Brookfield Asset Management (BAM) 40-F2021 FY Annual report (Canada)

MANAGEMENT’S

DISCUSSION AND ANALYSIS

ORGANIZATION OF MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This Report contains “forward-looking information” within the meaning of Canadian provincial securities laws and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and in any applicable Canadian securities regulations. We may provide such information and make such statements in the Report, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission or in other communications. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements which reflects management’s expectations regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of the Corporation and its subsidiaries, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”

Although we believe that our anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information contained in this Report. The statements and information involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which may cause the actual results, performance or achievements of the company to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.

Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: (i) investment returns that are lower than target; (ii) the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business, including as a result of COVID-19 and the related global economic disruptions; (iii) the behavior of financial markets, including fluctuations in interest and foreign exchange rates; (iv) global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; (v) strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; (vi) changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); (vii) the ability to appropriately manage human capital; (viii) the effect of applying future accounting changes; (ix) business competition; (x) operational and reputational risks; (xi) technological change; (xii) changes in government regulation and legislation within the countries in which we operate; (xiii) governmental investigations; (xiv) litigation; (xv) changes in tax laws; (xvi) ability to collect amounts owed; (xvii) catastrophic events, such as earthquakes, hurricanes, or pandemics/epidemics; (xviii) the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; (xix) the introduction, withdrawal, success and timing of business initiatives and strategies; (xx) the failure of effective disclosure controls and procedures and internal controls over financial reporting and other risks; (xxi) health, safety and environmental risks; (xxii) the maintenance of adequate insurance coverage; (xxiii) the existence of information barriers between certain businesses within our asset management operations; (xxiv) risks specific to our business segments including our real estate, renewable power and transition, infrastructure, private equity, and other alternatives, including credit; and (xxv) factors detailed from time to time in our documents filed with the securities regulators in Canada and the United States, including in “Part 6 – Business Environment and Risks” of our Annual Report available on SEDAR at www.sedar.com and EDGAR at www.sec.gov.

We caution that the foregoing list of important factors that may affect future results is not exhaustive. Readers are urged to consider the foregoing risks, as well as other uncertainties, factors and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-looking information. Except as required by law, the Corporation undertakes no obligation to publicly update or revise any forward-looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.

STATEMENT REGARDING USE OF NON-IFRS MEASURES

We disclose a number of financial measures in this Report that are calculated and presented using methodologies other than in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). We utilize these measures in managing the business, including for performance measurement, capital allocation and valuation purposes and believe that providing these performance measures on a supplemental basis to our IFRS results is helpful to investors in assessing the overall performance of our businesses. These financial measures should not be considered as the sole measure of our performance and should not be considered in isolation from, or as a substitute for, similar financial measures calculated in accordance with IFRS. We caution readers that these non-IFRS financial measures or other financial metrics may differ from the calculations disclosed by other businesses and, as a result, may not be comparable to similar measures presented by other issuers and entities. Reconciliations of these non-IFRS financial measures to the most directly comparable financial measures calculated and presented in accordance with IFRS, where applicable, are included within this Report. Please refer to our Glossary of Terms beginning on page 136 for all non-IFRS measures.

ASSET MANAGEMENT

We manage and earn fees on a diverse range of renewable power and transition, infrastructure, private equity, real estate and credit funds. These funds have a long duration, are closed-end and include opportunistic, value-add, core and core plus investment strategies.

On long-term private fund capital, we earn:

INVESTED CAPITAL

We have approximately $68 billion of invested capital on our balance sheet as a result of our history as an owner and operator of real assets. This capital provides attractive financial returns and important stability and flexibility to our asset management business.

Refer to Parts 2 and 3 of this MD&A for more information on our operations and performance.

We have three distinct competitive advantages that enable us to consistently identify and acquire high-quality assets and create significant value in the assets that we own and operate.

LARGE-SCALE CAPITAL

We have approximately $690 billion in assets under management.

We offer our investors a large portfolio of private funds that have global mandates and diversified strategies. Our access to large-scale, flexible capital enables us to pursue transactions of a size that lessens competition. In addition, investing significant amounts of our own capital either through our perpetual affiliates or through our own balance sheet ensures strong alignment of interest with our investors.

GLOBAL REACH

We operate in more than 30 countries on five continents around the world.

