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Note 24 - Financial Instruments
 12 Months Ended
Dec. 31, 2023
Notes to Financial Statements  
Financial Instruments Disclosure [Text Block]

24.      Financial instruments

 

Concentration of credit risk

The Company is subject to credit risk with respect to its cash and cash equivalents, accounts receivable, contract assets, other receivables and advisor loans receivable. Concentrations of credit risk with respect to cash and cash equivalents are limited by the use of multiple large and reputable banks. Concentrations of credit risk with respect to receivables are limited due to the large number of entities comprising the Company’s customer base and other counterparties, and their dispersion across different service lines in various countries.

 

Foreign currency risk

Foreign currency risk is related to the portion of the Company’s business transactions denominated in currencies other than US dollars. A significant portion of revenue is generated by the Company’s Canadian, Australian, UK and Euro currency operations. The Company’s head office expenses are incurred primarily in Canadian dollars which are hedged by Canadian dollar denominated revenue.

 

Fluctuations in foreign currencies impact the amount of total assets and liabilities that are reported for foreign subsidiaries upon the translation of these amounts into US dollars. In particular, the amount of cash, working capital, goodwill and intangibles held by these subsidiaries is subject to translation variance caused by changes in foreign currency exchange rates as of the end of each respective reporting period (the offset to which is recorded to accumulated other comprehensive income on the consolidated balance sheets).

 

Interest rate risk

The Company utilizes an interest rate risk management strategy that may use interest rate hedging contracts from time to time. The Company’s specific goals are to: (i) manage interest rate sensitivity by modifying the characteristics of its debt and (ii) lower the long-term cost of its borrowed funds.

 

Fair values of financial instruments

The following table provides the financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2023:

 

  

Level 1

  

Level 2

  

Level 3

 

Assets

            

Cash equivalents

 $3,753  $-  $- 

Equity securities

  5,049   12   - 

Debt securities

  -   19,176   - 

Mortgage derivative assets

  -   -   14,224 

Warehouse receivables

  -   177,104   - 

Interest rate swap assets

  -   4,275   - 

Deferred Purchase Price on AR Facility

  -   -   107,743 

Total assets

 $8,802  $200,567  $121,967 
             

Liabilities

            

Mortgage derivative liabilities

 $-  $-  $10,547 

Interest rate swap liabilities

  -   1,470   - 

Contingent consideration liabilities

  -   -   44,712 

Total liabilities

 $-  $1,470  $55,259 

 

Other than the assets and liabilities acquired in relation to business combinations (see note 4), there were no significant non-recurring fair value measurements recorded during the twelve months ended December 31, 2023.

 

Cash equivalents

Cash equivalents include highly liquid investments with original maturities of less than three months. Actively traded cash equivalents where a quoted price is readily available are classified as Level 1 in the fair value hierarchy.

 

Debt and equity securities

The Company records debt and equity securities at fair value on the consolidated balance sheets. These financial instruments are valued based on observable market data that may include quoted market prices dealer quotes, market spreads, cash flows, the US Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instruments’ terms and conditions and are classified as Level 2 of the fair value hierarchy.

 

Certain investments in equity securities where quoted prices are readily available are classified as Level 1 in the fair value hierarchy. The Company increases or decreases its investment each reporting period by the change in the fair value of the investment reported in net earnings on the consolidated statements of earnings.

 

Mortgage-related derivatives

Interest rate lock commitments and forward sale commitments are derivative instruments which use a discounted cash flow model and consider observable market data in determining their fair values, particularly changes in interest rates. In the case of interest rate lock commitments, the fair value measurement also considers the expected net cash flows associated with the servicing of the loans. The Company also considers the impact of unobservable inputs related to counterparty non-performance risk when measuring the fair value of these derivatives. Therefore, these mortgage-related derivatives are categorized as Level 3. The mortgage-related derivative assets and liabilities are included in Prepaid expenses and other current assets and Accounts payable and accrued expenses, respectively, on the consolidated balance sheets.

 

Given the credit quality of the Company’s counterparties, the short duration of interest rate lock commitments and forward sale commitments and the Company’s historical experience, management does not believe the risk of non-performance is significant. An increase in counterparty non-performance risk assumptions would result in a lower fair value measurement.

 

Changes in the fair value of the net mortgage derivative assets and liabilities comprises the following:

 

  

2023

 

Balance, January 1

 $6,949 

Settlements

  (31,919)

Realized gains recorded in earnings

  24,970 

Unrealized gains recorded in earnings

  3,677 

Balance, December 31

 $3,677 

 

Warehouse receivables

Warehouse receivables represent mortgage loans originated by the Company with commitments to sell to third party investors. Principal funded on mortgage loans plus gains attributable to the fair value of mortgage premiums and origination fees increase warehouse receivables and proceeds received from the sale of mortgage loans to third party investors reduce warehouse receivables. As at December 31, 2023, all warehouse facility liabilities are supported by mortgage warehouse receivables which are under commitment to be purchased by a qualifying investor. These assets are classified as Level 2 in the fair value hierarchy as a substantial majority of the inputs are readily observable.

