Bank of Montreal 1998 Annual Report Download - page 97

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 5, 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
We prepare our consolidated financial statements in accordance
with Canadian generally accepted accounting principles, including
the accounting requirements of our regulator, the Superintendent
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 account-
ing principles. There are no material differences in the consolidated
total assets and liabilities as at October 31, 1998 and 1997 or the
consolidated net income, consolidated shareholders’ equity and
consolidated statement of cash flow for the years ended October 31,
1998, 1997 and
1996 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.
Future Changes in United States Accounting Policies
In future years, we will be required to adopt new accounting stan-
dards 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.
NOTE 23 RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The pending changes in United States generally accepted account-
ing principles and our assessment of the potential impact are:
■Statement of Financial Accounting Standards No. 130, “Report-
ing Comprehensive Income”, which must be adopted in fiscal
1999 for United States reporting purposes. This Statement estab-
lishes standards for reporting comprehensive income, which
is defined as all changes in equity except investments by and
distributions to shareholders. There will be no impact on our
reported total assets or net income as the statement addresses
only presentation of comprehensive income. Under this standard
our unrealized gain (loss) on net investment in foreign operations,
which currently is reported as a component of shareholders’ equity,
would be reported as a component of comprehensive income.
■Statement of Financial Accounting Standards No. 133, “Account-
ing for Derivative Instruments and Hedging Activities”, which
must be adopted in fiscal 2000 for United States reporting purposes.
This Statement outlines accounting and reporting standards for
derivative instruments and hedging activities. Under this stan-
dard, all derivatives will be recognized at fair value in the balance
sheet, and changes in the fair value of these instruments will be
accounted for depending on the intended use of each derivative
and its designation as a hedge. The adoption of this standard
is not expected to have a material effect on our reported assets,
liabilities or net income.
89
BANK OF MONTREAL GROUP OF COMPANIES
1998 19 97
Fair value Fair value Fair value Fair value Fair value Fair value
Book of assets and of ALM over (under) Book of assets and of ALM over (under)
value liabilities derivatives book value value liabilities derivatives book value
Assets
Cash resources $ 19,730 $ 19,730 $ (233) $ (233) $ 32,245 $ 32,245 $ (8) $ (8)
Securities (note 4) 43,465 43,634 – 169 41,789 42,243 1 455
Loans 129,691 129,856 344 509 114,918 115,674 90 846
Customers’ liability under acceptances 6,944 6,944 – – 5,594 5,594 – –
Other assets 20,449 20,449 – – 11,234 11,234 – –
220,279 220,613 111 445 205,780 206,990 83 1,293
Liabilities
Deposits 143,983 144,365 192 574 144,212 144,659 (76) 371
Acceptances 6,944 6,944 – – 5,594 5,594 – –
Securities sold but not yet purchased 7,843 7,843 – – 10,304 10,304 – –
Securities sold under
repurchase agreements 29,758 29,758 – – 21,389 21,389 – –
Other liabilities 18,663 18,678 – 15 13,605 13,619 – 14
Subordinated debt 4,791 5,170 (22) 357 3,831 4,222 (18) 373
$ 211,982 $ 212,758 $ 170 $ 946 $ 198,935 $ 199,787 $ (94) $ 758
To t a l $ (501) $ 535
■Fair value of impaired loans is equal to the book value which is calculated using the
basis of valuation described in notes 5 and 6.
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 is $2 as at
October 31, 1998 and 1997 for loans to designated countries and $41 as at
October 31, 1998 and $57 as at October 31, 1997 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 $2,311 as at October 31, 1998 and $2,058 as at
October 31, 1997.