475 3,339,000 TechMediaNetwork Inc. ^ 22-May-22 3.000 4,109 4,638 693,552 Telsat Canada 28-Mar-19 3.500 780 951 2,385,000 Toronto Dominion Bank 18-Feb-20 1.356 2,360 2,363 3,552,000 TransCanada PipeLines Ltd. 15-May-67 6.350 4,261 3,738 4,726,000 Tuckamore Capital Management Inc. 23-Mar-16 8.000 4,018 4,634 4,171,000 Unicredit Spa^ 29-May-18 3.438 4,275 4,171 3,235,000 Videotron Ltd. 15-Jul-21 6.875 3,433 3,411 1,693,000 Videotron Ltd. 15-Jun-25 5.625 1,636 1,694 2,281,000 VW Credit Canada Inc. 3-Apr-17 1.148 2,208 2,223 746,000 VW Credit Canada Inc. 4-Apr-18 1.600 715 726 1,129,000 WTH Car Rental ULC 20-Aug-19 2.542 1,129 1,144 4,670,683 Xplornet Communications Inc.^ 15-May-17 13.000 4,923 4,835 5,356,044 Xplornet Communications Inc.^ 25-Oct-20 13.000 5,356 6,308 14,592,765 Yellow Pages Digital & Media Solutions Ltd. 30-Nov-18 9.250 15,397 15,244 274,416 276,203 61.33

VPI INCOME POOL Schedule of Investments (continued) (In thousands of dollars, except for unit amounts) December 31, 2015 Number of Coupon units, shares Maturity rate Average Fair % of or par value Description date % cost value net assets Mortgage-backed securities: 3,201,246 Concentra Financial Services 1-May-19 1.883 $ 2,928 $ 2,977 2,741,000 Conexus Credit Union 1-Jun-19 2.023 2,266 2,305 1,126,000 ICICI Bank Canada 1-Jun-16 1.233 366 365 324,000 I.G. Investment Management Ltd. 1-Nov-18 2.050 254 257 1,428,000 I.G. Investment Management Ltd. 1-Feb-20 0.933 1,271 1,265 3,336,000 MCAP Service Corp. 1-Jul-20 1.183 3,269 3,253 9,067,000 Merrill Lynch Financial Assets Inc. 1-Aug-19 1.750 8,154 8,269 259,000 Merrill Lynch Financial Assets Inc. 1-Mar-20 1.863 236 233 5,676,000 Merrill Lynch Financial Assets Inc. 1-Aug-20 1.044 5,537 5,636 788,000 Merrill Lynch Financial Assets Inc. 7-May-21 6.673 367 370 24,648 24,930 5.54 Equities: Banks: 104,700 Bank of Montreal 6,794 8,175 183,200 Bank of Nova Scotia 10,248 10,254 101,725 Canadian Imperial Bank of Commerce 9,360 9,276 1,098,392 Firm Capital Property Trust 5,690 6,316 25,909 Tuckamore Capital Management Inc. 15 4 32,107 34,025 7.55 Consumer Durables and Apparel: 107,870 Dorel Industries Inc. - Class B 3,926 3,380 205,000 Macy’s Inc. 9,983 9,961 13,909 13,341 2.96 Diversified Financials: 106,200 JP Morgan Chase & Co. 6,430 9,741 2.16 Energy: 745,526 Cenovus Energy Inc. 15,352 13,047 738,800 Ensign Energy Services Inc. 7,302 5,452 136,100 Royal Dutch Shell PLC 9,760 8,657 176,616 Total SA 12,370 11,028 44,784 38,184 8.48 Food, Beverage & Tobacco: 93,000 Philip Morris International Inc. 9,407 11,357 2.52 Technology Hardware & Equipment: 243,685 Qualcomm Inc. 17,626 16,920 3.76

VPI INCOME POOL Schedule of Investments (continued) (In thousands of dollars, except for unit amounts) December 31, 2015 Number of Coupon units, shares Maturity rate Average Fair % of or par value Description date % cost value net assets Real estate: 628,400 NorthWest Healthcare Properties Real Estate Investment Trust $ 5,065 $ 5,611 1.25 Warrants: 4,783 Xplornet Communications Inc., Warrants^ 25-Oct-23 – – 3,349 Xplornet Communications Inc.,