 

AR Facility deferred purchase price (“DPP”)

The Company recorded a DPP under its AR Facility. The DPP represents the difference between the fair value of the Receivables sold and the cash purchase price and is recognized at fair value as part of the sale transaction. The DPP is remeasured each reporting period in order to account for activity during the period, including the seller’s interest in any newly transferred Receivables, collections on previously transferred Receivables attributable to the DPP and changes in estimates for credit losses. Changes in the DPP attributed to changes in estimates for credit losses are expected to be immaterial, as the underlying Receivables are short-term and of high credit quality. The DPP is valued using Level 3 inputs, primarily discounted cash flows, with the significant inputs being discount rates ranging from 2.5% to 5.0% depending upon the aging of the Receivables. See note 16 for information on the AR Facility.

 

Changes in the fair value of the DPP comprises the following:

 

  

2023

  

2022

 

Balance, January 1

 $92,278  $238,835 

Additions to DPP

  139,065   143,579 

Collections on DPP

  (124,313)  (288,004)

Fair value adjustment

  129   (78)

Foreign exchange and other

  584   (2,054)

Balance, December 31

 $107,743  $92,278 

 

Interest rate swaps

The Company has entered into interest rate swap agreements (“IRS”) to convert floating interest on US dollar denominated debt to fixed interest rates. The interest rate swaps are measured at fair value and are included in Other assets on the consolidated balance sheets. The table below summarizes the details of the interest rate swaps in place as at December 31, 2023.

 

 

Effective

Maturity

 

Notional Amount

 

Interest rates

 
 

Date

Date

 

of US dollar debt

 

Floating

 

Fixed

 

2022 IRS A

July 15, 2022

May 27, 2027

 $150,000 

SOFR

  2.8020%

2022 IRS B

December 21, 2022

May 27, 2027

 $250,000 

SOFR

  3.5920%

2023 IRS A

April 28, 2023

May 27, 2027

 $100,000 

SOFR

  3.7250%

2023 IRS B

December 5, 2023

May 27, 2027

 $100,000 

SOFR

  4.0000%

 

2022 IRS A, 2022 IRS B, 2023 IRS A and 2023 IRS B (collectively the “Designated IRSs”) are being accounted for as cash flow hedges and are measured at fair value on the consolidated balance sheets. Gains or losses on the Designated IRSs, which are determined to be effective as hedges, are reported in accumulated other comprehensive income (“AOCI”).

 

In the year ended December 31, 2023, $825 of the AOCI, was included in interest expense on the consolidated statements of earnings (2022 - $2,510) associated with an IRS that was entered into in December 2018 and which was dedesignated as a hedging relationship on July 1, 2021. This IRS matured on April 30, 2023.

 

Contingent acquisition consideration

The inputs to the measurement of the fair value of contingent consideration related to acquisitions are Level 3 inputs. The fair value measurements were made using a discounted cash flow model; significant model inputs were expected future operating cash flows (determined with reference to each specific acquired business) and discount rates (which range from 3.5% to 10.3%, with a weighted average of 5.9%). The wide range of discount rates is attributable to the level of risk related to economic growth factors combined with the length of the contingent payment periods; and the dispersion was driven by unique characteristics of the businesses acquired and the respective terms for these contingent payments. A 2% increase in the weighted average discount rate would reduce the fair value of contingent consideration by $1,000. See note 4 for discussion on contingent acquisition consideration.

 

Changes in the fair value of the contingent consideration liability comprises the following:

 

  

2023

  

2022

 

Balance, January 1

 $91,229  $154,671 

Amounts recognized on acquisitions

  3,962   57,600 

Fair value adjustments (note 7)

  (17,698)  3,700 

Resolved and settled in cash

  (34,475)  (123,629)

Other

  1,694   (1,113)

Balance, December 31

 $44,712  $91,229 
         

Less: current portion

 $13,944  $42,942 

Non-current portion

 $30,768  $48,287 

 

The carrying amounts for cash, restricted cash, accounts receivable, accounts payable, advisor loans, other receivables and accrued liabilities approximate their estimated fair values due to the short-term nature of these instruments, unless otherwise indicated. The carrying value of the Company’s Revolving Credit Facility and other short-term borrowings approximate their estimated fair value due to their short-term nature and variable interest rate terms. These fair value measurements use a net present value approach; significant model inputs were expected future cash outflows and discount rates which are Level 3 inputs within the fair value hierarchy.

 

The carrying amount and the estimated fair value of Senior Notes and Convertible Notes are presented in the table below. Interest rate yield curves, interest rate indices and market prices (Level 2 inputs within the fair value hierarchy) are used in determining the fair value of the Senior Notes and Convertible Notes.

 

  

December 31, 2023

  

December 31, 2022

 
  

Carrying

  

Fair

  

Carrying

  

Fair

 
  

amount

  

value

  

amount

  

value

 

Senior Notes

 $518,982  $458,377  $506,533  $414,195 

Convertible Notes

  -   -   226,534   366,183