EX-99.2 3 a2018-40xfex992annualreport.htm EXHIBIT 99.2 Exhibit
Exhibit 99.2
Management’s Discussion and Analysis
orangebara36.jpg
ORGANIZATION OF THE MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”)
PART 1 – OUR BUSINESS AND STRATEGY
Infrastructure
Our Business
Private Equity
Organizational Structure
Residential Development
PART 2 – REVIEW OF CONSOLIDATED
 
Corporate Activities
FINANCIAL RESULTS

 
PART 4 – CAPITALIZATION AND LIQUIDITY
 
Overview
Capitalization
Income Statement Analysis
Liquidity
Balance Sheet Analysis
Review of Consolidated Statements of Cash Flows
Consolidation and Fair Value Accounting
Contractual Obligations
Foreign Currency Translation
Exposures to Selected Financial Information
Summary of Quarterly Results
PART 5 – ACCOUNTING POLICIES AND INTERNAL
 
Corporate Dividends
CONTROLS
 
PART 3 – OPERATING SEGMENT RESULTS
Accounting Policies, Estimates and Judgments
Basis of Presentation
Management Representations and Internal Controls
Summary of Results by Operating Segment
Related Party Transactions
Asset Management
PART 6 – BUSINESS ENVIRONMENT AND RISKS
Real Estate
GLOSSARY OF TERMS

Renewable Power
 
 
“Brookfield,” the “company,” “we,” “us” or “our” refers to Brookfield Asset Management Inc. and its consolidated subsidiaries. The “Corporation” refers to our asset management business which is comprised of our asset management and corporate business segments. Our “invested capital” includes our “listed partnerships,” Brookfield Property Partners L.P., Brookfield Renewable Partners L.P., Brookfield Infrastructure Partners L.P. and Brookfield Business Partners L.P., which are separate public issuers included within our Real Estate, Renewable Power, Infrastructure and Private Equity segments, respectively. Additional discussion of their businesses and results can be found in their public filings. We use “private funds” to refer to our real estate funds, infrastructure funds and private equity funds.
Please refer to the Glossary of Terms beginning on page 108 which defines our key performance measures that we use to measure our business. Other businesses include Residential Development and Corporate.
Additional information about the company, including our Annual Information Form, is available on our website at www.brookfield.com, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the U.S. Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
We are incorporated in Ontario, Canada, and qualify as an eligible Canadian issuer under the Multijurisdictional Disclosure System and as a “foreign private issuer” as such term is defined in Rule 405 under the U.S. Securities Act of 1933, as amended, and Rule 3b-4 under the U.S. Securities Exchange Act of 1934, as amended. As a result, we comply with U.S. continuous reporting requirements by filing our Canadian disclosure documents with the SEC; our MD&A is filed under Form 40-F and we furnish our quarterly interim reports under Form 6-K.



Information contained in or otherwise accessible through the websites mentioned does not form part of this report. All references in this report to websites are inactive textual references and are not incorporated by reference.

2018 MD&A AND FINANCIAL STATEMENTS 17


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. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements 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 because they 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 Corporation 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: investment returns that are lower than target; the impact or unanticipated impact of general economic, political and market factors in the countries in which we do business; the behavior of financial markets, including fluctuations in interest and foreign exchange rates; global equity and capital markets and the availability of equity and debt financing and refinancing within these markets; strategic actions including dispositions; the ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits; changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and estimates); the ability to appropriately manage human capital; the effect of applying future accounting changes; business competition; operational and reputational risks; technological change; changes in government regulation and legislation within the countries in which we operate; governmental investigations; litigation; changes in tax laws; ability to collect amounts owed; catastrophic events, such as earthquakes and hurricanes; the possible impact of international conflicts and other developments including terrorist acts and cyberterrorism; and other risks and factors detailed from time to time in our documents filed with the securities regulators in Canada and the United States.
We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. 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 FORWARD-LOOKING STATEMENTS AND USE OF NON-IFRS MEASURES
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. See “Cautionary Statement Regarding Forward-Looking Statements and Information” above.
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 108 for all non-IFRS measures.


18 BROOKFIELD ASSET MANAGEMENT


PART 1 – OUR BUSINESS AND STRATEGY
ourbusiness.jpg
OUR BUSINESS
We are a leading global alternative asset manager with a 120-year history and over $350 billion of assets under management across a broad portfolio of Real Estate, Infrastructure, Renewable Power and Private Equity assets. Our $138 billion in fee bearing capital is invested on behalf of some of the world’s largest institutional investors, sovereign wealth funds and pension plans, along with thousands of individuals.
We provide a diverse product mix of flagship private funds and dedicated public vehicles, which allow investors to invest in our four key asset classes and participate in the strong performance of the underlying portfolio. We invest in a disciplined manner, targeting 12-15% returns with strong downside protection, allowing our investors and their stakeholders to meet their goals and protect their financial futures.
ü
Investment focus
We predominantly invest in real assets across Real Estate, Infrastructure, Renewable Power and Private Equity
ü
Diverse products offering
We offer public and private vehicles to invest across a number of product lines, including core, value-add, opportunistic and credit in both closed-end and long-life vehicles
ü
Focused investment strategies
We invest where we can bring our competitive advantages to bear, such as our strong capabilities as an owner-operator, our large-scale capital and our global reach
ü
Disciplined financing approach
We employ leverage in a prudent manner to enhance returns while preserving capital throughout business cycles
In addition, we maintain significant invested capital on the Corporation’s balance sheet where we invest alongside our investors. This capital generates annual cash flows that enhance the returns we earn as an asset manager, creates a strong alignment of interest, and allows us to bring the following strengths to bear on all our investments.
1.
Large-scale capital
We have over $350 billion in assets under management and $138 billion in fee bearing capital
2.
Operating expertise
We have more than 100,000 operating employees worldwide who maximize value and cash flows from our operations
3.
Global presence
We operate in more than 30 countries around the world
Our financial returns are represented by the combination of the earnings of our asset manager as well as capital appreciation and distributions from our invested capital. Our primary performance measure is funds from operations (“FFO”) which we use to evaluate the performance of our segments.

2018 MD&A AND FINANCIAL STATEMENTS 19


ourbusiness.jpg
Asset Management
Our asset management activities encompass $138 billion of fee bearing capital across private funds, listed partnerships and public securities.
Private Funds – $70 billion fee bearing capital
We manage and earn fees on 42 private funds across real estate, renewable power, infrastructure and private equity. Our fund strategies include core, credit, value-add and opportunistic, and we offer both closed-end and long-life vehicles. We have nearly 600 unique institutional investors, who on average invest in 2.1 funds. On private fund capital we earn:
1.
Diversified and long-term base management fees which are based on closed-end and long-life fund capital. Closed-end fund capital is typically committed for 10 years with two one-year extension options, and our long-life funds are perpetual vehicles that can continually raise new capital.
2.
Carried interest, which enables us to receive a portion of overall fund profits provided that investors receive a minimum prescribed preferred return. Carried interest is recognized once it is no longer subject to clawback.
Listed Partnerships – $54 billion fee bearing capital
We manage publicly listed perpetual-capital vehicles BPY, BEP, BIP, BBU, TERP and Acadian Timber Corp. (“Acadian”). On listed partnership capital, we earn:
1.
Long-term perpetual base management fees, which are based on our listed vehicles’ total capitalization.
2.
Stable incentive distribution fees which are linked to cash distributions (BPY, BEP and BIP). These cash distributions have exceeded pre-determined thresholds and have a historic annual growth rate of 5-9%.
3.
Performance fees based on unit price performance (BBU).
Public Securities – $13 billion fee bearing capital
We manage public funds and separately managed accounts, focused on fixed income and equity securities within the real estate, infrastructure and natural resources asset classes. We earn management fees, which are based on committed capital and fund net asset value and performance income based on investment returns.
Invested Capital1 
We have approximately $40 billion of invested capital on the Corporation’s balance sheet as a result of our history as an owner and operator of real assets, which provides attractive financial returns and important flexibility to our asset management business.
Key attributes of our invested capital:
Transparent approximately 80% of our invested capital is listed partnerships (BPY, BEP, BIP, BBU) and other smaller publicly traded investments. The remaining is primarily held in a residential homebuilding business, and a few other directly held investments.
Diversified, long-term, stable cash flows received from our underlying public investments. These cash flows are underpinned by investments in real assets which should provide inflation protection and less volatility compared to traditional equities, and higher yields compared to fixed income.
Strong alignment of interests the Corporation is the largest investor into each of our listed partnerships, and in turn, the listed partnerships are typically the largest investor in each of our private funds.
Refer to Parts 2 and 3 of this MD&A for more information on our operations and performance.


1.
See definition in Glossary of Terms beginning on page 108.

20 BROOKFIELD ASSET MANAGEMENT


organizationalstructure.jpg
ORGANIZATIONAL STRUCTURE
We employ approximately 1,700 employees within our asset management business and a further 100,000 operating employees within the assets we own through managed funds.
orgstructure0324.jpg
Our global presence spans over 30 countries and covers major economies around the world.
map0327.jpg

2018 MD&A AND FINANCIAL STATEMENTS 21


compadv.jpg
COMPETITIVE ADVANTAGES
We have three distinct competitive advantages that allow 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 over $350 billion in assets under management.
We offer our investors a large portfolio of private funds which have global mandates and diversified strategies. Our access to large-scale capital from our private funds and co-investors enables us to pursue transactions where there is less competition. In addition, investing significant amounts of our own capital either through our listed partnerships or through the Corporation’s balance sheet ensures alignment of interest with our investors and additional flexible capital to fund larger investments.
largescalecapitalr1a01.jpg
Operating Expertise
We have more than 100,000 operating employees worldwide who are instrumental in maximizing the value and cash flows from our operations.
We believe that real operating experience is essential in maximizing efficiency and productivity and ultimately, returns. We do this by maintaining a culture of long-term focus, alignment of interest and collaboration through the people we hire and our operating philosophy. This in-house operating expertise developed through our heritage as an owner-operator is invaluable in underwriting acquisitions and executing value-creating development and capital projects.
Global Presence
We operate in more than 30 countries 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 local 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.


22 BROOKFIELD ASSET MANAGEMENT


operatingcyc.jpg
OPERATING CYCLE
Raise Capital
As an asset manager, the starting point is forming new funds and other investment products to which investors are willing to commit capital. This will, in turn, provide us with capital to invest and the opportunity to earn base management fees and performance-based returns such as incentive distributions and carried interest. Accordingly, we create value by increasing the amount of fee bearing capital and by achieving strong investment performance that leads to increased cash flows and asset values.
 
 
 
 
Identify and Acquire High-Quality Assets
We follow a value-based approach to investing and allocating capital. We believe our disciplined approach, global reach and our expertise in recapitalizations and operational turnarounds enable us to identify a wide range of potential opportunities, some of which are challenging for others to pursue, and allow us to invest at attractive valuations and generate superior risk-adjusted returns. We also have considerable expertise in executing large development and capital projects, providing additional opportunities to deploy capital.
 
 
 
 
Secure Long-Term Financing
We finance our operations primarily on a long-term, investment-grade basis, and most of our capital consists of equity and standalone asset-by-asset financing with minimal recourse to other parts of the organization. We utilize relatively modest levels of corporate debt to provide operational flexibility and optimize returns. This provides us with considerable stability, improves our ability to withstand financial downturns and enables our management teams to focus on operations and other growth initiatives.
 
 
 
 
Enhance Value and Cash Flows Through Operating Expertise
Our operating capabilities enable us to increase the value of the assets within our businesses and the cash flows they produce, and they protect capital better in adverse conditions. Our operating expertise, development capabilities and effective financing can help ensure that an investment’s full value creation potential is realized by optimizing operations and development projects. We believe this is one of our most important competitive advantages as an asset manager.
 
 
 
 
Realize Capital from Asset Sale or Refinancings
We actively monitor opportunities to sell or refinance assets to generate proceeds that we return to investors in the case of limited life funds and redeploy to enhance returns in the case of perpetual entities. In many cases, returning capital from private funds completes the investment process locking in investor returns and giving rise to performance income.
 