Series B Warrants^ 15-May-17 – – 776 Xplornet Communications Inc., Warrants^ 15-May-17 – – – – – Summary: Corporate Bonds 274,416 276,203 61.33 Mortgage-backed securities 24,648 24,930 5.54 Equities 129,328 129,179 28.68 428,392 430,312 95.55 Transaction costs (66) – Total financial assets at FVTPL 428,326 430,312 95.55 Cash:

Domestic 21,252 21,252 Foreign 138 139

Total cash 21,390 21,391 4.75 Forward currency contracts (601) (0.13) Liabilities, net of other assets (772) (0.17) Total net assets attributable to holders of redeemable units $ 450,330 100.00

^ Level 3 Securities Forward currency contracts: The Pool has the following forward currency contract outstanding as at December 31, 2015: Currency to Fair value Currency Fair value Unrealized Expiry purchase Amount to purchase to deliver Amount to deliver gain (loss) date CAD $ 61,901 $ 61,901 USD $ 45,004 $ 62,502 $ (601) March 2016


VPI INCOME POOL Notes to Financial Statements (In thousands of dollars, except for unit amounts) Years ended December 31, 2015 and 2014

1. Reporting entity:

(a) VPI Income Pool (the Pool) is an open-ended mutual fund trust, established on September 26, 2005 by declaration of trust under the laws of the Province of Ontario. The registered office of the Pool is located at 400-305 Broadway, Winnipeg, Manitoba. The trustee of the Pool is RBC Investor Services Trust and the Manager of the Pool is Value Partners Investments Inc. (VPI or the Manager).

The Pool commenced operations on October 20, 2005 with one series of units: Series A. On July 3, 2007, the Pool began offering Series B and Series F units.

The Pool’s objective is to place a strong emphasis on avoiding material or long-term capital losses while investing in securities that provide a reasonable level of income and the potential for long-term capital growth. The Pool invests primarily in fixed income and equity securities that pay income.

(b) Redeemable units issued and outstanding are considered to be capital of the Pool. The Pool’s authorized capital consists of an unlimited number of units and series without par value. The number of outstanding units of each series is disclosed in the statements of financial position.

Series A units are subject to a negotiated sales commission payable by the investor at the time of purchase. Series B units are subject to a fixed sales commission payable by the Manager at the time of purchase. The investor is subject to a redemption fee if units are redeemed within three years of purchase. Series F units are only available to investors that have a fee-based account with a dealer that has signed a Series F agreement with the Manager.

Each series of units pays its proportionate share of common expenses of the Pool, in addition to expenses that are unique to that series. Distributions of each series may vary due to the differences in expenses between the series.

(c) Unitholders may redeem all or part of their units by delivering a written request to do so to the Manager or Trustee or to an investment dealer, securities dealer or mutual fund dealer for delivery to the Manager or Trustee. Units will be redeemed at the net asset value per unit as determined on the next valuation date. Requests for redemption received after 4.00 p.m., Toronto time, on any day are deemed to be received on the first business day following the date of the actual receipt.


2. Basis of preparation:

These financial statements have been prepared in compliance with International Financial Reporting Standards (IFRS) applicable to the preparation of annual financial statements.

The financial statements were authorized for issue by the Manager on behalf of the board of directors on February 18, 2016.

(a) Basis of measurement:

The financial statements have been prepared on an historical cost basis except for investments at fair value through profit or loss, which are measured at fair value.

(b) Functional and presentation currency:

These financial statements are presented in Canadian dollars, which is the Pool’s functional currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand.

(c) Use of estimates and judgments:

The preparation of the financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

The most significant judgments made by the Manager in preparing these financial statements is in determining the fair value of financial instruments not traded in an active market, if any, under IFRS 13 - Fair Value Measurement (IFRS 13).


3. Significant accounting policies:

The accounting policies set out below have been applied consistently to all periods presented in these financial statements.

(a) Financial instruments:

(i) Recognition and measurement:

Financial instruments are required to be classified into one of the following categories: fair value through profit or loss (FVTPL), available-for-sale, loans and receivables, held-to-maturity, and other financial liabilities. Financial instruments classified as FVTPL may either be held–for-trading or designated as FVTPL.

All financial instruments are measured at fair value on initial recognition. Measurement in subsequent periods depends on the classification of the financial instrument. Transaction costs are included in the initial carrying amount of financial instruments except for financial instruments classified as FVTPL, in which case transaction costs are expensed as incurred.

Financial instruments at FVTPL are recognized initially on the trade date, which is the date on which the Pool becomes a party to the contractual provisions of the instrument. Other financial assets and financial liabilities are recognized on the date on which they are originated. The Pool derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the statements of financial position only when the Pool has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

The Pool has not classified any of its financial instruments as available-for-sale or held to-maturity.