Our global reach allows us to diversify and identify a broad range of opportunities. We are able to invest where capital is scarce, and our scale enables us to move quickly and pursue multiple opportunities across different markets. Our global reach also allows us to operate our assets more effectively: we believe that a strong on-the-ground presence is critical to operating successfully in many of our markets, and many of our businesses are truly local. Furthermore, the combination of our strong local presence and global reach allows us to bring global relationships and operating practices to bear across markets to enhance returns.

APPROACH TO CAPITALIZATION

We maintain a prudent level of long-dated capitalization in the form of common equity, perpetual preferred shares and corporate bonds, which provides a very stable capital structure. In addition, we maintain appropriate levels of liquidity throughout the organization to fund operating, development and investment activities as well as unforeseen requirements.

A key element of our capital strategy is to maintain significant liquidity at the corporate level, primarily in the form of cash, financial assets and undrawn credit lines. 

Within our perpetual affiliates and private funds, we strive to:

As at December 31, 2021, only $10.9 billion of long-term debt has recourse to the Corporation. The remaining debt on our consolidated balance sheet is held within managed entities and has no recourse to the Corporation but is consolidated under IFRS.

LIQUIDITY

CAPITAL MANAGEMENT

We utilize a metric we call the Corporation’s Capital to manage the business in a number of ways, including operating performance, value creation, credit metrics and capital efficiency. The performance of the Corporation’s Capital is closely tracked and monitored by the company’s key management personnel and evaluated against management’s objectives. The primary goal of the company is to earn a 12-15% return compounded over the long-term while always maintaining excess capital to support ongoing operations.

The Corporation’s Capital consists of the capital invested in its asset management activities, including investments in entities that it manages, its corporate investments that are held outside of managed entities and its net working capital, and is computed as follows:

The Corporation’s Capital is funded with common equity, preferred equity and corporate borrowings issued by the Corporation.

The remaining 94% of our consolidated debt is non-recourse and is held within managed entities and has virtually no cross-collateralization or parental guarantees by the Corporation.

The following table presents our total capitalization on a corporate and consolidated basis. Total capitalization also includes amounts payable under long-term incentive plans, fixed annuity liabilities fully backed by financial asset portfolios, deferred tax liabilities and other working capital balances:

CASH FLOW GENERATION FROM OUR CAPITAL

Our Corporation’s Capital generates significant, recurring cash flows at the corporate level, which may be used for (i) reinvestment into the business; or (ii) returning cash to shareholders. These cash flows are underpinned by:

These cash flows are supplemented with carried interest as we monetize mature investments and return capital to our investors.

FOCUS ON RISK CULTURE

A strong risk culture is the cornerstone of our risk management program: one that promotes measured and appropriate risk-taking, addresses current and emerging risks and ensures employees conduct business with a long-term perspective and in a sustainable and ethical manner. This culture is reinforced by strong commitment and leadership from our senior executives, as well as the policies and practices we have implemented, including our compensation approach.

SHARED EXECUTION

Given the diversified and decentralized nature of our operations, we seek to ensure that risk is managed as close to its source as possible and by the management teams that have the most knowledge and expertise in the specific

business or risk area. As such, business specific risks—such as safety, environmental and other operational risks—are generally managed at the operating business level, as the risks vary based on the nature of each business. At the same time, we monitor key risks organization-wide to ensure adequacy of risk management, adherence to applicable Brookfield policies, and sharing of best practices.

For risks that are more pervasive and correlated in their impact across the organization—such as liquidity, foreign exchange and interest rates or where we can bring specialized knowledge—we utilize a coordinated approach that is centralized amongst our corporate and business groups. Management of strategic, reputational and regulatory compliance risks are similarly coordinated to ensure consistent focus and implementation across the organization.

We have implemented strong governance practices to monitor and oversee our risk management program. Management committees bring together required expertise to manage key risk areas, ensuring appropriate application and coordination of approaches and practices across our business and functional groups, and include the following:

ESG AT BROOKFIELD

Our business philosophy is based on our conviction that acting responsibly toward our stakeholders is foundational to operating a productive, profitable and sustainable business, and that value creation and sustainable development are complementary goals. This view has been underpinned by what we have learned throughout our 100+ year heritage as an owner and operator of long-term assets, many of which form the backbone of the global economy. Our long-term focus lends itself to implementing robust ESG programs throughout our asset management business and underlying operations, which has always been a key priority for us.