 
 
 
Our Operating Cycle Leads to Value Creation
We create value from earning robust returns on our investments that compound over time and grow our fee bearing capital. By generating value for our investors and shareholders, we increase fees and carried interest received in our asset management business and grow cash flows that compound value in our invested capital.
compadvmar40.jpg

2018 MD&A AND FINANCIAL STATEMENTS 23


liquidity.jpg
LIQUIDITY AND CAPITAL RESOURCES
We manage our liquidity and capitalization on a group-wide basis, however it is organized into three principal tiers:
i)
The Corporation:
Strong levels of liquidity are maintained to support growth and ongoing operations.
Capitalization consists of a large common equity base, supplemented with perpetual preferred shares, long-dated corporate bonds and, from time to time, draws on our corporate credit facilities.
Negligible guarantees are provided on the financial obligations of listed partnerships and managed funds.
High levels of cash flows are available after common share dividends.
ii)
Our listed partnerships (BPY, BEP, BIP and BBU):
Strong levels of liquidity are maintained at each of the listed partnerships to support their growth and ongoing operations.
Listed partnerships are intended to be self-funding with stable capitalization through market cycles.
Financial obligations have no recourse to the Corporation.
iii)
Managed funds, or operating asset level in directly held investments:
Each underlying investment is typically funded on a standalone basis.
Fund level borrowings are generally limited to subscription facilities which are backed by the capital commitments to the fund.
Financial obligations have no recourse to the Corporation.
Unlike many other alternative asset managers, much of the debt issued within our managed entities is included in our consolidated balance sheet not withstanding that virtually none of this debt has any recourse to the Corporation. This is due in large part to the larger amount of capital that we invest in our funds relative to other managers, which causes us to consolidate these entities in our Consolidated Balance Sheets.
Approach to Capitalization
Our overall approach is to maintain appropriate levels of liquidity throughout the organization to fund operating, development and investment activities as well as unforeseen requirements. The following are key elements of our capital strategy:
Maintain significant liquidity at the corporate level, primarily in the form of cash, financial assets and undrawn credit lines. Ensure our listed partnerships can finance their operations on a standalone basis without recourse to or reliance on the Corporation.
Structure our borrowings and other financial obligations to provide a stable capitalization at levels that are attractive to investors, are sustainable on a long-term basis and can withstand business cycles.
The vast majority of this debt is at investment-grade levels, however, periodically, we may borrow at sub-investment grade levels in certain parts of our business where the borrowings are carefully structured and monitored.
Provide recourse only to the specific businesses or assets being financed, without cross-collateralization or parental guarantees.
Match the duration of our debt to the underlying leases or contracts and match the currency of our debt to that of the assets such that our remaining exposure is on the net equity of the investment.
We maintain a prudent level of capitalization at the Corporation with 77% of our capitalization in the form of common and preferred equity. Consistent with our conservative approach, our corporate borrowings represent only 17% of our corporate capitalization and equate to just 5% of our consolidated debt. The remaining 95% of consolidated debt obligations have no recourse to the Corporation, are held within managed entities and have virtually no cross-collateralization or parental guarantees.
Our corporate capitalization is now more than $38 billion and our debt to capitalization level remains below 20%.

24 BROOKFIELD ASSET MANAGEMENT


AS AT DEC. 31
(MILLIONS)
2018

 
% of Total

Corporate borrowings
$
6,409

 
17
%
Accounts payable and other liabilities
2,496

 
6
%
Preferred equity
4,168

 
11
%
Common equity - book value
25,647

 
66
%
Corporate capitalization
$
38,720

 
100
%
Liquidity
The Corporation has very few capital requirements. Nevertheless, we maintain significant liquidity ($4 billion in the form of cash and financial assets and undrawn credit facilities as at December 31, 2018) at the corporate level to bridge larger fund transactions, seed new fund products or participate in equity issuances by our listed partnerships.
On a group basis, we have over $34 billion of liquidity, which includes corporate liquidity, listed partnership liquidity and uncalled private fund commitments. Uncalled private fund commitments are third party commitments available for drawdown in our private funds.
AS AT DEC 31, 2018
(MILLIONS)
Corporate Liquidity

 
Group Liquidity

Cash and financial assets, net
$
2,275

 
$
3,752

Undrawn committed credit facilities
1,867

 
7,061

Core liquidity1
4,142

 
10,813

Third-party uncalled private fund commitments

 
23,575

Total liquidity1
$
4,142

 
$
34,388

1.
See definition in Glossary of Terms beginning on page 108.
Cash Flow Generation
We generate 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:
Fee related earnings that are supported by long-term and perpetual contractual agreements.
Distributions from listed investments that are stable and backed by high-quality operating assets.
In 2018, cash available for distribution and/or reinvestment was $2.4 billion, and over the past five years has grown at a 19% compound annual growth rate:
FOR THE YEAR ENDED DEC. 31
(MILLIONS)
2018

 
2017

Fee related earnings
$
1,129

 
$
896

Realized carried interest
188

 
74

Distributions from investments
1,698

 
1,351

Other invested capital earnings
 
 
 
Corporate activities
(486
)
 
(300
)
Other wholly-owned investments
41

 
23

 
(445
)
 
(277
)
Preferred share dividends
(151
)
 
(145
)
Total cash available for distribution and/or reinvestment1
$
2,419

 
$
1,899

1.
See definition in Glossary of Terms beginning on page 108.


2018 MD&A AND FINANCIAL STATEMENTS 25


risk.jpg
RISK MANAGEMENT
riskmgnt318.jpg
Our Approach
Managing risk is an integral part of our business. We have a well-established and disciplined risk management approach that is based on clear operating methods and a strong risk culture. Brookfield’s risk management program emphasizes the proactive management of risks, ensuring that we have the necessary capacity and resilience to respond to changing environments by evaluating both current and emerging risks. We have implemented a risk management framework and methodology that is designed to enable comprehensive and consistent management of risk across the organization.
We use a thorough and integrated risk assessment process to identify and evaluate risk areas across the business such as human capital, climate change, foreign exchange and other strategic, financial, regulatory and operational risks. Management and mitigation approaches and practices are tailored to the specific risk areas and executed by business and functional groups for their businesses, with appropriate coordination and oversight through monitoring and reporting processes.

riskmgnt0321.jpg

26 BROOKFIELD ASSET MANAGEMENT


risk.jpg
Focus on Risk Culture
A strong risk culture is the cornerstone of our risk management program: one that promotes conservative 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 the strong commitment and leadership from our senior executives, as well as the policies and practices we have implemented.
Our compensation program reflects this focus on long-term decision making to generate sustainable growth and risk adjusted returns by emphasizing equity compensation which has long-term vesting and retention requirements as well as reimbursement provisions in the event of restatements or detrimental conduct. Approximately 85% of total compensation for named executive officers is in the form of long-term incentive awards. This approach ensures consideration of the risks associated with decisions, minimizes the possibility that executives are rewarded in the short-term for actions which are detrimental in the long term, and reinforces the alignment of the interests of management with the long-term interests of fund investors and shareholders.
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 overall such as safety, environment and other operational risks are generally managed at the operating  business group level, as the risks vary based on the nature of each business. At the same time, we monitor many of these 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 rate or where we can bring specialized knowledge, we utilize a centralized approach amongst our corporate and our operating business groups. Management of strategic, reputational and regulatory compliance risks is similarly coordinated to ensure consistent focus and implementation across the organization.
Oversight & Coordination
We have implemented strong governance practices to monitor and oversee our risk management practices. Management committees have been formed to bring together required expertise to manage key risk areas, ensuring appropriate application and coordination of approaches and practices across our business and functional groups:
Risk Management Steering Committee to coordinate the risk management program on an enterprise-wide basis;
Investment Committees to oversee the investment process, as well as monitor the ongoing performance of investments;
Conflicts Committee to resolve potential conflict situations in the investment process and other corporate transactions;
Financial Risk Oversight Committee to review and monitor financial exposures;
Environmental, Social and Governance (“ESG”) Committee to coordinate ESG initiatives;
Safety Steering Committee to focus on health, safety and security matters; and
Disclosure Committee to oversee the public disclosure of material information.
Brookfield’s Board of Directors oversees risk management with a focus on more significant risks and leverages management’s monitoring processes. The Board has delegated responsibility for oversight of specific risks to the following board committees:
Risk Management Committee oversees the management of Brookfield’s significant financial and non-financial risk exposures, including review of risk assessment and risk management practices and confirming that the company has an appropriate risk-taking philosophy and suitable risk capacity.
Audit Committee oversees the management of risks related to Brookfield’s systems and procedures for financial reporting, as well as for associated audit processes (internal and external).
Management Resources and Compensation Committee oversees the risks related to Brookfield’s management resource planning, including succession planning, executive compensation and senior executives’ performance.
Governance and Nominating Committee oversees the risks related to Brookfield’s governance structure, including the effectiveness of board and committee activities and potential conflicts of interest.

2018 MD&A AND FINANCIAL STATEMENTS 27


esg.jpg
ENVIRONMENTAL, SOCIAL AND GOVERNANCE MANAGEMENT
We believe that acting responsibly toward our stakeholders is fundamental to operating a productive, profitable and sustainable business. This is consistent with our philosophy of conducting business with a long-term perspective in a sustainable and ethical manner. Our bottom line is that having robust ESG principles and practices is good business for a wide variety of reasons. Accordingly, we have embedded ESG principles and practices into both our asset management activities and underlying business operations.
We incorporate ESG factors into our investment decisions, starting with the due diligence of a potential investment through to the exit process. During the initial due diligence phase, we utilize our operating expertise to identify material ESG opportunities or risks relevant to the potential investment and then perform a deeper due diligence if required, where we utilize internal experts and, as needed, third-party consultants. All investments made by Brookfield must be approved by our investment committees based on a set of predetermined criteria that evaluate potential risks, mitigants and opportunities. ESG matters are part of this evaluation, including anti-bribery and corruption, health and safety, environmental and social considerations.
As part of each acquisition, the investment teams create a tailored integration plan that, among other things, includes material ESG-related matters for review or execution. ESG risks and opportunities are actively managed by the portfolio companies with oversight from the investment team responsible for the investment. This recognizes the importance of local expertise, which provides valuable insight given the wide range of asset types and locations in which we invest, coupled with the broad Brookfield investment expertise. We believe there is a strong correlation between actively managing these considerations effectively and enhancing investment returns.
With respect to environmental considerations, we believe that our operating businesses are well positioned as the world transitions toward lower carbon and more sustainable economies. Our renewable power business is one of the largest pure-play global owners and operators of hydroelectric, wind and solar generation facilities and is committed to supporting the global transition toward a low-carbon economy; we also benefit by having negligible fossil fuel inputs and enhanced revenues. Further, we are one of the world’s largest owners of real estate; our office and retail portfolios are heavily weighted towards properties that meet high environmental sustainability standards consistent with the expectations of our tenants, which enhances rental revenues and lowers operating costs. Our infrastructure and private equity businesses include a wide variety of businesses, many of which are well positioned to have a positive environmental impact and benefit from our focus on operational efficiency, including energy efficiency.
Regarding the management of social considerations, we would not be able to operate our businesses without our 100,000 operating employees and 1,700 employees within our asset management operations. Therefore, we are constantly focused on human capital development. We believe that diversity adds significant benefits to a workplace and so we are continuing to introduce measures to increase diversity. Diversity is about having a workplace that reflects a variety of perspectives, but a diverse work environment is not enough. We also are focused on maintaining an inclusive environment—meaning one in which all are encouraged to contribute, enabling the organization as a whole to benefit from different perspectives in order to achieve better business outcomes.
We also recognize that we must be positive contributors to the communities in which we operate and not just an employer. We encourage and support numerous community and philanthropic initiatives across Brookfield, and we believe that these programs have a positive impact not just on the communities but on our many employees that participate.
Finally, we understand that good governance is critical to sustainable business operations. We have developed a comprehensive governance framework across Brookfield. This is greatly assisted by operating through public companies, including Brookfield Asset Management and our listed partnerships, as well as within the regulatory requirements of a global asset manager. Governance extends to all facets of our activities, including those related to ESG matters. We maintain a committee of senior executives representing each of our major business operations to coordinate ESG initiatives across our business groups, share best practices and encourage a firm-wide effort to constantly improve our activities in these regards. While our board of directors has always had oversight over ESG matters, in 2018, our board formally embedded ESG management into the various board and committee mandates to acknowledge these areas as priorities, as noted on the following page.