(ii) FVTPL:

Financial instruments classified as FVTPL are subsequently measured at fair value at each reporting period with changes in fair value recognized in the statements of comprehensive income in the period in which they occur. The Pool’s derivative financial assets and derivative financial liabilities are classified as held-for-trading. The Pool’s investments in securities are designated as FVTPL.

VPI INCOME POOL Notes to Financial Statements (continued) (In thousands of dollars, except for unit amounts) Years ended December 31, 2015 and 2014

3. Significant accounting policies (continued):

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and marketable securities) are based on quoted market prices at the close of trading on the reporting date. The Pool uses the last traded market price for both financial assets and financial liabilities where the last traded price falls within that day’s bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager determines the point within the bid-ask spread that is most representative of fair value based on the specific facts and circumstances. The Pool’s policy is to recognize transfers into and out of the fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer.

The fair value of financial assets and liabilities that are not traded in an active market, including derivative instruments, is determined using valuation techniques. Valuation techniques include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and others commonly used by market participants and which make the maximum use of observable inputs. Should the value of the financial asset or liability, in the opinion of the Manager, be inaccurate, unreliable or not readily available, the fair value is estimated on the basis of the most recently reported information of a similar financial asset or liability.

The Pool’s accounting policies for measuring the fair value of investments are consistent with those used for measuring its net asset value for transactions with unitholders.

(iii) Loans and receivables:

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent measurement of loans and receivables is at amortized cost using the effective interest method, less any impairment losses. Interest income is recognized by applying the effective interest rate. The Pool classifies cash and cash equivalents, accrued dividends receivable, accrued interest receivable for distribution purposes, and subscriptions receivable as loans and receivables.

The effective interest method is a method of calculating the amortized cost of a financial asset or liability and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments through the expected life of the financial asset or liability, or where appropriate, a shorter period.



At each reporting date, the Pool assesses whether there is objective evidence that a financial asset at amortized cost is impaired. If such evidence exists, the Pool recognizes an impairment loss as the difference between the amortized cost of the financial asset and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. Impairment losses on financial assets at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.

Cash and cash equivalents include cash on deposit from the custodian.

(iv) Other financial liabilities:

Other financial liabilities are initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method. The Pool’s other financial liabilities are comprised of accounts payable and accrued liabilities, redemptions payable, management fees payable, distributions payable and due to brokers.

(v) Forward currency contracts:

The value of a forward currency contract is the gain or loss that would be realized if, on the date that valuation is made, the positions were closed out. It is reflected in the statements of financial position as part of “forward currency contracts” and the change in value over the period is reflected in the statements of comprehensive income as part of “change in unrealized appreciation (depreciation) on forward currency contracts”. When the forward currency contracts are closed out, gains and losses are realized and are included in the “net realized gain (loss) on forward currency contracts” in the statements of comprehensive income.

(b) Redeemable units:

The Pool classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The Pool has multiple classes of redeemable units that do not have identical features and therefore, does not qualify as equity under IAS 32, Financial Instruments (IAS 32). The redeemable units, which are measured at the redemption amounts and are considered a residual amount of the net assets attributable to holders of redeemable units, provide investors with the right to require redemption, subject to available liquidity, for cash at a unit price based on the Pool’s valuation policies at each redemption date.



(c) Foreign currency:

The Pool’s subscriptions and redemptions are denominated in Canadian dollars, which is also its functional and presentation currency. Foreign denominated investments and other foreign denominated assets and liabilities are translated into Canadian dollars using the exchange rates prevailing on each valuation date. Purchases and sales of investments, as well as income and expense transactions denominated in foreign currencies, are translated using exchange rates prevailing on the date of the transaction. Foreign exchange gains and losses relating to cash are presented as ‘Foreign currency gain (loss) on cash’ and those relating to other financial assets and liabilities are presented within ‘Net realized gain’ and ‘Change in unrealized appreciation (depreciation)’ in the statements of comprehensive income.

(d) Investment transactions and revenue recognition:

Interest income for distribution purposes from investments in bonds and short-term investments represents the coupon interest received by the Pool accounted for on an accrual basis. The Pool does not use the effective interest method to amortize premiums paid or discounts received on the purchase of fixed-income securities. Dividend income is recognized on the date that the right to receive payment is established, which for quoted equity securities is usually the ex-dividend date. Portfolio transactions are recorded on the trade date. Realized gains and losses arising from the sale of investments are determined on the average cost basis of the respective investments.