All investments made by Brookfield must be approved by the applicable Investment Committee, which makes its decision based on a set of predetermined criteria. To facilitate this, investment teams outline for the Committee the

merits of the transaction and material risks, mitigants and significant opportunities for improvement, including those related to ESG, such as bribery and corruption risks, health and safety risks, and environmental and social risks.

As part of each acquisition, investment teams create a tailored integration plan that includes, among other things, material ESG-related matters for review or execution. Brookfield looks to advance ESG initiatives and improve ESG performance to drive long-term value creation, as well as to manage any associated risks. This is because we have witnessed and continue to see a strong correlation between managing these considerations and enhancing investment returns. It is the responsibility of the management teams within each portfolio company to manage ESG risks and opportunities through the investment’s life cycle, supported by the applicable investment team. The combination of having local accountability and expertise in tandem with Brookfield’s investment and operating capabilities is important when managing a wide range of asset types across jurisdictions.

When preparing an asset for divestiture, we create robust business plans outlining potential value creation deriving from several different factors, including ESG considerations. We also prepare both qualitative and quantitative data that summarize the ESG performance of the investment and provide a holistic understanding of how Brookfield has managed the investment during the holding period.

Below is a summary of some of the ESG initiatives that we undertook in 2021. For additional information, please refer to Brookfield’s latest ESG report, which is available on the Responsibility page at brookfield.com.

ENVIRONMENTAL

We support the goal of net zero greenhouse gas (“GHG”) emissions by 2050 or sooner. We believe that the transition to net zero represents an enormous investment opportunity estimated at $3.5–$5.0 trillion annually and will require large economic adjustments and potential rewiring of virtually every industry. We are committed to doing our part to support the global decarbonization effort.

To formalize our support, in March 2021, Brookfield became a signatory to the Net Zero Asset Managers (“NZAM”) initiative. As part of joining this initiative, we will (i) work on decarbonization goals, consistent with an ambition to reach net-zero emissions by 2050 or sooner across all assets under management; (ii) set an interim target of a specific proportion of our assets to be managed in line with net zero, with targeted emissions reduction by 2030; and (iii) review this interim target at least every five years, with a view to increasing the proportion of AUM covered until 100% of assets are included. As an initial step, we are working on creating a consistent GHG emissions inventory across our portfolio companies and are in the process of setting an interim target that outlines the proportion of assets to be managed in line with net zero by 2030.

We believe many of our operating businesses are well-positioned to play a critical role in the transition to net zero. We are one of the largest pure-play global owners and operators of hydroelectric, wind and solar power generation facilities, and we have a significant development portfolio. In addition, we are one of the world’s largest owners of real estate, and the majority of our office and retail assets have earned green building certificates, thereby meeting stringent environmental sustainability standards. Finally, our infrastructure and private equity businesses encompass a diverse range of assets, many of which not only help form the backbone of the global economy but are well positioned to generate positive environmental outcomes.

In 2021, we launched the Brookfield Global Transition Fund, Brookfield’s first dedicated impact fund, which will invest in the global transition to net zero. Specifically, the fund will focus on investments that contribute to the decarbonization of the global economy across three main themes: (i) new-build renewable power generation and related technologies that provide additional capacity to the energy mix; (ii) business transformation of companies in industries, such as steel, cement and chemicals, which require both renewable power generation to lower their carbon footprint and capital to decarbonize their production processes; and (iii) the provision of capital to electricity generators to enable them to shift from coal to gas and from gas to renewables. We are in the final stages of closing this $15 billion fund and have already started putting capital to work.

We have continued to be active in the sustainable finance market, with issuances in 2021 reaching $8 billion across green bonds and hybrid securities, sustainability-linked debt and sustainability-linked loans, up from $3.6 billion in 2020. We also published the Brookfield Asset Management Green Bond and Preferred Securities Framework, which lays out the process for evaluating and selecting the eligible investments, the use and management of the proceeds, and the reporting frequency and format.

In 2021, we became supporters of the TCFD, and many of the above-mentioned initiatives also relate to our continued effort to align with the TCFD recommendations. This applies to embedding climate change considerations into our strategy through our net-zero commitment, our sustainable financing efforts and the launch of our inaugural transition fund. In addition, in 2021 we also undertook a climate risk assessment to better understand the potential physical and transition risks, as well as opportunities, across all our businesses. We are leveraging those results to identify ways to improve our approach to climate change mitigation and adaptation and continue to integrate these considerations into our business and investment strategies.