28 BROOKFIELD ASSET MANAGEMENT


esg.jpg
2018 Highlights
In 2018, we embedded ESG management into the charter for the Corporation’s Board of Directors, as well as its Governance and Nominating Committee, which allows for more formal director engagement with respect to our ESG initiatives. This ensures that sustainability is a priority and is explicitly addressed in our long-term business strategy and risk management.
We are taking specific actions to better measure our greenhouse gas (“GHG”) emissions. Our renewable power business now measures its scope 1 and 2 GHG emissions globally. In 2018, which represents the base-year calculation, BEP’s global gross carbon intensity was measured to be one of the lowest among comparable power companies. Our North American core office business, U.S. retail and our London office businesses also measure their GHG emissions and report their results annually to the Global Real Estate Sustainability Benchmark, or GRESB, a leading sustainability assessment tool. In 2018, all three businesses maintained their GRESB Green Star rating.
Another environmental focus area is the recycling and reduction of waste across our operating businesses. Many of our real estate, infrastructure and private equity businesses have either launched innovative programs in this area or continued to improve their waste reduction measures. These initiatives span groundbreaking programs, such as the removal of plastic waste from the ocean at our U.K. ports business and the commitment by our London office business to becoming the world’s first plastic-free commercial center, to ongoing waste reduction and recycling initiatives.
We are becoming more active in sustainable finance initiatives. In 2018, our renewable power business issued C$300 million in corporate green bonds and developed the Brookfield Renewable Green Bond Framework, which defines the investments that are eligible for green bond issuance and how performance will be measured. Sustainalytics, a leading global provider of ESG ratings, confirmed its view that the framework aligns to its 2018 Green Bond Principles. The growing green bond market allows debt investors to participate in the financing of sustainable products, and we plan to offer additional green bond issuances.
We continue to implement measures to improve diversity within our employee base. We have now formalized our requirement that candidate pools be sufficiently diverse as part our recruiting process. Further, we have broadened the number of activities that promote and support success for our female employees. The following provides an indication of our progress at the asset management level.
At the Corporation, women comprise:
>40
%
ä
of our overall workforce
40
%
ä
of our independent board directors
20
%
ä
of our senior vice-presidents and above (up from 11% three years ago)
Recently, we released a Positive Work Environment Policy, which consolidates our previous regional harassment policies into one global policy and sets a consistent and high standard across all our jurisdictions by explicitly expressing our commitment to maintaining a workplace free from discrimination, violence and harassment. Each employee is required to report any actions or incidents that they witness or experience that are in violation of this policy.
In recent years, data privacy and cybersecurity have become key ESG priorities for global companies. At Brookfield, we have continued to focus on strengthening our processes in this area through a number of measures. For example, we have established an information security steering committee, which ensures that our cybersecurity efforts are aligned across the organization. In addition, our cybersecurity program consists of key internal and external initiatives ranging from regular scanning of our data systems for vulnerabilities to improving our employees’ cybersecurity awareness through mandatory firm-wide training.


2018 MD&A AND FINANCIAL STATEMENTS 29


PART 2 – REVIEW OF CONSOLIDATED FINANCIAL RESULTS
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 42 we provide an overview of our fair value accounting across our business 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.
OVERVIEW
Net income increased to $7.5 billion in 2018, with $3.6 billion attributable to common shareholders ($3.40 per share) and $3.9 billion attributable to non-controlling interests.
During 2018, we acquired a number of businesses across each of our operating segments that contributed to our results, the most significant of which was through the privatization of GGP Inc. (“GGP”) in the third quarter within our real estate segment. BPY previously held a 34% interest in this entity and started to consolidate the results effective August 28, 2018 through Brookfield Property REIT Inc. (“BPR”), a real estate trust created to consolidate GGP’s operations. As BPY issued equity to pay a portion of the consideration, our ownership interest in BPY decreased to 54%, as compared to 69% at the beginning of the year. Refer to pages 33 and 34 for more information about significant acquisitions and dispositions.
Our balance sheet was also impacted by acquisition and divestment activity as we acquired $78.6 billion of assets through business combinations during the year. In addition to the privatization of GGP which increased our asset base by $22.1 billion, the acquisitions of a diversified U.S. REIT, a portfolio of European wind and solar assets, a service provider to the power generation industry, a service provider to the offshore oil production industry and a North American residential energy infrastructure business had the most significant impact on our asset base. We also sold businesses throughout the year, most notably our Chilean electricity transmission business, various assets in our real estate LP investments portfolio, including our U.S. logistics portfolio and a portfolio of self-storage assets, an office property in Toronto and our Australian energy operations.
In addition to the impact of recent acquisitions, the $2.9 billion increase in consolidated net income and the $2.1 billion increase in net income attributable to common shareholders are primarily attributable to:
same-store1 growth across many of our businesses;
fair value gains of $1.8 billion relating primarily to investment property valuation gains and various transaction-related gains, including the impact of completing step-up acquisitions in our real estate and private equity businesses; and
deferred tax recoveries, relating primarily to the projected utilization of previously unrecognized loss carryforwards; partially offset by
the absence of income from assets sold, higher taxes and increases in interest expense on new borrowings.












1.
See definition in Glossary of Terms beginning on page 108.

30 BROOKFIELD ASSET MANAGEMENT


INCOME STATEMENT ANALYSIS
The following table summarizes the financial results of the company for 2018, 2017 and 2016:
 
 
 
 
 
 
 
Change
FOR THE YEARS ENDED DEC. 31
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
2018

 
2017

 
2016

 
2018 vs 2017

 
2017 vs 2016

Revenues1
$
56,771

 
$
40,786

 
$
24,411

 
$
15,985

 
$
16,375

Direct costs
(45,519
)
 
(32,388
)
 
(17,718
)
 
(13,131
)
 
(14,670
)
 
11,252

 
8,398

 
6,693

 
2,854

 
1,705

Other income and gains
1,166

 
1,180

 
482

 
(14
)
 
698

Equity accounted income
1,088

 
1,213

 
1,293

 
(125
)
 
(80
)
Expenses
 
 
 
 
 
 
 
 
 
Interest
(4,854
)
 
(3,608
)
 
(3,233
)
 
(1,246
)
 
(375
)
Corporate costs
(104
)
 
(95
)
 
(92
)
 
(9
)
 
(3
)
Fair value changes
1,794

 
421

 
(130
)
 
1,373

 
551

Depreciation and amortization
(3,102
)
 
(2,345
)
 
(2,020
)
 
(757
)
 
(325
)
Income taxes
248

 
(613
)
 
345

 
861

 
(958
)
Net income
7,488

 
4,551

 
3,338

 
2,937

 
1,213

Non-controlling interests
(3,904
)
 
(3,089
)
 
(1,687
)
 
(815
)
 
(1,402
)
Net income attributable to shareholders
$
3,584

 
$
1,462

 
$
1,651

 
$
2,122

 
$
(189
)
Net income per share
$
3.40

 
$
1.34

 
$
1.55

 
$
2.06

 
$
(0.21
)
1.
2017 and 2016 revenues have not been restated as we adopted IFRS 15 using the modified retrospective method as at January 1, 2018.
2018 vs. 2017
Revenues for the year were $56.8 billion, an increase of $16.0 billion compared to 2017 primarily due to:
$16.3 billion of additional revenues earned from acquisitions during the current and prior year across each of our listed partnerships1, most notably the purchase of our road fuel distribution business in the second quarter of last year, which added $8.8 billion of incremental revenues. Included in this business’ revenues and direct costs are significant flow-through duty amounts that are passed through to the customers and recorded gross in both accounts, without impact to margin generated by the business;
initiatives in our existing infrastructure businesses, in particular from strong connections activity at our regulated distribution business and higher tariffs and strong volumes across a number of our transport operations; and
same-store increases, including improved performance at our graphite electrode manufacturing business and growth in our real estate business from strong core office same-property leasing growth of 5.9%; partially offset by
the absence of $390 million of revenues from businesses sold and the deconsolidation of Norbord Inc. (“Norbord”)1 in the fourth quarter of 2017, which contributed $1.7 billion of revenues in 2017.
A discussion of the impact on revenues and net income from recent acquisitions and dispositions can be found on pages 33 and 34.
Changes in direct costs correspond with the growth of revenue. Our direct costs increased by $13.1 billion in 2018 due to recent acquisitions, as discussed above, as well as higher costs to support same-store growth within existing operations. These increases were partially offset by the absence of direct costs from assets sold and the impact of the Norbord deconsolidation.
Other income and gains of $1.2 billion relate primarily to portfolio premiums as we sold a number of assets for more than their IFRS carrying values. The most significant gains reported during the year were the sale of our Chilean electricity transmission business in the first quarter, the sale of a portfolio of self-storage properties in the third quarter, the sale of our U.S. logistics portfolio in the fourth quarter and the sale of our Australian energy operations in the fourth quarter.


1.
See definition in Glossary of Terms beginning on page 108.

2018 MD&A AND FINANCIAL STATEMENTS 31


Equity accounted income decreased by $125 million to $1.1 billion primarily due to:
valuation losses at various equity accounted investments, particularly certain GGP investment properties prior to its privatization;
higher depreciation costs of $190 million relating to recent acquisitions; and
the consolidation of previously equity accounted entities as a result of increases in our ownership interest; partially offset by
an increase in FFO from equity accounted investments of $303 million due to contributions from recent investments, particularly our investment in our entertainment operations and the impact of FFO generated by Norbord which was consolidated up until the fourth quarter of 2017.
Interest expense increased by $1.2 billion largely due to additional borrowings associated with acquisitions across our portfolio, debts assumed from acquired businesses and $1.6 billion of corporate recourse debt issued since the third quarter of 2017 on which we have incurred interest expense. We also issued additional debt in certain listed partnerships, increasing total interest expense.
We recorded fair value gains of $1.8 billion, compared to $421 million in 2017, primarily as a result of:
the impact of step-up acquisitions of GGP in our Real Estate segment and a service provider to the offshore oil production industry in our Private Equity segment, partially offset by successful deal costs;
valuation gains on properties in our core office and LP investments1 portfolios;
gains recorded on the extinguishment of a debt obligation associated with a hospitality property; and
gains related to the acquisitions and restructuring of businesses within our U.S. operations that resulted in the recognition of deferred tax assets; partially offset by
net unrealized losses on financial contracts entered into to manage foreign currency, interest rates and pricing exposures.
Depreciation and amortization expense increased by $757 million to $3.1 billion due primarily to businesses acquired in the last twelve months as well as the impact of revaluation gains in the fourth quarter of 2017, which increased the carrying value of our PP&E from which depreciation is determined.
We recorded an income tax recovery of $248 million in 2018 compared to an expense of $613 million last year. This was primarily due to a deferred tax recovery on the recognition of previously unrecognized loss carryforwards that will offset future projected taxable income.
2017 vs. 2016
Revenues in 2017 increased by $16.4 billion compared to 2016 primarily due to the acquisition of new businesses and assets across all of our listed partnerships, most notably our road fuel distribution business. Same-store growth from existing operations, including in our infrastructure transport businesses and private equity construction services business, also contributed to the increase. These were partially offset by the absence of revenues from merchant development sales realized in 2016 and fewer deliveries in our Brazilian residential business.
Direct costs increased by $14.7 billion in 2017 due to recent acquisitions and higher than planned construction services costs, partially offset by a reduction in expenses from businesses sold and the benefits of operational improvements.
Other income and gains of $1.2 billion in 2017 include gains from the sale of our bath and shower business, the partial sale of Norbord and the sale of a European logistics portfolio. The 2016 results include realized gains from the sales of a German hotel portfolio, a hospitality trademark and a toehold position in our Australian port business.
Equity accounted income decreased by $80 million to $1.2 billion as valuation losses at GGP and the absence of a one-time gain in our infrastructure business related to the privatization of our Brazilian toll road investment were partially offset by lower mark-to-market losses on interest rate swap contracts in our U.K. office portfolio.
Interest expense increased by $375 million as a result of additional borrowings associated with acquisitions across our portfolio and the addition of debt within newly acquired businesses, particularly in our renewable power, infrastructure and private equity operations.