(e) Increase (decrease) in net assets attributable to holders of redeemable units, per unit:

Increase (decrease) in net assets attributable to holders of redeemable units, per unit in the statements of comprehensive income represents the net increase (decrease) in the net assets from operations for each series for the period divided by the weighted average units outstanding for each series for the period.



(f) Income taxes:

As at December 31, 2015 and December 31, 2014, the Pool qualifies as a Mutual Fund Trust as defined in the Income Tax Act (Canada). Pursuant to the terms of the Declaration of Trust establishing the Pool, it is deemed to distribute annually to the unitholders all of the net taxable income, including net realized gains on sale of investments, and such distributions are immediately reinvested in units of the Pool.

In general, the Pool is subject to income tax, however no income tax is payable on net income and/or net realized capital gains which are distributed to unitholders. In addition, income taxes payable on net realized capital gains is refundable on a formula basis when units of the Pool are redeemed.

Capital losses are available to be carried forward indefinitely and applied against future capital gains. Non-capital losses that are realized in 2005 can be carried forward for ten years. Any non-capital losses that are realized in the taxation year 2006 and after may now be carried forward for 20 years and applied against future income and capital gains.

(g) New standards and interpretations not yet adopted:

IFRS 9, Financial Instruments (IFRS 9) will replace Internal Accounting Standard 39, Financial Instruments - Recognition and Measurement (IAS 39). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. The standard also includes guidance on the classification and measurement of financial liabilities. IFRS 9 is effective for fiscal years beginning on or after January 1, 2018. The Pool continues to evaluate the impact of IFRS 9 on its financial statements, particularly with regard to the recording of its investments.

On December 18, 2014, the IASB issued amendments to IAS 1 Presentation of Financial Statements as part of its major initiative to improve presentation and disclosure in financial reports (the “Disclosure Initiative”). The amendments are effective for annual periods beginning on or after 1 January 2016. Early adoption is permitted. These amendments will not require any significant change to current practice, but should facilitate improved financial statement disclosures. The Pool intends to adopt these amendments in its financial statements for the annual period beginning on January 1, 2016. The extent of the impact of adoption of the amendments has not yet been determined.


4. Management fees and expenses:

The Manager of the Pool is entitled to a monthly management fee from the Pool based on a percentage of the net asset value of the Pool as of the close of business on each business day calculated at the following annual rates:

Series A 1.80% Series B 2.00% Series F 0.90%

In addition to the management fee, the Pool pays its own operating expenses. These expenses include, but are not limited to audit, legal and filing fees, custodial, recordkeeping and trustee fees, transfer agent fees, investor servicing costs, taxes, compensation and expenses of the Independent Review Committee, and costs of unitholder reports, financial reporting, prospectuses, regulatory filings, and other communications. Brokerage commissions and transaction costs for buying and selling investments for the Pool’s portfolio are also paid by the Pool, as well as the costs and expenses related to holding any meeting convened by unitholders.

5. Related party transactions:

Related party balances of the Pool as at December 31, 2015 and December 31, 2014 are as follows:

2015 2014 Management fees payable $ 695 $ 465

Related party transactions of the Pool for the periods ended December 31, 2015 and 2014 are as follows:

2015 2014 Management fees $ 6,865 $ 3,771


5. Related party transactions (continued):

These transactions are in the normal course of operations and are measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.

As of December 31, 2015 and December 31, 2014, the Manager or parent company of the Manager held the following number of units in the Pool:

2015 2014 Series F 66,408 62,393

6. Brokerage commissions:

Commissions paid to brokers for portfolio transactions for the years ended December 31, 2015 and 2014 are disclosed in the statements of comprehensive income.

There were no soft dollar commissions paid during the years ended December 31, 2015 and 2014.

7. Income taxes:

As of December 31, 2015 and December 31, 2014 there are no capital or non-capital losses available for carry forward.

8. Financial risk management:

The investment activities of the Pool expose the Pool to various types of financial risks. The Manager seeks to minimize potential adverse effects of these risks on the Pool by contracting professional, experienced portfolio managers, by monitoring the Pool and market events on a daily basis, and by diversifying the investment portfolio within the parameters of the investment objective and strategy. The most significant risks include market risk (other price risk, interest rate risk and currency risk), credit risk and liquidity risk. These risks and related risk management practices employed by the Pool are discussed below:


8. Financial risk management (continued):

(i) Other price risk:

Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk), whether caused by factors specific to an individual investment, its issuer, or all factors affecting all instruments traded in a market or market segment. The maximum risk resulting from financial instruments held by the Pool is determined by the fair value of the financial instruments. The portfolio manager moderates this risk through a careful selection of securities within specified parameters established for the Pool.