Finally, we continue to align our business with the TCFD recommendations and are targeting to publish TCFD disclosures for the 2022 fiscal year in 2023.

SOCIAL

We recognize that our people drive our success. Developing our 2,300 asset management employees and ensuring their continued engagement is one of our top priorities. We aim to create an environment that is built on strong relationships and conducive to developing our workforce, and where individuals from diverse backgrounds can thrive. In 2021, we continued to work on ensuring that our talent attraction and retention efforts and our diversity, equity and inclusion efforts are in line with best practices.

Our approach to diversity, equity and inclusion has been deliberate and is integrated into our human capital development processes and initiatives. Specifically, over the last five years, we have more than doubled our employee population and during this period we have increased our female representation at the most senior levels of the organization by 140%; female representation among managing partners/managing directors increased from 7% to 19%, and among senior vice presidents from 15% to 33%.

Further, in 2021, we launched a global process for employees to self-identify their ethnicity. This information will assist us in identifying specific areas of focus related to increasing ethnic diversity. Our response rate in countries with more than 100 employees (U.S., Canada, Australia, the U.K. and Brazil) was 92%. These results demonstrate our current state of diversity:

Having a diverse workforce reinforces our culture of collaboration and strengthens our ability to develop team members and maintain an engaged workforce. We seek to foster a diverse and inclusive workplace by ensuring our leaders understand their role in creating an inclusive environment and by maintaining a focus on disciplined talent management processes that seek to mitigate the impact of unconscious bias. We believe that these priorities are foundational to our success in enhancing diversity and inclusion within our workplace, where career advancement is

directly tied to performance and to alignment with our values of making decisions with intense collaboration and a long-term focus.

Occupational health and safety continues to be integral to how we manage our businesses. As health and safety risk varies across industries, sectors, and the nature of operations, we emphasize the importance of our operating businesses having direct accountability and responsibility for managing and reporting risks within their operations, with Brookfield providing support and strategic oversight at the business’ board (or similarly situated governance body.) For details on our health and safety framework, as it relates to our operating businesses, please refer to Brookfield’s latest ESG report.

Our approach to addressing modern slavery is designed to be commensurate with the risks we face, which vary based on jurisdiction, industry and sector. In 2021, we expanded our U.K. modern slavery and human trafficking policy to a global modern slavery policy that covers all Brookfield entities and provides guidance on measures to prevent and detect modern slavery. In addition, we have several other policies and procedures that provide guidance on the identification of modern slavery risks and the steps to be taken to mitigate these risks. These include our Code of Conduct, Vendor Management Guidelines, ESG Due Diligence Guidelines, ABC Program, Anti-Money Laundering Program and Whistleblowing Program. Our portfolio companies’ senior management teams are each responsible for identifying and managing the modern slavery and human rights risks for their individual businesses.

Employees in certain jurisdictions and functions receive modern slavery training as part of the onboarding process and access ongoing training, as necessary. In particular, we regularly train employees involved in higher-risk functions, such as procurement. We also encourage employees, suppliers and business partners to report concerns in accordance with our Whistleblowing Policy.

We are cognizant of the fact that the risks of modern slavery and human trafficking are complex and evolving, and we will continue to work on addressing these risks in our business.

The pandemic placed high demands on all of our people, requiring close coordination across the organization, increased communication with investors and employees, and deep engagement with communities and other stakeholders around the world. Over this period, our experience reinforced for us what we consider to be the core strengths of Brookfield: adhering to a business model that supports resilience, keeping a long-term perspective—especially during periods of uncertainty and volatility—maintaining a collaborative corporate culture, and putting our assets and resources to good use for the community. It will likely take years to understand the full extent of the pandemic’s global impact; however, we believe that we have emerged more resilient, more flexible and, in some ways, more connected than ever.

GOVERNANCE

We recognize that strong governance is essential to sustainable business operations, and we aim to conduct our business according to the highest ethical and legal standards.

In 2021, Brookfield formally established Proxy Voting Guidelines, which apply when Brookfield votes proxies for its own accounts and those of its clients. These guidelines ensure that we vote in our investors’ best interests, in accordance with any applicable proxy voting agreements and consistent with the investment mandate. While our public securities holdings are modest relative to our assets under management, we considered it important to formally record the variety of ESG factors that we assess in determining whether voting a proxy is in the client’s best interests, including gender equality, board diversity, ecology and sustainability, climate change, ethics, human rights,

and data security and privacy. As part of our Proxy Voting Guidelines, Brookfield has created a Proxy Voting Committee that comprises senior executives across Brookfield and oversees proxy voting across our holdings.