1.
Formerly referred to as Opportunistic.

32 BROOKFIELD ASSET MANAGEMENT


We recorded fair value gains of $421 million, which compared to a loss of $130 million in 2016, primarily as a result of:
increases in the values of our LP investments real estate portfolios;
a gain recorded when we deconsolidated our investment in Norbord; and
the absence of a one-time impairment loss in 2016 on the conversion of a debt instrument to equity in our Private Equity segment; partially offset by
valuation losses in our core office portfolio, mark-to-market losses on our GGP warrants prior to exercise and mark-to-market losses on foreign exchange derivatives that do not qualify for hedge accounting.
Depreciation and amortization expense increased by $325 million to $2.3 billion due primarily to the impact of recent acquisitions.
Income tax expense was $613 million, compared to a $345 million recovery in 2016. The prior year included a one-time income tax recovery of approximately $900 million as a result of a change in tax rates arising from the reorganization of certain of our U.S. real estate operations. Excluding the impact of this recovery, income tax expenses were consistent year over year as increased expenses associated with acquisitions were offset by $157 million of recoveries associated with U.S. tax reform.
Significant Acquisitions and Dispositions
We have summarized below the impact of recent significant acquisitions and dispositions on our results for 2018:
FOR THE YEAR ENDED DEC. 31, 2018
(MILLIONS)
Acquisitions
 
Dispositions
Revenue

 
Net Income

 
Revenue

 
Net Income

Real estate
$
1,430

 
$
516

 
$
(336
)
 
$
(118
)
Renewable power
1,117

 
165

 
(15
)
 
(13
)
Infrastructure
1,157

 
211

 

 
(9
)
Private equity and other
12,642

 
62

 
(39
)
 
(15
)
 
16,346

 
954

 
(390
)
 
(155
)
Gains recognized in net income

 
833

 

 
592

 
$
16,346

 
$
1,787

 
$
(390
)
 
$
437

Acquisitions
Real Estate
Recent acquisitions contributed an incremental $1.4 billion of revenues and $516 million of net income, respectively, in 2018. The most significant contributor was our core retail portfolio as we have been consolidating our results in BPR since August 28, 2018. Previously, we reported our 34% proportionate share of GGP’s results as equity accounted income. We have recognized $588 million of revenues since we began to consolidate this entity. We are also reporting our increased share of GGP’s net income, an incremental $237 million this year relative to the net income we would have reported if GGP were still equity accounted, to reflect our increased ownership. The net impact of the gains relating to the privatization is reported through the “Gains recognized in net income” line.
Other recent acquisitions that have had a significant impact on current period revenues and net income include our extended-stay property portfolios, an office property in Houston, a hospitality asset in Toronto and our office parks in India.
Renewable Power
Within our Renewable Power segment, the recent acquisitions of TERP and TerraForm Global, portfolios of wind and solar assets acquired in the fourth quarter of 2017, as well as a portfolio of European wind and solar assets acquired by TERP in the second quarter of 2018, contributed an additional $1.1 billion of revenues and net income of $165 million this year.
Infrastructure
Within our infrastructure operations, revenues increased by $1.2 billion and net income increased by $211 million due to recent acquisitions. Our Brazilian regulated gas transmission business acquired partway through 2017 contributed an additional $305 million in revenues and $154 million in net income this year. We were also impacted by contributions from our recently acquired Colombian natural gas distribution business and certain businesses acquired in the fourth quarter, most notably a North American provider of residential energy infrastructure services.

2018 MD&A AND FINANCIAL STATEMENTS 33


Private Equity
Recent acquisitions within our Private Equity segment contributed an additional $12.6 billion of revenues in 2018. Our road fuel distribution business, acquired partway through 2017, contributed an additional $8.8 billion of revenues in 2018. Other recent acquisitions that had a significant impact on revenues include Westinghouse Electric Company (“Westinghouse”) which is our service provider to the power generation industry, a returnable plastic container business and our fuel marketing business. Revenues also benefited from the consolidation of our service provider to the offshore oil production industry in the third quarter of this year, previously an equity accounted investment. Gains that relate directly to the initial impact of consolidating this business are reported through the “Gains recognized in net income” line.
Gains Recognized in Net Income
A significant portion of the $833 million in gains related to the impact of the step-up acquisitions of GGP and our service provider to the offshore oil production industry. Additional gains include those arising from the recognition of a deferred tax asset upon acquiring control of an investment that was not reflected in the carrying amount of the investment prior to the business combination. These gains were partially offset by transaction costs incurred relating to acquisitions completed during the year.
Further details relating to the significant acquisitions described above are provided in Note 5 of the consolidated financial statements.
Dispositions
Recent asset sales across our listed partnerships resulted in the absence of revenues and net income of $390 million and $155 million, respectively. The assets sold that most significantly impacted our results were our European logistics business, several office properties and a portfolio of self-storage assets in our Real Estate segment.
The gains recognized in net income relate primarily to portfolio premiums on various assets sold, most notably our U.S. logistics operations, a portfolio of self-storage assets, our Chilean electricity transmission business and our Australian energy operations.
Fair Value Changes
The following table disaggregates fair value changes into major components to facilitate analysis: 
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2018

 
2017

 
Change

Investment properties
$
1,610

 
$
1,021

 
$
589

Transaction related gains, net of deal costs
1,132

 
637

 
495

Financial contracts
(189
)
 
(868
)
 
679

Impairments and provisions
(309
)
 
(344
)
 
35

Other fair value changes
(450
)
 
(25
)
 
(425
)
Total fair value changes
$
1,794

 
$
421

 
$
1,373

Investment Properties
Investment properties are recorded at fair value with changes recorded in net income. The following table disaggregates investment property fair value changes by asset type:
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2018

 
2017

 
Change

Core office
$
150

 
$
(864
)
 
$
1,014

LP Investments and other
1,460

 
1,885

 
(425
)
 
$
1,610

 
$
1,021

 
$
589

We discuss the key valuation inputs of our investment properties on page 85.

34 BROOKFIELD ASSET MANAGEMENT


Core Office
Valuation gains totaled $150 million. The gains relate primarily to:
strong leasing activity in our Sydney and Toronto portfolios; and
an increase in value in a London development property as the asset nears completion; partially offset by
fair value adjustments in our downtown New York properties.
Valuation losses of $864 million in the prior year were primarily attributable to a change of valuation metrics and a slowdown in leasing activity in our properties in downtown New York, partially offset by gains in certain properties from rate compression and strong leasing activity.
LP Investments and Other
Valuation gains of $1.5 billion relate primarily to:
our U.S. logistics portfolio, for which we reduced discount rates as development properties approached stabilization, increased cash flow assumptions due to strong overall leasing and updated values to reflect recent market transactions and purchase offers; and
higher cash flow projections for our office portfolio in India to reflect the impact of regulatory changes that allow for an increase in leasable area; partially offset by
valuation losses on our opportunistic retail portfolio.
In the prior year, valuation gains of $1.9 billion were primarily related to valuation gains on our European logistics operations, increases in the values of our Indian office properties and mixed-use property in South Korea due to improved leasing activity and market rents and occupancy increases in our U.K. student housing portfolio.
Transaction Related Gains, Net of Deal Costs
Transaction related gains of $1.1 billion relate primarily to:
gains of $584 million arising from the acquisitions and restructuring of businesses within our U.S. operations that resulted in the recognition of tax assets;
the privatization of GGP, resulting in a net transaction related gain of $422 million. The net gain on acquisition was partially offset by fair value adjustments to adjust the carrying value of our investment in GGP to its fair value immediately prior to acquiring control;
a $411 million gain following the extinguishment of outstanding debt relating to a hospitality asset; and
a $250 million gain recognized on taking control of a service provider to the offshore oil production industry. This includes a gain of $44 million on the settlement of subsidiary level debt and warrants; partially offset by
deal costs of $582 million across the company, primarily from acquisitions completed during the year in our private equity and real estate businesses.
The prior year gains relate primarily to the deconsolidation of Norbord Inc. We reduced our interest in Norbord to less than 50% in the fourth quarter of 2017 and recognized a gain when we revalued the assets and liabilities on the change of control.
Financial Contracts
Financial contracts include mark-to-market gains and losses on financial contracts related to foreign currency, interest rate and pricing exposures that are not designated as hedges.
Unrealized losses of $189 million relate primarily to the mark-to-market movements on our interest rate and cross-currency swaps, as well as fair value changes on currency hedges which do not qualify for hedge accounting.
The prior year losses relate to the valuation of contracts in our financial asset portfolio and foreign exchange contracts that do not qualify for hedge accounting.

2018 MD&A AND FINANCIAL STATEMENTS 35


Impairments and Provisions
Impairments and provisions totaled $309 million. We recognized impairment in our Private Equity segment following a write-down of property, plant and equipment in a Canadian natural gas operation. Additionally, our Brazilian residential business recorded a provision as a result of an ongoing assessment of outstanding claims.
In the prior year, impairments and provisions related primarily to the cost of terminations on condominium sales agreements in our Brazilian residential business, as well as impairment losses in our hospitality assets, timber assets and certain investments in our Private Equity segment.
Income Taxes
We recorded an aggregate income tax recovery of $248 million in 2018, compared to an expense of $613 million in the prior year, including current taxes of $861 million (2017$286 million) and a deferred tax recovery of $1.1 billion (2017 – expense of $327 million).
The decrease in income tax expense relates primarily to a lower effective tax rate primarily attributable to (1) an increase in the projected utilization of previously unrecognized loss carryforwards; and (2) changes in the proportion of income in the jurisdictions with different tax rates.
The company recognized additional tax loss carryforwards as a result of higher projected taxable income in our revised business plan that we expect to be able to offset with previously unrecognized loss carryforwards. This resulted in a deferred tax recovery of approximately $700 million which contributed to the 12% reduction to our effective income tax rate.
Our effective income tax rate is different from the Canadian domestic statutory income tax rate due to the following differences:
FOR THE YEARS ENDED DEC. 31
2018

 
2017

 
Change

Statutory income tax rate
26
 %
 
26
 %
 
 %
Increase (reduction) in rate resulting from:
 
 
 
 
 
Portion of gains subject to different tax rates
(4
)
 
(5
)
 
1

Change in tax rates and new legislation
(4
)
 
(3
)
 
(1
)
International operations subject to different tax rates
(3
)
 
3

 
(6
)
Taxable income attributed to non-controlling interests
(8
)
 
(9
)
 
1

Recognition of deferred tax assets
(12
)
 
(2
)
 
(10
)
Non-recognition of the benefit of current year’s tax losses
1

 
3

 
(2
)
Other
1

 
(1
)
 
2

Effective income tax rate
(3
)%
 
12
 %
 
(15
)%
Our income tax provision does not include a number of non-income taxes paid that are recorded elsewhere in our 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.
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 includes 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 of the net income, but only our share of the associated tax provision. This gave rise to an 8% and 9% reduction in the effective tax rate relative to the statutory tax rate in 2018 and 2017, respectively.
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 gave rise to a 3% decrease in our effective tax rate, compared to a 3% increase in the prior year. The difference will vary from period to period depending on the relative proportion of income in each country.

