Bank of Montreal 1997 Annual Report Download - page 93

Bank of Montreal 180th Annual Report 1997 87
We prepare our consolidated financial statements in accordance
with Canadian generally accepted accounting principles, includ-
ing the accounting requirements of our regulator, the Super-
intendent of Financial Institutions Canada. As a result of listing
our common shares on the New York Stock Exchange we are
required by the United States Securities and Exchange Commission
to report all material differences between Canadian and United
States accounting principles. There are no material differences in
the consolidated total assets as at October 31, 1997 and 1996 or
the consolidated net income, consolidated shareholders’ equity
and the consolidated statement of changes in financial position
for the years ended October 31, 1997, 1996 and 1995 that have been
reported in accordance with Canadian accounting principles
compared to what we would have reported if we had used United
States accounting principles.
Our total assets and total liabilities as at October 31, 1996 would
have been $4,279 higher under United States accounting principles,
which required that unrealized gains and losses on derivative
financial instruments be reported on a gross rather than net basis,
which was the practice in Canada at that time.
Future Changes in United States Accounting Policies
In future years, we will be required to adopt new accounting
standards set out below for our United States reporting which
may or may not give rise to material differences with our
current Canadian accounting principles. We assess the potential
impact of new policies when they are issued by standard setters
and report the potential differences in this note.
The pending changes in United States generally accepted
accounting principles and our assessment of the potential
impact are:
•
Statement of Financial Accounting Standards No. 125,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities”, which must be adopted
in fiscal 1997 for United States reporting purposes. This
Statement outlines accounting and reporting standards for
transfers and servicing of financial assets and extinguish-
ments of liabilities. FAS No. 125 is effective for transactions
occurring after December 31, 1996, except those provisions
relating to repurchase agreements, securities lending and other
similar transactions and pledged collateral, which have been
delayed until after December 31, 1997 by FAS No. 127, “Deferral
of the Effective Date of Certain Provisions of FASB Statement
No. 125, and amendment of FAS No. 125.” We adopted the
appropriate provisions of FAS No. 125 on January 1, 1997. The
effect of the adoption of the remainder of the provisions of
this standard for United States reporting purposes did not have
a material effect on our reported total assets or net income.
•
Statement of Financial Accounting Standards No. 128,
“Earnings per Share”, which must be adopted in fiscal 1998
for United States reporting purposes. This Statement establishes
standards for computing and presenting earnings per share
(“EPS”) requiring presentation of basic and fully diluted EPS
in the Consolidated Statement of Income. This standard
corresponds to the existing Canadian standard.
Note 22 Reconciliation of Canadian and United States Generally Accepted Accounting Principles
ALM = asset/liability management derivatives which we use to manage the interest rate
and foreign exchange exposures arising from our on-balance sheet positions.
The following sets out the valuation methods and assumptions we have used to estimate
fair value:
Due to the short-term nature of certain assets and liabilities we believe that the book
value is comparable to the estimated fair value. These assets and liabilities include:
•
Cash resources
•
Customers’ liability under acceptances
•
Other assets
•
Acceptances
•
Securities sold but not yet purchased
•
Securities sold under repurchase agreements
•
Other liabilities, excluding liabilities of subsidiaries, other than deposits.
The fair values of loans are determined using a variety of valuation methods, depending
on the nature of the loan, which include:
•
Fair value of loans to and past due interest bonds of designated countries, as defined
in note 4, is based on quoted market rates;
•
Fair value of performing loans is calculated by adjusting the original value of the loan
for changes in credit risk and interest rates since the time we granted the loan; and
•
Fair value of impaired loans is equal to the book value which is calculated using the
basis of valuation described in notes 4 and 5.
The fair value of our deposits is determined by discounting the cash flows to be paid on
the deposits using market interest rates currently offered for similar deposits.
The fair value of our subordinated debt and liabilities of subsidiaries included in other
liabilities is determined by referring to current market prices for similar debt instruments.
Our estimates of fair values are calculated based on our current pricing policy, the
economic and competitive environment and the characteristics of the financial instru-
ments. Our calculations are subjective in nature and require us to make significant
assumptions. Tax implications, if any, are excluded from the calculations.
Included in the excess of fair value over book value of loans as at October 31,1997
is $2 (1996 – $4) for loans to designated countries and $57 (1996 – $100) for past due
interest bonds of designated countries.
Premises and equipment are not financial instruments and have
been excluded from our estimate of fair value. The net amounts
excluded totalled $2,058 as at October 31, 1997 and $1,867 as at
October 31, 1996.