We aim to uphold strong governance practices, and we actively monitor proposed and evolving ESG legislation, regulation and market practices in all jurisdictions in which we operate. This includes, for example, the EU Sustainable Finance Disclosure Regulation and EU Taxonomy Regulation as well as the newly announced International Sustainability Standards Board. We seek to continuously improve and refine our processes by actively participating in the development and implementation of new industry standards and best practices.

Data privacy and cybersecurity remain key ESG focus areas for us. In 2022, we undertook initiatives to further enhance our data protection and threat-intelligence capabilities, and we worked on improving our processes for third-party risk management. We review and update our cybersecurity program annually and conduct regular external-party assessments of our program maturity based on the NIST Cybersecurity Framework. The results of the NIST Cybersecurity Maturity Assessment conducted in 2021 validated the strength of our program. Finally, in addition to continued mandatory cybersecurity education for all employees, we enhanced our phishing simulations to include social engineering.

Finally, we continue to align our business practices with leading frameworks for responsible investing and are an active participant in industry forums and other organizations. We are a signatory to the United Nations-supported Principles for Responsible Investment (“PRI”), which demonstrates our ongoing commitment to responsible investment and ESG best practices. As a participant in organizations like the PRI, the TCFD and NZAM, we are committed to ongoing engagement and stewardship and the promotion of leading ESG practices—both with our portfolio companies and with the broader asset management industry—that are designed to enhance the value of our assets and businesses. In addition, through our membership in these organizations and other industry forums, we remain actively involved in discussions aimed at advancing ESG awareness across private and public markets and enhance our reporting and protocols in line with evolving best practices.

The following section contains a discussion and analysis of line items presented within our consolidated financial statements. The financial data in this section has been prepared in accordance with IFRS. Starting on page 55 we provide an overview of our fair value accounting process and why we believe it provides useful information for investors about our performance. We also provide an overview of our application of the control-based model under IFRS used to determine whether or not an investment should be consolidated.

During 2021, our operating performance was strong, with most of our businesses generating solid financial results. The market environment was strong and continues to get stronger in most, if not all, of the key markets that we operate in.

Net income was $12.4 billion in the current year, with $4.0 billion attributable to common shareholders ($2.39 per share) and the remaining income attributable to non-controlling interests.

The $11.7 billion increase in consolidated net income and the $4.1 billion increase in net income attributable to common shareholders were primarily attributable to:

The following table summarizes the financial results of the company for 2021, 2020 and 2019:

2021 vs. 2020

Revenues for the year were $75.7 billion, an increase of $13.0 billion or 21% compared to 2020, primarily due to the recovery from the pandemic related economic shutdowns in 2020, including:

A discussion of the impact on revenues and net income from recent acquisitions and dispositions can be found on page 45.

Direct costs increased by 20% or $10.8 billion primarily due to:

Other income and gains of $3.1 billion primarily relate to the sale of our Canadian and U.S. district energy operations in our Infrastructure segment.

Equity accounted income increased by $2.5 billion primarily due to:

Interest expense of $7.6 billion increased by $391 million due to additional borrowings associated with acquisitions, partially offset by the impact of dispositions and the refinancing of debt across our operations.

We recorded fair value gains of $5.2 billion, compared to losses of $1.4 billion in the prior year, primarily as a result of valuation gains on our LP investments, partially offset by valuation losses of certain retail portfolios across our real estate business. Refer to pages 46 and 47 for a discussion on fair value changes.

We recorded an income tax expense of $2.3 billion for the year compared to $837 million in the prior year mainly due to an increase in tax rates in the U.K. and Colombia, higher taxable income and the tax impact of the aforementioned fair value uplifts.

2020 vs. 2019

Revenues decreased by $5.1 billion in 2020 primarily due to the impact of the economic shutdowns, including lower volumes and lower contributions at our road fuels operations and our construction operations within our Private Equity segment, respectively. These decreases also related to lower revenues at our hospitality assets within our Real Estate segment as a result of reduced occupancy levels, partially offset by a full year of contributions from acquisitions completed in 2019, including businesses acquired within our Private Equity segment, and acquisitions completed in 2020. Furthermore, the benefits of organic growth within our Infrastructure segment, net of the foreign exchange impact, contributed to our revenues in 2020.