36 BROOKFIELD ASSET MANAGEMENT


BALANCE SHEET ANALYSIS
The following table summarizes the statement of financial position of the company as at December 31, 2018, 2017 and 2016:
 
 
 
 
 
 
 
Change
AS AT DEC. 31
(MILLIONS)
2018

 
2017

 
2016

 
2018 vs 2017

 
2017 vs 2016

Assets
 
 
 
 
 
 
 
 
 
Investment properties
$
84,309

 
$
56,870

 
$
54,172

 
$
27,439

 
$
2,698

Property, plant and equipment
67,294

 
53,005

 
45,346

 
14,289

 
7,659

Equity accounted investments
33,647

 
31,994

 
24,977

 
1,653

 
7,017

Cash and cash equivalents1
8,390

 
5,139

 
4,299

 
3,251

 
840

Accounts receivable and other1
16,931

 
11,973

 
9,133

 
4,958

 
2,840

Intangible assets
18,762

 
14,242

 
6,073

 
4,520

 
8,169

Goodwill
8,815

 
5,317

 
3,783

 
3,498

 
1,534

Other assets
18,133

 
14,180

 
12,043

 
3,953

 
2,137

Total Assets
$
256,281

 
$
192,720

 
$
159,826

 
$
63,561

 
$
32,894

Liabilities
 
 
 
 
 
 
 
 
 
Corporate borrowings1
$
6,409

 
$
5,659

 
$
4,500

 
$
750

 
$
1,159

Non-recourse borrowings of managed entities1
111,809

 
72,730

 
60,391

 
39,079

 
12,339

Other non-current financial liabilities1
13,528

 
10,478

 
7,759

 
3,050

 
2,719

Other liabilities
27,385

 
23,981

 
17,488

 
3,404

 
6,493

Equity
 
 
 
 
 
 


 


Preferred equity
4,168

 
4,192

 
3,954

 
(24
)
 
238

Non-controlling interests
67,335

 
51,628

 
43,235

 
15,707

 
8,393

Common equity
25,647

 
24,052

 
22,499

 
1,595

 
1,553

Total Equity
97,150

 
79,872

 
69,688

 
17,278

 
10,184

 
$
256,281

 
$
192,720

 
$
159,826

 
$
63,561

 
$
32,894

1.
The amounts for the year ended December 31, 2018 have been prepared in accordance with IFRS 9. Prior period amounts have not been restated (refer to Note 2 of the consolidated financial statements).


2018 MD&A AND FINANCIAL STATEMENTS 37


2018 vs. 2017
Consolidated assets at December 31, 2018 were $256.3 billion, an increase of $63.6 billion since December 31, 2017. The increases noted in the table above are largely attributable to $78.6 billion of assets acquired through business combinations, increases in the fair value of our investment properties and property, plant and equipment, and additions to our fixed asset portfolios, including ongoing construction of existing assets and asset purchases. We have summarized below the impact of acquisitions on our consolidated assets and liabilities:
(MILLIONS)
Real Estate

 
Infrastructure

 
Private Equity

 
Renewable Power and Other

 
Total 

Cash and cash equivalents
$
1,056

 
$
71

 
$
658

 
$
388

 
$
2,173

Accounts receivable and other
2,247

 
511

 
2,267

 
623

 
5,648

Inventory
150

 
23

 
686

 
5

 
864

Equity accounted investments
12,379

 
15

 
329

 
29

 
12,752

Investment properties
33,024

 

 

 

 
33,024

Property, plant and equipment
1,748

 
2,945

 
4,913

 
2,970

 
12,576

Intangible assets
54

 
3,208

 
2,942

 
386

 
6,590

Goodwill
96

 
2,905

 
971

 
186

 
4,158

Deferred income tax assets
220

 

 
38

 
582

 
840

Total assets
50,974

 
9,678

 
12,804

 
5,169

 
78,625

Less:
 
 
 
 
 
 
 
 
 
Accounts payable and other
(2,177
)
 
(591
)
 
(3,657
)
 
(715
)
 
(7,140
)
Non-recourse borrowings
(18,218
)
 
(1,484
)
 
(3,669
)
 
(2,023
)
 
(25,394
)
Deferred income tax liabilities
(58
)
 
(839
)
 
(156
)
 
(210
)
 
(1,263
)
Non-controlling interests1
(2,603
)
 
(544
)
 
(512
)
 
(22
)
 
(3,681
)
 
(23,056
)
 
(3,458
)
 
(7,994
)
 
(2,970
)
 
(37,478
)
Net assets acquired
$
27,918

 
$
6,220

 
$
4,810

 
$
2,199

 
$
41,147

1.
Includes non-controlling interests recognized on business combinations measured as the proportionate share of fair value of the identifiable assets and liabilities on the date of acquisition. For certain business combinations in our Private Equity segment, non-controlling interest recognized on business combinations is measured at the proportionate fair value of the total net assets on the date of acquisition.
Further details on business combinations are provided in Note 5 to the consolidated financial statements.
During 2018, we sold $11.1 billion of assets, while the impact of decreasing foreign exchange rates also partially offset the increases described above.
Investment properties consist primarily of the company’s real estate assets. The balance as at December 31, 2018 increased by $27.4 billion, primarily due to:
acquisitions of $33.0 billion, including $18.0 billion of investment properties at GGP which were previously reported through equity accounted investments and $9.4 billion through the acquisition of a diversified U.S. REIT with office, multifamily and retail assets. Other notable investments include a U.K. student housing portfolio, office buildings in New York and Chicago, an office park in Mumbai and a mixed-use entertainment complex in Germany;
additions of $3.1 billion as we enhanced or expanded numerous properties through capital expenditures; and
valuation gains recorded in fair value changes of $1.6 billion, largely within our LP investments portfolio (refer to page 34 for further information); partially offset by
the $1.7 billion impact of decreasing foreign exchange rates; and
sales or reclassifications of $8.6 billion, including office properties in Toronto and Sydney, 112 storage properties across the U.S., our U.S. logistics portfolio and the reclassification of a number of properties to held for sale, including office properties in the U.S. and Brazil and a mixed-use portfolio in China.
We provide a continuity of investment properties in Note 11 to the consolidated financial statements.

38 BROOKFIELD ASSET MANAGEMENT


Property, plant and equipment increased by $14.3 billion primarily as a result of:
acquisitions of $12.6 billion across our operating segments, including one of North America’s leading providers of essential residential energy infrastructure, a western Canadian natural gas gathering and processing business, a service provider to the power generation industry, extended-stay hotels across the U.S., wind and solar assets in Europe and the consolidation of a service provider to the offshore oil production industry that was previously equity accounted;
revaluation surplus of $5.6 billion in our Renewable Power segment, primarily attributed to the benefit of the United States tax reform enacted into law in 2017 and the successful integration of key acquisitions into the business; and
additions of $2.1 billion primarily related to growth capital expenditures across our operating segments; partially offset by
the negative impact of foreign currency translation of $3.0 billion; and
sales and depreciation in the period, including the impact of reclassifying $749 million to assets held for sale as part of the expected sale of certain wind and solar assets in non-core regions within our Renewable Power segment.
We provide a continuity of property, plant and equipment in Note 12 to the consolidated financial statements.
The increase of $1.7 billion in equity accounted investments is primarily due to:
the $2.5 billion net impact of the GGP transaction, as the consolidation of equity accounted investments held within GGP was partially offset by the derecognition of the carrying value of our investment prior to consolidation;
$3.1 billion of other additions or acquisitions through business combinations across our operating segments, including assets acquired as part of the acquisition of a diversified U.S. REIT in the fourth quarter; and
our share of comprehensive income of $1.6 billion; partially offset by
the sale of our $1.0 billion Chilean electricity transmission business;
the reclassification of a service provider to the offshore oil production industry and two entities in our Real Estate and Corporate segments after increasing our ownership, thereby gaining control during the year; and
distributions received and returns of capital of $1.9 billion.
Cash and cash equivalents increased by $3.3 billion as at December 31, 2018 compared to the prior year end primarily due to timing of cash flows. 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.
Intangible assets increased by $4.5 billion primarily from new acquisitions completed during the year, particularly a North American residential energy infrastructure business acquired in the fourth quarter in our Infrastructure segment and a service provider to the power generation industry acquired in the third quarter in our Private Equity segment. This was partially offset by amortization during the year of $659 million and the negative impact of foreign currency, which reduced the balance by $1.7 billion.
Goodwill increased by $3.5 billion, primarily from acquisitions of $4.2 billion. Our Infrastructure segment completed many acquisitions during the year that resulted in goodwill, including a residential energy infrastructure business, a Colombian natural gas distribution business, a large-scale data center business and a western Canadian natural gas gathering and processing business. This was partially offset by the negative impact of foreign currency, which reduced the balance by $635 million.
Other assets are comprised of inventory, deferred income tax assets, assets classified as held for sale and other financial assets. The increase of $4.0 billion is primarily a result of:
acquisitions completed in the year;
$840 million of deferred income tax assets from the recognition of net operating losses that can be used to offset future projected net income; and
an increase in assets held for sale of $580 million, primarily attributable to the reclassification of certain wind and solar assets in our Renewable Power segment, as well as a Shanghai property portfolio in our Real Estate segment.
Corporate borrowings increased by $750 million due to $1.1 billion of corporate debt issued during the year, partially offset by the impact of decreasing foreign exchange rates and the absence of draws on the corporate revolving facility.

2018 MD&A AND FINANCIAL STATEMENTS 39


Non-recourse borrowings increased by $39.1 billion primarily due to acquisitions across our businesses, most notably in our Real Estate segment. The balance also increased due to the use of leverage to fund certain recent acquisitions, specifically in our Private Equity segment, and the impact of debt refinancings in various businesses, including our graphite electrode manufacturing business and our Brazilian regulated gas transmission business. These increases were partially offset by the impact of decreasing foreign exchange rates and the repayment of amounts previously drawn on revolving or term bank facilities.
Other non-current financial liabilities consist of our subsidiary equity obligations, non-current accounts payable and other long-term liabilities that are due after one year. The balance increased as a result of liabilities assumed on acquiring businesses during the year.
Refer to Part 4 – Capitalization and Liquidity for more information.
2017 vs. 2016
Consolidated assets as at December 31, 2017 were $192.7 billion, compared to $159.8 billion as at December 31, 2016. Year-over-year increases were primarily due to the impact of acquisitions completed in 2017. In addition, most foreign currency-denominated assets increased as the majority of foreign currencies appreciated against the U.S. dollar.
Investment properties were $2.7 billion higher at the end of 2017 compared to the prior year as the impact of various real estate investments completed during the year, as well as the impact of valuation gains and foreign exchange, was partially offset by numerous asset sales across our core office and LP investments portfolios.
Property, plant and equipment increased by $7.7 billion during 2017. The increase was primarily a result of acquisitions completed during the year, most notably solar and wind assets within our renewable power business. The increase from asset acquisitions was partially offset by depreciation recorded during the year.
Equity accounted investments were $32.0 billion as at December 31, 2017, an increase of $7.0 billion compared to the prior year. The increase was due primarily to $5.3 billion of additions, net of dispositions, related to increases across multiple businesses, including higher ownership of our investment in GGP and increases to our Brazilian toll road portfolio and our North American natural gas transmission business. In 2017, we also reclassified our investment in Norbord to an equity accounted investment. We benefited from comprehensive income of $1.7 billion and $727 million of foreign exchange gains in 2017, partially offset by distributions of $732 million.
The increase in intangible assets of $8.2 billion was due to acquisitions completed in 2017, specifically a Brazilian regulated gas transmission business in our Infrastructure segment and a Brazilian water treatment business in our Private Equity segment.
Corporate borrowings increased by $1.2 billion as the issuance of $1.3 billion of corporate notes and the impact of foreign exchange were partially offset by the repayment of $250 million and C$250 million of corporate notes during the year.
Non-recourse borrowings increased by $12.3 billion from 2016 to 2017, the majority of which relates to debt assumed on acquisitions and increased borrowings to finance these acquisitions.
Other liabilities increased by $6.5 billion primarily due to the impact of recent acquisitions, including deferred income tax liabilities recorded in business combinations where the tax bases of the net assets acquired were lower than their fair values.