For the Pool, the most significant exposure to other price risk arises from investments in equity securities. The following table shows the exposure of the Pool to equity securities and indicates the impact on net assets if the prices of the equity securities on the respective stock exchanges increased or decreased by 5 percent, with all other variables held constant.

Fair value % of net Impact on net Impact on net of equities assets assets ($) assets (%) As at December 31, 2015 $ 129,179 28.68% $ 6,459 1.44% As at December 31, 2014 76,227 27.33% 3,811 1.37%

(ii) Interest rate risk:

Interest rate risk arises on interest-bearing financial instruments such as bonds. The Pool is exposed to this risk to the extent that the value of interest-bearing financial instruments will fluctuate due to changes in the prevailing levels of market interest rates.

The tables below summarize the Pool’s exposure to interest rate risk. They include the Pool’s assets and trading liabilities at fair values, categorized by the earlier of contractual re-pricing or maturity dates.

Greater Non-

Less than 1 - 3 3 - 5 than interest As at December 31, 2015 1 year years years 5 years bearing Total

Financial assets at FVTPL $ 11,580 $ 60,801 $ 102,989 $ 125,763 $ 129,179 $ 430,312 Forward currency contracts $ - $ - $ - $ - $ (601) $ (601)



Greater Non-

Less than 1 - 3 3 - 5 than interest As at December 31, 2014 1 year years years 5 years bearing Total

Financial assets at FVTPL $ 11,114 $ 27,216 $ 70,929 $ 85,052 $ 76,227 $ 270,538

At December 31, 2015 and December 31, 2014, should interest rates have increased or decreased by 25 basis points, excluding cash and treasury bills and assuming a parallel shift in the yield curve, with all other variables held constant, net assets for each Pool would have approximately increased or decreased as indicated in the following table. The Pool’s sensitivity to interest rates was estimated using the weighted average duration of the bond portfolio.

Impact on Impact on (In thousands of dollars) net assets ($) net assets (%) As at December 31, 2015 $ 1,997 0.44% As at December 31, 2014 1,783 0.64%

(iii) Credit risk:

Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Pool. The Pool’s greatest concentration of credit risk is in debt securities such as bonds. The fair value of debt securities includes consideration of the credit worthiness of the debt issuer. The carrying amount of investments represents the maximum credit risk exposure as at December 31, 2015 and December 31, 2014.

All transactions in listed securities are settled/paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker.

The Fund may enter into forward currency contracts to buy and sell currencies for the purpose of settling foreign securities transactions. These are short-term spot settlements carried out with counterparties with a credit rating of at least “A.” The exposure to credit risk on these contracts is considered minimal as there are few contracts outstanding at any one time and the transactions are settled and paid for upon delivery.



Debt securities in the Pool by credit rating are as follows:

% of debt % of net As at December 31, 2015 securities assets AAA 14.27% 9.55% AA 7.43% 4.97% A 4.64% 3.10% BBB 16.72% 11.18% BB 24.78% 16.57% B 16.02% 10.71% N/R 16.14% 10.79%

100.00% 66.87%

% of debt % of net As at December 31, 2014 securities assets AAA 16.70% 11.62% AA 16.40% 11.42% A 4.84% 3.37% BBB 17.06% 11.88% BB 24.74% 17.23% B 7.59% 5.28% CCC 2.52% 1.76% N/R 10.15% 7.07%

100.00% 69.63%

(iv) Liquidity risk:

The Pool is exposed to liquidity risk to the extent that it is subject to daily cash redemptions of redeemable units. Therefore, the Pool invests the majority of their assets in investments that are traded in an active market and can be readily disposed. In addition, the Pool retains sufficient cash positions to maintain liquidity.



(v) Currency risk:

The Pool uses the Canadian dollar as its functional and reporting currency. Currency risk is the risk that financial instruments which are denominated or exchanged in a currency other than the Canadian dollar, the Pool’s reporting currency, will fluctuate due to changes in exchange rates. The Pool may enter into forward currency contracts to reduce its foreign currency exposure.