Other income and gains of $785 million in 2020 primarily relate to the sales of our cold storage logistics business and the pathology business within our healthcare service operations in our Private Equity segment, as well as the sale of our self-storage business in our Real Estate segment.

Equity accounted income decreased from $2.5 billion to a loss of $79 million. This decrease primarily related to valuation losses in our real estate retail portfolio as a result of adjusted discounted cash flows in light of the economic shutdown, partially offset by a deferred tax recovery at our Brazilian data center operations in our Infrastructure segment and strong operating performance at Norbord.

Interest expense of $7.2 billion remained consistent in 2020 versus 2019 as the benefits from lower interest rates on issued borrowings and our variable rate debt held at our real estate operations were partially offset by additional interest expense paid on new debt offerings.

Income tax expense increased by $342 million to $837 million in 2020, primarily due to the absence of the 2019 deferred income tax recovery of $475 million, related to the recognition of deferred tax assets due to the projected utilization of net operating loss carryforwards.

ACQUISITIONS

Acquisitions in 2021 and 2020 contributed incremental revenues and net income of $4.5 billion and $651 million, respectively, in the current year.

Within our Renewable Power and Transition segment, recent acquisitions contributed to incremental revenues and net income of $205 million and $24 million, respectively. These contributions were primarily due to the acquisitions of a distributed generation platform and a wind portfolio in the U.S. in the first quarter of 2021.

Within our Private Equity segment, recent acquisitions contributed to incremental revenues of $1.7 billion and net loss of $12 million. These contributions and net loss were primarily from acquisitions of a technology services operation, a solar power solutions operation and an engineered components manufacturer in the first, third and fourth quarter of 2021, respectively.

DISPOSITIONS

The following table disaggregates fair value changes into major components to facilitate analysis: 

INVESTMENT PROPERTIES

Investment properties are recorded at fair value with changes recorded in net income. We present the investment properties of our Real Estate segment within three sub-segments. The sub-segments are based on our strategy to maintain an irreplaceable portfolio of trophy mixed-use precincts in global gateway cities (“Core”), maximize returns through a development or buy-fix-sell strategy (“Transitional and Development”), or recycle capital from our private funds (“LP Investments”).

The following table disaggregates investment property fair value changes by asset type:

We discuss the key valuation inputs of our investment properties on pages 102 and 103.

Valuation losses of $174 million are mainly due to lower cash flow and leasing assumptions on certain retail assets, as well as changes in market leasing assumptions on our downtown New York office portfolio. These losses were partially offset by valuation gains at our office portfolio in Canada.

Valuation losses of $345 million in the prior year were primarily due to changes to leasing assumptions as a result of the impacts from the pandemic related economic shutdowns in our downtown New York office portfolio, partially offset by gains as certain assets neared completion and met development milestones at our London and Toronto office portfolios, respectively.

Valuation losses of $259 million primarily relate to:

Valuation losses of $1.4 billion in the prior year were primarily related to changes in assumptions on a space-by-space basis to reflect the impacts of the pandemic related economic shutdowns.

Valuation gains of $5.5 billion primarily relate to:

In the prior year, valuation gains of $1.5 billion were primarily due to gains on our life science assets in our Forest City portfolio, our mixed-use property in China, our Brazil office portfolio, our U.K. student housing portfolio and our U.S. manufactured housing portfolio. These gains were partially offset by updated cash flow assumptions on our retail and office assets as a result of the impact of the pandemic related economic shutdown.

TRANSACTION RELATED GAINS, NET OF EXPENSES

Transaction related gains, net of expenses, totaled $714 million for the year. This was primarily due to a gain on the deconsolidation of our investment in our graphite electrode operations, within our Private Equity segment. This gain was partially offset by transaction costs related to recent acquisitions, as well as restructuring costs incurred in our Private Equity segment.

The prior year transaction related gains, net of expenses, of $20 million primarily relate to restructuring gains at our Infrastructure and Private Equity segments, partially offset by the early redemption of debt across a number of our businesses and transaction costs related to acquisitions.

FINANCIAL CONTRACTS

Financial contracts include mark-to-market gains and losses related to foreign currency, interest rate and pricing exposures that are not designated as hedges.