40 BROOKFIELD ASSET MANAGEMENT


Equity
The significant variances in common equity and non-controlling interests are discussed below. Preferred equity is discussed in Part 4 of this MD&A.
Common Equity
The following table presents the major contributors to the period-over-period variances for common equity:
AS AT AND FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2018

 
2017

Common equity, beginning of year
$
24,052

 
$
22,499

Changes in period
 
 
 
Changes in accounting policies
(218
)
 

Net income to shareholders
3,584

 
1,462

Common dividends
(575
)
 
(642
)
Preferred dividends
(151
)
 
(145
)
Foreign currency translation
(959
)
 
280

Other comprehensive income
1,365

 
569

Share repurchases, net of issuances and vesting
(359
)
 
(103
)
Ownership changes and other
(1,092
)
 
132

 
1,595

 
1,553

Common equity, end of year
$
25,647

 
$
24,052

Common equity increased by $1.6 billion to $25.6 billion during 2018. The change includes:
a reduction in opening common equity of $218 million to reflect the adjustments required to transition to IFRS 15 Revenue from Contracts with Customers (“IFRS 15”) and IFRS 9 Financial Instruments (“IFRS 9”);
net income attributable to shareholders of $3.6 billion;
foreign currency translation losses of $959 million as average foreign currency rates in the jurisdictions where we hold the majority of our non-U.S. dollar investments weakened relative to the U.S. dollar;
other comprehensive income of $1.4 billion relating primarily to the revaluation surplus recorded on revaluing our property, plant and equipment at year end;
share repurchases, net of issuances and vesting, of $359 million, which included $388 million paid to repurchase 9.6 million Class A common shares (“Class A shares”), of which $310 million was to fund long-term compensation plans; and
ownership changes and other which are primarily related to the dilution loss to reflect our reduced ownership interest in BPY following the GGP privatization, partially offset by gains relating to the partial disposition of our graphite electrode manufacturing business through initial and secondary public offerings in the second and third quarters, respectively.
Non-controlling Interests
Non-controlling interests in our consolidated results primarily consist of third-party interests in BPY, BEP, BIP and BBU, and their consolidated entities as well as co-investors and other participating interests in our consolidated investments as follows:
AS AT DEC. 31
(MILLIONS)
2018

 
2017

Brookfield Property Partners L.P.
$
31,580

 
$
19,736

Brookfield Renewable Partners L.P.
12,457

 
10,139

Brookfield Infrastructure Partners L.P.
12,752

 
11,376

Brookfield Business Partners L.P.
4,477

 
4,000

Other participating interests
6,069

 
6,377

 
$
67,335

 
$
51,628


2018 MD&A AND FINANCIAL STATEMENTS 41


Non-controlling interests increased by $15.7 billion in 2018 to $67.3 billion, primarily due to:
comprehensive income attributable to non-controlling interests which totaled $5.7 billion; this is inclusive of foreign currency translation losses as average foreign currency rates in the jurisdictions where we hold the majority of our non-U.S. dollar investments weakened relative to the U.S. dollar;
ownership changes attributable to non-controlling interests of $10.2 billion; and
net equity issuances to non-controlling interests totaling $6.7 billion; partially offset by
$6.7 billion of distributions to non-controlling interests.
CONSOLIDATION AND FAIR VALUE ACCOUNTING
As a Canadian domiciled public corporation, we report under IFRS, while many of our alternative asset manager peers report under U.S. GAAP. There are many differences between U.S. GAAP and IFRS, but the two principal differences affecting our consolidated financial statements compared to those of our peers are consolidation and fair value accounting.
In particular, U.S. GAAP allows some of our alternative asset manager peers to report their investments at fair value on one line in their balance sheet on a net basis as opposed to consolidating the funds. This approach is not available under IFRS. This can create significant differences in the presentation of our financial statements as compared to our alternative asset manager peers.
Consolidation
Our consolidation conclusions under IFRS may differ from our peers who report under U.S. GAAP for two primary reasons:
U.S. GAAP uses a voting interest model or a variable interest model to determine consolidation requirements, depending on the circumstances, whereas IFRS uses a control-based model. We generally have the contractual ability to unilaterally direct the relevant activities of our funds; and
we generally invest significant amounts of capital alongside our investors and partners, which, in addition to our customary management fees and incentive fees, means that we earn meaningful returns as a principal investor in addition to our asset management returns compared to a manager who acts solely as an agent.
As a result, in many cases, we control entities in which we hold only a minority economic interest. For example, a Brookfield-sponsored private fund to which we have committed 30% of the capital may acquire 60% of the voting interest in an investee company. The contractual arrangements generally provide us with the irrevocable ability to direct the funds’ activities. Based on these facts, we would control the investment because we exercise decision making power over a controlling interest of that business and our 18% economic interest provides us with exposure to the variable returns of a principal.
All entities that we control are consolidated for financial reporting purposes. As a result, we include 100% of these entities’ revenues and expenses in our Consolidated Statements of Operations, even though a substantial portion of their net income is attributable to non-controlling interests. Furthermore, we include all of the assets and liabilities of these entities in our Consolidated Balance Sheets, and include the portion of equity held by others as non-controlling interests.
Intercompany revenues and expenses between Brookfield and its subsidiaries, such as asset management fees, are eliminated in our Consolidated Statements of Operations; however, these items affect the attribution of net income between shareholders and non-controlling interests. For example, asset management fees paid by our listed partnerships to the Corporation are eliminated from consolidated revenues and expenses. However, as the common shareholders are attributed all of the fee revenues while only attributed their proportionate share of the listed partnerships’ expenses, the amount of net income attributable to common shareholders is increased with a corresponding decrease in net income attributable to non-controlling interests.
Fair Value Accounting
Under U.S. GAAP, many of our alternative asset manager peers account for their funds as investment companies and reflect their investments at fair value.
Under IFRS, as a parent company, we are required to look through our consolidated and equity accounted investments and account for their assets and liabilities under the applicable IFRS guidance. We reflect a large number of assets at fair value, namely our commercial properties, renewable power facilities and certain infrastructure assets which are typically recorded at amortized cost under U.S. GAAP. However, there are other assets that are not subject to fair value accounting under IFRS and are therefore carried at amortized cost, which would be more consistent with U.S. GAAP.

42 BROOKFIELD ASSET MANAGEMENT


Under both IFRS and U.S. GAAP, the value of asset management activities is generally not reflected on the balance sheet despite being material components of the value of these businesses.
For additional details on the valuation approach for the relevant segments, critical assumptions and related sensitivities, refer to Part 5 of this MD&A.
FOREIGN CURRENCY TRANSLATION
Approximately half of our capital is invested in non-U.S. currencies and the cash flows generated from these businesses, as well as our equity, are subject to changes in foreign currency exchange rates. From time to time, we utilize financial contracts to adjust these exposures. The most significant currency exchange rates that impact our business are shown in the following table:
AS AT DEC. 31
Year-End Spot Rate
 
Change
 
Average Rate
 
Change
2018

 
2017

 
2016

 
2018 vs 2017

 
2017 vs 2016

 
2018

 
2017

 
2016

 
2018 vs 2017

 
2017 vs 2016

Australian dollar
0.7050

 
0.7809

 
0.7197

 
(10
)%
 
9
 %
 
0.7475

 
0.7669

 
0.7441

 
(3
)%
 
3
 %
Brazilian real1
3.8745

 
3.3080

 
3.2595

 
(15
)%
 
(1
)%
 
3.6550

 
3.1928

 
3.4904

 
(13
)%
 
9
 %
British pound
1.2760

 
1.3521

 
1.2357

 
(6
)%
 
9
 %
 
1.3350

 
1.2889

 
1.3554

 
4
 %
 
(5
)%
Canadian dollar
0.7331

 
0.7953

 
0.7439

 
(8
)%
 
7
 %
 
0.7718

 
0.7711

 
0.7555

 
 %
 
2
 %
1.
Based on U.S. dollar to Brazilian real.
As at December 31, 2018, our IFRS net equity of $25.6 billion was invested in the following currencies: United States dollars – 56% (2017 – 48%); Brazilian reais – 13% (2017 – 17%); British pounds – 12% (2017 – 15%); Canadian dollars – 7% (2017 – 6%); Australian dollars – 6% (2017 – 9%); and other currencies – 6% (2017 – 5%). Currency exchange rates relative to the U.S. dollar at the end of 2018 were lower than December 31, 2017 for all of our significant non-U.S. dollar investments.
The following table disaggregates the impact of foreign currency translation on our equity by the most significant non-U.S. currencies:
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2018

 
2017

 
Change

Australian dollar
$
(629
)
 
$
406

 
$
(1,035
)
Brazilian real
(2,162
)
 
(506
)
 
(1,656
)
British pound
(539
)
 
768

 
(1,307
)
Canadian dollar
(644
)
 
752

 
(1,396
)
Other
(714
)
 
662

 
(1,376
)
Total cumulative translation adjustments
(4,688
)
 
2,082

 
(6,770
)
Currency hedges1
1,365

 
(1,643
)
 
3,008

Total cumulative translation adjustments net of currency hedges
$
(3,323
)
 
$
439

 
$
(3,762
)
Attributable to:
 
 
 
 
 
Shareholders
$
(959
)
 
$
280

 
$
(1,239
)
Non-controlling interests
(2,364
)
 
159

 
(2,523
)
 
$
(3,323
)
 
$
439

 
$
(3,762
)
1.
Net of deferred income tax expense of $69 million.
Lower period end rates for our non-U.S. dollar investments, particularly the Brazilian real which decreased 15% from the beginning of the year, reduced our equity, net of currency hedges, by $3.3 billion. Gains on our hedges against the Australian, British and Canadian currencies, for which financial contracts and foreign currency debt are used to reduce exposures, partially offset the foreign currency translation losses. The overall result has been a net decrease in net equity.
For the year ended December 31, 2017, the year-over-year foreign exchange rates relative to the U.S. dollar for our significant currency exposures increased with the exception of the Brazilian real, leading to an increase in net equity of $439 million.
We typically do not hedge our equity in Brazil and other emerging markets due to the high costs associated with these contracts.

2018 MD&A AND FINANCIAL STATEMENTS 43


SUMMARY OF QUARTERLY RESULTS
In the past two years the quarterly variances in revenues are due primarily to acquisitions and dispositions. Variances in net income to shareholders relate primarily to the timing and amount of fair value changes and deferred tax provisions, as well as seasonality and cyclical influences in certain businesses. Changes in ownership have resulted in the consolidation and deconsolidation of revenues from some of our assets, particularly in our real estate and private equity businesses. Other factors include the impact of foreign currency on non-U.S. revenues and net income attributable to non-controlling interests.
Our real estate operations typically generate consistent results on a quarterly basis due to the long-term nature of contractual lease arrangements subject to the intermittent recognition of disposition and lease termination gains. Our retail properties typically experience seasonally higher retail sales during the fourth quarter, and our resort hotels tend to experience higher revenues and costs as a result of increased visits during the first quarter. We fair value our real estate assets on a quarterly basis which results in variations in net income based on changes in the value.
Renewable power hydroelectric operations are seasonal in nature. Generation tends to be higher during the winter rainy season in Brazil and spring thaws in North America; however, this is mitigated to an extent by prices, which tend not to be as strong as they are in the summer and winter seasons due to the more moderate weather conditions and reductions in demand for electricity. Water and wind conditions may also vary from year to year. Our infrastructure operations are generally stable in nature as a result of regulation or long-term sales contracts with our investors, certain of which guarantee minimum volumes.
Revenues and direct costs in our private equity operations vary from quarter to quarter primarily due to acquisitions and dispositions of businesses, fluctuations in foreign exchange rates, business and economic cycles and weather and seasonality in underlying operations. Broader economic factors and commodity market volatility may have a significant impact on a number of our businesses, in particular within our industrial operations. For example, seasonality affects our contract drilling and well-servicing operations as the ability to move heavy equipment safely and efficiently in western Canadian oil and gas fields is dependent on weather conditions. Within our infrastructure services, the core operating plants business of our service provider to the power generation industry generates the majority of its revenue during the fall and spring, when power plants go offline to perform maintenance and replenish their fuel. Some of our business services operations will typically have stronger performance in the latter half of the year whereas others, such as our fuel marketing and road fuel distribution businesses, will generate stronger performance in the second and third quarters. Net income is impacted by periodic gains and losses on acquisitions, monetization and impairments.
Our residential development operations are seasonal in nature and a large portion is correlated with the ongoing U.S. housing recovery and, to a lesser extent, economic conditions in Brazil. Results in these businesses are typically higher in the third and fourth quarters compared to the first half of the year, as weather conditions are more favorable in the latter half of the year which tends to increase construction activity levels.
Our condensed statements of operations for the eight most recent quarters are as follows:
 