At December 31, 2015 and 2014, the Pool was exposed to the U.S dollar and the Euro. The following tables illustrate the potential impact to the Pool’s net assets, all other variables held constant, as a result of a 5 percent change in these currencies relative to the Canadian dollar and include the underlying principal of forward currency contracts, if any. Forward Foreign currency Net Impact on Impact on As at December 31, 2015 currencies ($) contract exposure net assets ($) net assets (%) Financial assets at FVTPL $ 188,153 $ (62,502) $ 125,651 $ 6,283 1.40% Cash 139 - 139 7 0.00% Other assets less liabilities 2,404 - 2,404 120 0.03% $ 190,696 $ (62,602) $ 128,194 $ 6,410 1.43%

Forward Foreign currency Net Impact on Impact on As at December 31, 2014 currencies ($) contract exposure net assets ($) net assets (%) Financial assets at FVTPL $ 94,563 $ - $ 94,563 $ 4,728 1.69% Cash 95 - 95 5 0.00% Other assets less liabilities 627 - 627 31 0.01% $ 95,285 $ - $ 95,285 $ 4,764 1.70%



(vi) Concentration risk:

Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product type, industry sector or counterparty type. The following is a summary of the Pool’s concentration risk:

Market segment December 31, December 31, Long 2015 2014 % %

Banks 7.91 4.34 Consumer durables and apparel 3.10 3.96 Corporate bonds 64.19 60.10 Diversified financials 2.27 2.85 Energy 8.87 8.93 Food, beverage and tobacco 2.64 4.79 Mortgage-backed securities 5.79 11.72 Retailing – 3.31 Real estate 1.30 – Technology hardware and equipment 3.93 – Total 100.00 100.00

9. Fair value disclosure:

(i) Valuation models:

The Pool’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Pool’s financial instruments are recorded at fair value or at amounts that approximate fair value in the financial statements. The Pool classifies fair value measurements within a hierarchy which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:


9. Fair value disclosure (continued):

Level 1: Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Manager has the ability to access at the measurement date.

Level 2: Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active.

Level 3: Inputs that are unobservable. There is little if any market activity. Inputs into the determination of fair value require significant management judgment or estimation.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Changes in valuation methods may result in transfers into, or out of, a financial instrument’s assigned level.

(ii) Fair value hierarchy - financial instruments measured at fair value:

The following tables present information about the Pool’s assets which are recorded at fair value on a recurring basis as of December 31, 2015 and December 31, 2014:

Financial assets and liabilities at fair value as at December 31, 2015:

Financial assets Level 1 Level 2 Level 3 Total Equities - long $ 127,856 $ 1,323 $ – $ 129,179 Bonds – 251,656 24,547 276,203 Mortgage-back securities – 24,930 – 24,930 $ 127,856 $ 277,909 $ 24,547 $ 430,312

Financial liabilities Level 1 Level 2 Level 3 Total Forward currency contract $ – $ (601) $ – $ (601) $ – $ (601) $ – $ (601)


9. Fair value disclosure (continued):

Financial assets and liabilities at fair value as at December 31, 2014:

Financial assets Level 1 Level 2 Level 3 Total Equities - long $ 71,873 $ 4,354 $ – $ 76,227 Bonds – 143,444 19,155 162,599 Mortgage-back securities – 31,712 – 31,712 $ 71,873 $ 179,510 $ 19,155 $ 270,538

There were no financial liabilities at fair value as at December 31, 2014.

Level 3 securities have been valued based upon third party broker quotes provided without a range.

For the years ended December 31, 2015 and December 31, 2014, there were no transfers between levels. The financial instruments not measured at FVTPL are short-term financial assets and financial liabilities whose carrying amounts approximate fair value.

Reconciliation of Level 3:

For the year ended December 31, 2015:

Balance at Net Realized Unrealized Balance at December 31, transfers gain gain December 31, 2014 Purchases Sales In (out) (loss) (loss) 2015 Bonds $ 19,155 $ 3,745 $ – $ – $ – $ 1,647 $ 24,547

For the year ended December 31, 2014:

Balance at Net Realized Unrealized Balance at December 31, transfers gain gain December 31, 2013 Purchases Sales In (out) (loss) (loss) 2014 Bonds $ – $ 19,454 $ – $ – $ – $ (299) $ 19,155

Change in unrealized gain (loss) related to Level 3 investments held at December 31, 2015 was $1,946.

Value Partners Investments - VPI INCOME POOL · 2015 2014 Cash flows from (used) in operating...

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