The gain of $984 million in 2021 is primarily attributable to gains on our toehold positions in our Infrastructure and Real Estate businesses, as well as fair value gains on our venture investments. These gains were partially offset by the mark-to-market movement on short-term financial contracts to hedge power prices in our Renewable Power and Transition business.

Unrealized gains of $686 million in the prior year primarily related to gains on our financial contracts in our Private Equity segment and mark-to-market movements on market and currency hedges, partially offset by losses on interest rate and cross-currency swaps, which did not qualify for hedge accounting.

IMPAIRMENT PROVISIONS

Impairment and provisions expense for the year of $654 million is primarily attributable to the impairment of PP&E and goodwill in our offshore oil services operations and provisions taken at our advanced energy storage operations within our Private Equity segment. In addition, legal provisions at our Brazil residential development business are included in this balance.

Other fair value losses of $1.0 billion were reported for the year. These losses primarily relate to accretion expenses and amortization of deferred financing fees across most operations. The remainder of the losses are various one-time charges across our segments.

We recorded an aggregate income tax expense of $2.3 billion in 2021 (2020 – $837 million), including current tax expenses of $1.1 billion (2020 – $756 million) and deferred tax expense of $1.2 billion (2020 – $81 million).

Our income tax provision does not include a number of non-income taxes paid that are recorded elsewhere in our consolidated financial statements. For example, a number of our operations in Brazil are required to pay non-recoverable taxes on revenue, which are included in direct costs as opposed to income taxes. In addition, we pay considerable property, payroll and other taxes that represent an important component of the tax base in the jurisdictions in which we operate, which are also predominantly recorded in direct costs.

Our effective income tax rate is different from the Canadian domestic statutory income tax rate due to the following differences:

As an asset manager, many of our operations are held in partially owned “flow-through” entities, such as partnerships, and any tax liability is incurred by the investors as opposed to the entity. As a result, while our consolidated earnings include income attributable to non-controlling ownership interests in these entities, our consolidated tax provision includes only our proportionate share of the associated tax provision of these entities. In other words, we are consolidating all the net income, but only our share of the associated tax provision. This reduced our effective tax rate by 10% this year.

We operate in countries with different tax rates, most of which vary from our domestic statutory rate and we also benefit from tax incentives introduced in various countries to encourage economic activity. Differences in global tax rates resulted in a 1% decrease in our effective tax rate this year. The difference will vary from period to period depending on the relative proportion of income in each country.

The following table summarizes the statement of financial position of the company as at December 31, 2021, 2020 and 2019:

Total assets increased by $47.3 billion since December 31, 2020 to $391.0 billion as at December 31, 2021. The increase is driven by business combinations and asset acquisitions, which added total assets of $62.8 billion during the year. Net valuation gains recognized on our PP&E during the year also contributed to the increase in total assets. These increases were partially offset by amortization and depreciation as well as assets sold during the year.

We have summarized the impact of business combinations as well as equity accounted investment, investment properties and PP&E additions for the year ended December 31, 2021 in the table below:

We have summarized below the major contributors to the year-over-year variances for the statement of financial position.

PP&E increased by $15.5 billion primarily as a result of:

We provide a continuity of PP&E in Note 12 of the consolidated financial statements.

Investment properties consist primarily of the company’s real estate assets. The balance as at December 31, 2021 increased by $4.1 billion, primarily due to:

We provide a continuity of investment properties in Note 11 of the consolidated financial statements.

Equity accounted investments increased by $4.8 billion to $46.1 billion in the current year, mainly due to:

We provide a continuity of equity accounted investments in Note 10 of the consolidated financial statements.

Cash and cash equivalents increased by $2.8 billion as at December 31, 2021. For further information, refer to our Consolidated Statements of Cash Flows and to the Review of Consolidated Statements of Cash Flows within Part 4 – Capitalization and Liquidity.

Increases of $6.0 billion and $5.5 billion in our intangible assets and goodwill balances, respectively, are related to additions from acquisitions, net of dispositions, primarily in our Infrastructure and Private Equity segments, partially offset by the amortization of certain intangible assets.

Other assets are comprised of inventory, deferred income tax assets, assets classified as held for sale and other financial assets. The increase of $5.9 billion is primarily a result of:

Corporate borrowings increased by $1.8 billion from the $600 million green bond issuance and $250 million re-opening of our 2051 notes during the year, in addition to net draws of $912 million of commercial paper issuances and credit facility draws.