2018
 
2017
FOR THE PERIODS ENDED
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Q4

 
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

Revenues1
$
16,006

 
$
14,858

 
$
13,276

 
$
12,631

 
$
13,065

 
$
12,276

 
$
9,444

 
$
6,001

Net income
3,028

 
941

 
1,664

 
1,855

 
2,083

 
992

 
958

 
518

Net income (loss) to shareholders
1,884

 
163

 
680

 
857

 
1,046

 
228

 
225

 
(37
)
Per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
– diluted
$
1.87

 
$
0.11

 
$
0.62

 
$
0.84

 
$
1.02

 
$
0.20

 
$
0.19

 
$
(0.08
)
– basic
1.91

 
0.11

 
0.64

 
0.85

 
1.05

 
0.20

 
0.20

 
(0.08
)
1.
2017 revenues have not been restated as we adopted IFRS 15 using the modified retrospective method as at January 1, 2018.
The following table shows fair value changes and income taxes for the last eight quarters, as well as their combined impact on net income:
 
2018
 
2017
FOR THE PERIODS ENDED
(MILLIONS)
Q4

 
Q3

 
Q2

 
Q1

 
Q4

 
Q3

 
Q2

 
Q1

Fair value changes
$
257

 
$
132

 
$
833

 
$
572

 
$
280

 
$
132

 
$
213

 
$
(204
)
Income taxes
884

 
(144
)
 
(339
)
 
(153
)
 
(110
)
 
(259
)
 
(119
)
 
(125
)
Net impact
$
1,141

 
$
(12
)
 
$
494

 
$
419

 
$
170

 
$
(127
)
 
$
94

 
$
(329
)

44 BROOKFIELD ASSET MANAGEMENT


Over the last eight completed quarters, the factors discussed below caused variations in revenues and net income to shareholders on a quarterly basis:
The increase in revenues in the fourth quarter of 2018 is due primarily to recent acquisitions, including a full quarter of revenues from GGP following the privatization, as well as the impact of same-store growth across the business. Consolidated net income is higher than prior period due to gains on sales of businesses, fair value valuation gains on investment properties and a deferred tax recovery in our Corporate segment. These increases were partially offset by higher interest expense from new borrowings to fund acquisitions and debts assumed from acquired businesses.
Revenues increased in the third quarter primarily due to recent acquisitions across all segments, including the privatization of GGP, and same-store growth, in particular improved pricing at our graphite electrode manufacturing business. Higher interest and depreciation expenses associated with recent acquisitions, and the recognition of a deferred tax expense associated with the GGP privatization, more than offset the increase in revenues.
The increase in revenues in the second quarter of 2018 is primarily attributable to recent acquisitions, additional home closings in our North American residential business and improved pricing at our graphite electrodes manufacturing business. Increases in direct costs offset these changes in revenue. While net income also benefited from strong performance at Norbord and valuation and transaction-related gains in our Real Estate segment, results were more than offset by higher income tax expenses and the absence of a one-time gain recognized on the sale of a business in the first quarter.
In the first quarter of 2018, revenues decreased due to the seasonality of our residential homebuilding and construction services businesses, partially offset by a full quarter of revenues contributed by recent acquisitions in our Renewable Power segment. Net income benefited from investment property valuation gains and other fair value gains recognized in the current quarter.
The increase in revenues in the fourth quarter of 2017 is attributable to same-store growth in existing operations across our business and acquisitions throughout the year. Net income benefited from gains from the sale of the European logistics company and from a change in basis of accounting for Norbord.
Revenues in the third quarter of 2017 increased as a result of incremental contributions from acquisitions made partway through the second quarter of 2017, as described below, that have now contributed to a full quarter. Current quarter acquisitions also added to the increase, namely the acquisition of a fuel marketing business in our Private Equity segment. Results were partially offset by higher income tax expenses in the quarter.
The overall increase in results in the second quarter of 2017 is predominantly attributable to acquisitions completed in the quarter, including the regulated gas transmission operation and the leading water treatment business, both in Brazil and the U.K. road fuel distribution business.
In the first quarter of 2017, we recorded fair value losses, predominantly driven by mark-to-market losses on the GGP warrants, as well as decreases in valuations in our core office portfolio. Revenue declined from the prior quarter due to seasonality in the residential business.


2018 MD&A AND FINANCIAL STATEMENTS 45


CORPORATE DIVIDENDS
The dividends paid by Brookfield on outstanding securities during the past three years are summarized in the following table:
 
Distribution per Security
 
2018

 
2017

 
2016

Class A and B1 Limited Voting Shares (“Class A and B shares”)
$
0.60

 
$
0.56

 
$
0.52

Special distribution to Class A and B shares2,3

 
0.11

 
0.45

Class A Preferred Shares
 
 
 
 
 
Series 2
0.48

 
0.39

 
0.36

Series 4
0.48

 
0.39

 
0.36

Series 8
0.68

 
0.55

 
0.48

Series 9
0.53

 
0.53

 
0.75

Series 13
0.48

 
0.39

 
0.36

Series 144

 

 
0.11

Series 15
0.40

 
0.28

 
0.23

Series 17
0.92

 
0.92

 
0.90

Series 18
0.92

 
0.92

 
0.90

Series 245
0.58

 
0.58

 
0.80

Series 255
0.68

 
0.56

 
0.27

Series 266
0.67

 
0.72

 
0.85

Series 287
0.53

 
0.70

 
0.87

Series 308
0.90

 
0.93

 
0.90

Series 329
0.89

 
0.87

 
0.85

Series 34
0.81

 
0.81

 
0.80

Series 36
0.94

 
0.94

 
0.92

Series 37
0.95

 
0.95

 
0.92

Series 38
0.85

 
0.85

 
0.83

Series 40
0.87

 
0.87

 
0.85

Series 42
0.87

 
0.87

 
0.85

Series 44
0.96

 
0.97

 
0.94

Series 4610
0.93

 
1.03

 

Series 4811
0.92

 
0.28

 

1.
Class B Limited Voting Shares (“Class B shares”).
2.
Distribution of one common share of Trisura Group Ltd. for every 170 Class A Shares and Class B Shares held as of the close of business of June 1, 2017.
3.
Distribution of a 20.7% interest in Brookfield Business Partners on June 20, 2016, based on IFRS values.
4.
Redeemed March 1, 2016.
5.
1,533,133 shares were converted from Series 24 to Series 25 on July 1, 2016.
6.
Dividend rate reset commenced March 31, 2017.
7.
Dividend rate reset commenced June 30, 2017.
8.
Dividend rate reset commenced December 31, 2017.
9.
Dividend rate reset commenced September 30, 2018.
10.
Issued November 18, 2016.
11.
Issued September 13, 2017.
Dividends on the Class A and B shares are declared in U.S. dollars whereas Class A Preferred share dividends are declared in Canadian dollars.

46 BROOKFIELD ASSET MANAGEMENT


PART 3 – OPERATING SEGMENT RESULTS
BASIS OF PRESENTATION
How We Measure and Report Our Operating Segments
Our operations are organized into our asset management business, five operating groups and our corporate activities, which collectively represent seven operating segments for internal and external reporting purposes. We measure operating performance primarily using FFO generated by each operating segment and the amount of capital invested by the Corporation in each segment using common equity. Common equity relates to invested capital allocated to a particular business segment which we use interchangeably with segment common equity. To further assess operating performance for our Asset Management segment we also provide unrealized carried interest1 which represents carried interest generated on unrealized changes in value of our private fund investment portfolios.
Our operating segments are global in scope and are as follows:
i.
Asset management operations include managing our listed partnerships, private funds and public securities on behalf of our investors and ourselves. We generate contractual base management fees for these activities as well as incentive distributions and performance income, including performance fees, transaction fees and carried interest. Common equity in our asset management segment is immaterial.
ii.
Real estate operations include the ownership, operation and development of core office, core retail, LP investments and other properties.
iii.
Renewable power operations include the ownership, operation and development of hydroelectric, wind, solar, storage and other power generating facilities.
iv.
Infrastructure operations include the ownership, operation and development of utilities, transport, energy, data infrastructure and sustainable resource assets.
v.
Private equity operations include a broad range of industries, and are mostly focused on business services, infrastructure services and industrial operations.
vi.
Residential development operations consist of homebuilding, condominium development and land development.
vii.
Corporate activities include the investment of cash and financial assets, as well as the management of our corporate leverage, including corporate borrowings and preferred equity, which fund a portion of the capital invested in our other operations. Certain corporate costs such as technology and operations are incurred on behalf of our operating segments and allocated to each operating segment based on an internal pricing framework.
In assessing results, we separately identify the portion of FFO and common equity within our segments that relate to our primary listed partnerships: BPY, BEP, BIP and BBU. We believe that identifying the FFO and common equity attributable to our listed partnerships enables investors to understand how the results of these public entities are integrated into our financial results and is helpful in analyzing variances in FFO between reporting periods. Additional information with respect to these listed partnerships is available in their public filings. We also separately identify the components of our asset management FFO and realized disposition gains1 included within the FFO of each segment in order to facilitate analysis of variances in FFO between reporting periods.








1.
See definition in Glossary of Terms beginning on page 108.

2018 MD&A AND FINANCIAL STATEMENTS 47


SUMMARY OF RESULTS BY OPERATING SEGMENT
The following table presents revenues, FFO and common equity by segment on a year-over-year basis for comparative purposes:
AS AT AND FOR THE YEARS ENDED DEC. 31
(MILLIONS)
Revenues1
 
FFO2
 
Common Equity
2018

 
2017

 
Change 
 
2018

 
2017

 
Change 
 
2018

 
2017

 
Change 
Asset Management
$
1,947

 
$
1,467

 
$
480

 
$
1,317

 
$
970

 
$
347

 
$
328

 
$
312

 
$
16

Real Estate
8,116

 
6,862

 
1,254

 
1,786

 
2,004

 
(218
)
 
17,423

 
16,725

 
698

Renewable Power
3,762

 
2,788

 
974

 
328

 
270

 
58

 
5,302

 
4,944

 
358

Infrastructure
5,018

 
3,871

 
1,147

 
602

 
345

 
257

 
2,887

 
2,834

 
53

Private Equity
37,270

 
24,577

 
12,693

 
795

 
333

 
462

 
4,279

 
4,215

 
64

Residential Development
2,683

 
2,447

 
236

 
49

 
34

 
15

 
2,606

 
2,915

 
(309
)
Corporate Activities
188

 
362

 
(174
)
 
(476
)
 
(146
)
 
(330
)
 
(7,178
)
 
(7,893
)
 
715

Total
$
58,984

 
$
42,374

 
$
16,610

 
$
4,401

 
$
3,810

 
$
591

 
$
25,647

 
$
24,052

 
$
1,595

1.
Revenues include inter-segment revenues which are adjusted to arrive at external revenues for IFRS purposes. Please refer to Note 3(c) of the consolidated financial statements.
2.
Total FFO is a non-IFRS measure – see definition in Glossary of Terms beginning on page 108.
Total revenues and FFO were $59.0 billion and $4.4 billion in 2018 compared to $42.4 billion and $3.8 billion in the prior year, respectively. FFO includes realized disposition gains of $1.5 billion in 2018 compared to $1.3 billion in the prior year.
Revenues increased by $16.6 billion to $59.0 billion in the year, primarily as a result of:
recent acquisitions across all business groups, in particular a road fuel distribution business and a service provider to the power generation industry in our Private Equity segment; the step-up acquisition of GGP in our Real Estate segment; a Colombian gas commercialization and distribution business and one of North America’s leading providers of essential residential energy infrastructure in our Infrastructure segment; and portfolios of wind and solar assets in our Renewable Power segment; and
same-store growth, including the impact of improved pricing in our graphite electrode manufacturing business and same-property leasing growth in our core office properties; partially offset by
the absence of revenues from Norbord which was consolidated up until the fourth quarter of 2017 at which time we sold a partial interest and therefore no longer hold a controlling interest in the business.
FFO excluding disposition gains increased by $391 million from the prior year primarily due to:
continued expansion of our asset management activities, with significant increases in fee bearing capital resulting in higher management fees;
strong market performance by BBU resulting in higher performance fees earned; and
contributions from recent acquisitions and same-store growth as described above; partially offset by
the impact of foreign exchange.
We recorded realized disposition gains in 2018 across all our operating segments. In our real estate business, we monetized mature core office properties, sold core retail assets prior to the privatization of GGP and began to sell holdings in our first flagship opportunistic fund resulting in gains of $939 million. In our Private Equity segment, we realized gains on the partial sell-down of our graphite electrode manufacturing business through an IPO, secondary offering and share buyback. The sale of our Chilean electricity transmission business resulted in gains of $244 million for our Infrastructure segment while in our Renewable Power segment, gains of $38 million included the sale of a partial interest in certain of our Canadian hydroelectric assets.
Common equity increased by $1.6 billion to $25.6 billion due to contributions from earnings across our businesses and increases in the fair value of our operating assets, particularly in our renewable power business, partially offset by the impact of unfavorable foreign exchange rates and ownership changes on the privatization of GGP.
Further details on segment revenues, FFO and common equity are discussed in the following sections.

48 BROOKFIELD ASSET MANAGEMENT


assetmgmt8a06.jpg
Business Overview
We manage $138 billion of fee bearing capital, including $70 billion in private funds, $54 billion in listed partnerships and $13 billion within our public securities group. We earn recurring long-term fee revenues from this fee bearing capital, in the form of:
Long-term, diversified base management fee revenues from third party capital in our closed-end and long-life funds and perpetual fee revenues based on the total capitalization of our listed partnerships;
Incentive distributions from BIP, BEP and BPY, all of which have exceeded pre-determined thresholds; and
Performance fees, linked to the unit price performance of BBU and other transaction and advisory fees.
Included within our private fund fee bearing capital is $58 billion of carry eligible capital. We earn carried interest from this capital when fund performance achieves its preferred return, allowing us to receive a portion of fund profits returned to investors. We recognize this carried interest once it is no longer subject to claw-back.
Fee Bearing Capital1
AS AT DEC. 31 (BILLIONS)
 
Fee Related Earnings1
FOR THE YEARS ENDED DEC. 31 (MILLIONS)
feebearingcap0319.jpg
 
feerelatedearnings.jpg
 
 
 
Carry Eligible Capital1
AS AT DEC. 31 (BILLIONS)
 
Accumulated Unrealized Carried Interest1
AS AT DEC. 31 (MILLIONS)
carryeligiblecap.jpg
 
accumulatedcarried0307.jpg
1.
See definition in Glossary of Terms beginning on page 108.

2018 MD&A AND FINANCIAL STATEMENTS 49


Five-Year Review
Asset Management FFO has increased over the past five years primarily as a result of steady growth in fee bearing capital from increased market capitalization of our listed partnerships and growing private fund capital. This has contributed to higher base fees and a corresponding increase in Asset Management FFO. In particular, our private fund fee bearing capital significantly increased in 2016 and 2018 as we closed record levels of private fund capital. Higher FFO and distribution levels at our listed partnerships further contributed to increases in fee related revenues year over year.
Our accumulated unrealized carried interest has increased each of the past five-years due to the private fund fee bearing capital growth discussed above and as a result of the investment performance in many of our funds, which have recently entered the carry generation phase of their fund lives. We participate in the favorable investment performance of our private funds in the form of carried interest, and will recognize a growing amount of realized carried interest into FFO and net income as our earlier vintage funds begin to monetize investments and return significant capital to investors.
Outlook and Growth Initiatives
Real assets and alternatives continue to provide an attractive investment opportunity to institutional and high net worth investors. In periods when stock equity values are high, real assets provide diversification as they have demonstrated the ability to retain their value across cycles. These asset classes also provide investors with alternatives to fixed income investments by providing a strong yield profile. Institutional investors, in particular pension funds, must earn and generate returns to meet their long-term obligations while protecting their capital. As a result, inflows to alternative asset managers are continuing to grow and managers are focused on new product development to meet this demand.
We currently have eight funds in the market. Funds in the market include our fifth flagship private equity fund, our fourth flagship infrastructure fund and a European infrastructure debt fund, along with five long-life funds focused on real estate and infrastructure assets across multiple geographies. We continue to develop additional products in response to investor demand. In March 2019, we announced the agreement to acquire a 62% ownership in Oaktree Capital Management (“Oaktree”), a leading global alternative investment management firm with expertise in credit strategies. The successful completion of this acquisition will allow our shareholders access to increasingly diversified fee streams and will expand the product offerings available to our private fund investors.
Separate from the acquisition of Oaktree, we continue to expand our investor base bringing our total private fund investors to more than 600 following the successful final close of our third flagship real estate fund. This fund was our largest to date at $15 billion and included $2 billion from high net worth investors. We continue to advance our fundraising efforts in the high net worth space and raised $3 billion through multiple channels in 2018 and the start of 2019.
Operations
Private Funds ($70 billion of fee bearing capital)
We manage our fee bearing capital through 42 active private funds across our major asset classes: real estate, infrastructure/renewable power and private equity. These funds include core, credit, value-add and opportunistic closed-end funds and core, core plus and credit long-life funds. These are primarily invested in the equity of private companies, although in certain cases, are invested in publicly traded equities. Our credit strategies invest in debt of companies in our areas of focus.
We refer to our largest private fund series as our flagship funds. We have flagship funds within each of our major asset classes: Real Estate (BSREP series), Infrastructure (BIF series, which includes infrastructure and renewable power investments) and Private Equity (BCP series).
Closed-end private fund capital is typically committed for 10 years from the inception of the fund with two one-year extension options.
Long-life private funds are perpetual vehicles that are able to continually raise capital as new investments arise.
We are compensated for managing these private funds through base management fees, which are generally determined on committed capital during the investment period and invested capital thereafter. We are entitled to receive carried interest on these funds, which represents a portion of fund profits above a preferred return to investors.
Listed Partnerships ($54 billion of fee bearing capital)
We manage fee bearing capital through publicly listed perpetual capital entities, including BPY, BEP, BIP, BBU, TERP and Acadian.
We are compensated for managing these entities through (i) base management fees, which are primarily determined by the market capitalization of these entities; and (ii) incentive distributions or performance fees.

50 BROOKFIELD ASSET MANAGEMENT


Incentive distributions for BPY, BEP, BIP, TERP and Acadian are a portion of the increases in distributions above predetermined hurdles. Performance fees for BBU are based on increases in the unit price of BBU above an escalating threshold.
Public Securities ($13 billion of fee bearing capital)
We manage our fee bearing capital through numerous funds and separately managed accounts, focused on fixed income and equity securities.
We act as advisor and sub-advisor, earning both base and performance fees.
Fee Bearing Capital
The following table summarizes fee bearing capital:
AS AT DEC. 31
(MILLIONS)
Private Funds

 
Listed 
Partnerships 

 
Public 
Securities 

 
Total 2018

 
Total 2017

Real estate
$
33,737

 
$
19,916

 
$

 
$
53,653

 
$
41,636

Renewable power
7,595

 
13,824

 

 
21,419

 
23,930

Infrastructure
17,766

 
15,946

 

 
33,712

 
38,751

Private equity
10,714

 
4,653

 

 
15,367

 
8,618

Diversified

 

 
13,377

 
13,377

 
12,655

December 31, 2018
$
69,812

 
$
54,339

 
$
13,377

 
$
137,528

 
n/a

December 31, 2017
$
52,375

 
$
60,560

 
$
12,655

 
n/a

 
$
125,590

Fee bearing capital increased by $11.9 billion during the year. The principal changes are set out in the following table:
AS AT AND FOR THE YEARS ENDED DEC. 31
(MILLIONS)
Private Funds

 
Listed 
Partnerships 

 
Public 
Securities 

 
Total 

Balance, December 31, 2017
$
52,375

 
$
60,560

 
$
12,655

 
$
125,590

Inflows
21,832

 
8,660

 
4,458

 
34,950

Outflows

 

 
(6,045
)
 
(6,045
)
Distributions
(4,035
)
 
(4,422
)
 

 
(8,457
)
Market valuation
247

 
(9,970
)
 
(1,716
)
 
(11,439
)
Other
(607
)
 
(489
)
 
4,025

 
2,929

Change
17,437

 
(6,221
)
 
722

 
11,938

Balance, December 31, 2018
$
69,812

 
$
54,339

 
$
13,377

 
$
137,528

Private fund capital increased by $17.4 billion, primarily due to:
$21.8 billion of inflows, including $8.2 billion of commitments to our third flagship real estate fund, $4.2 billion to our fifth flagship private equity funds, $2.1 billion to our long-life strategies and $1.2 billion to our other credit and multifamily strategies, as well as $6.1 billion to co-investments; partially offset by
$4.0 billion of distributions and capital returned during the year.
Listed partnership capital decreased by $6.2 billion, due to:
$8.7 billion of inflows, including $5.7 billion related to the BPY and BPR capital issued as a result of the GGP privatization (BAM is entitled to earn incentive distributions on the units issued as part of the transaction effective on the closing date but has agreed to a one-year management fee holiday on this capital). Additional inflows included $3.0 billion of debt and/or preferred equity issued at BIP, BEP and BPY; more than offset by
$4.4 billion of distributions to unitholders; and
lower unit prices across each of the listed partnerships, which were impacted by market volatility late in 2018 (unit prices improved in early 2019 as markets recovered from the declines seen in December).

2018 MD&A AND FINANCIAL STATEMENTS 51


Public securities capital increased by $722 million, due to:
$4.5 billion of inflows, including $1.0 billion in new managed accounts and subscriptions into our energy and real estate mutual funds, as well as additional inflows from retail and institutional investors; and
$4.0 billion due to the acquisition of an energy and infrastructure investment advisor; partially offset by
$6.0 billion of redemptions, including investor reallocations out of infrastructure funds due in part to recent volatility within the infrastructure market; and
$1.7 billion decrease in market value of investments across our public securities funds due to market volatility noted above.
Carry Eligible Capital
Carry eligible capital increased during the year to $58.3 billion as at December 31, 2018 (December 31, 2017 – $42.4 billion). This includes an increase of $19.0 billion from commitments to new carry eligible funds, partially offset by capital that was returned to investors following asset dispositions.
As at December 31, 2018, $36.4 billion of carry eligible capital has already been deployed (December 31, 2017 – $24.2 billion). This capital is either currently earning carried interest or will begin earning carried interest once its related funds have reached their preferred return threshold. There is currently an additional $21.9 billion of uncalled fund commitments that will begin to earn carried interest once the capital is deployed and fund preferred returns are met (December 31, 2017 – $18.2 billion).
Operating Results
Asset management FFO includes fee related earnings and realized carried interest earned by us in respect of capital managed for investors, including the capital invested by us in the listed partnerships. This is representative of how we manage the business and measures the returns from our asset management activities.
To facilitate analysis, the following table disaggregates our Asset Management segment revenues and FFO into fee related earnings, realized carried interest, net, as these are the measures that we use to analyze the performance of the Asset Management segment. We also analyze unrealized carried interest, net1, to provide insight into the value our investments have created in the period.
We have provided additional detail, where referenced, to explain significant variances from the prior period.
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
 
 
Revenues
 
FFO
Ref
 
2018

 
2017

 
2018

 
2017

Fee related earnings
i
 
$
1,693

 
$
1,368

 
$
1,129

 
$
896

Realized carried interest
ii
 
254

 
99

 
188

 
74

Asset Management FFO
 
 
$
1,947

 
$
1,467

 
$
1,317

 
$
970

 
 
 
 
 
 
 
 
 
 
Unrealized carried interest
 
 
 
 
 
 
 
 
 
Generated
 
 
 
 
 
 
$
802

 
$
1,279

Foreign exchange
 
 
 
 
 
 
(141
)
 
1

 
 
 
 
 
 
 
661

 
1,280

Less: direct costs
 
 
 
 
 
 
(171
)
 
(352
)
Unrealized carried interest, net
iii
 
 
 
 
 
$
490

 
$
928







1.
See definition in Glossary of Terms beginning on page 108.

52 BROOKFIELD ASSET MANAGEMENT


i.    Fee Related Earnings
FOR THE YEARS ENDED DEC. 31
(MILLIONS)
2018

 
2017

Fee revenues
 
 

Base management fees
$
1,195

 
$
1,048

Incentive distributions
206

 
151

Performance fees
278

 
142

Transaction and advisory fees
14

 
27

 
1,693

 
1,368

Direct costs and other