Non-recourse borrowings of managed entities increased by $25.7 billion, net of borrowings reclassified to held for sale, largely attributable to recent acquisitions across our business segments.

The increase of $8.5 billion in other liabilities, was primarily due to the increase in deferred income tax liabilities mainly as a result of acquisitions completed in the year, the aforementioned fair value uplifts in our Real Estate segment and revaluation of PP&E in our Renewable Power and Transition segment. Refer to Part 4 – Capitalization and Liquidity for more information.

2020 vs. 2019

Consolidated assets as at December 31, 2020 were $343.7 billion, compared to $324.0 billion as at December 31, 2019. Year-over-year increases were primarily due to business combinations and asset acquisitions completed in 2020, as well as net valuation gains recognized on our PP&E. These increases were partially offset by assets sold in 2020.

PP&E increased by $10.7 billion in 2020 primarily as a result of acquisitions completed across our segments and revaluation gains largely in our Renewable Power and Transition segment. These increases were partially offset by depreciation and the deconsolidation of our hospitality investments and other businesses in 2020.

Investment properties were $96 million higher at the end of 2020 compared to 2019 primarily due to capital expenditures, the purchase of investment properties and the positive impact of foreign currency translation. These increases were partially offset by asset sales, including a self-storage portfolio and an office asset in London within our Real Estate segment, as well as reclassifications to assets held for sale.

Equity accounted investments were $41.3 billion as at December 31, 2020, an increase of $629 million compared to 2019. The increase was mainly due to the acquisition of an interest in the work access services operation and the U.S. LNG export terminal within our Private Equity and Infrastructure segments, respectively. In addition, the increase was due to our proportionate share of the comprehensive income in 2020. These increases were partially offset by the reclassification of our interest in Norbord to held for sale, as well as distributions and returns of capital received.

Cash and cash equivalents increased by $3.2 billion as at December 31, 2020 compared to 2019 primarily due to net proceeds from corporate debt issuances, the secondary offerings of BEP units, BEPC and BIPC shares, as well as cash received from asset sales. These items were partially offset by cash used in business combinations completed in 2020.

Intangible assets decreased by $3.1 billion due to the impact of foreign currency translation and amortization, partially offset by additions from acquisitions in our Infrastructure segment in 2020. Goodwill increased by $164 million due to the acquisition of new businesses, partially offset by the sale of the pathology business in our healthcare services operation in 2020.

Other assets increased by $7.5 billion primarily as a result of strategic investments acquired and opportunistic financial asset positions entered into across most of our segments in 2020, as well as an increase in assets held for sale mainly attributable to the reclassification of retail and office assets within our Real Estate segment and our equity investment in Norbord within our Private Equity segment. These items were partially offset by the sale of the Australian portion of our rail operation and a Colombian regulated distribution operation within our Infrastructure segment in 2020.

Corporate borrowings increased by $2.0 billion due to issuances of a $600 million 30-year note, a $750 million 10-year note, a $500 million 31-year note and a $400 million 60-year note in 2020. These were partially offset by a repayment of a $251 million (C$350 million) note in 2020.

Non-recourse borrowings increased by $3.0 billion in 2020 as a result of an increase in subsidiary borrowings across the businesses to take advantage of the low interest rate environment to strengthen liquidity, as well as an increase in property-specific borrowings mainly related to the aforementioned acquisitions in 2020.

Other non-current financial liabilities increased by $4.5 billion in 2020 primarily due to the aforementioned acquisitions in 2020 as well as an increase in lease obligations in our Real Estate segment.

Other liabilities increased by $4.4 billion in 2020 primarily attributable to an increase in financial liabilities associated with hedges in our Infrastructure segment as well as liabilities associated with assets held for sale in our Real Estate segment.

The significant variances in common equity and non-controlling interests are discussed below. Preferred equity is discussed in Part 4 – Capitalization and Liquidity.

COMMON EQUITY

The following table presents the major contributors to the year-over-year variances for common equity:

Common equity increased by $10.5 billion to $42.2 billion during the year. The change includes:

NON-CONTROLLING INTERESTS

Non-controlling interests in our consolidated results primarily consist of third-party interests in BEP, BIP, BBU, BPG and their consolidated entities as well as co-investors and other participating interests in our consolidated investments as follows: