Bank of Montreal 1999 Annual Report Download - page 84

Notes to Consolidated Financial Statements (Canadian $ in millions, unless otherwise stated)
78 Bank of Montreal Group of Companies 1999 Annual Report
Note 1 Basis of Presentation
Note 2 Cash Resources
Note 3 Securities
Deposits with Banks
Deposits with banks are recorded at cost and include acceptances which
wehavepurchasedthathavebeenissuedbyotherbanks.Interest
income earned on these deposits is recorded on an accrual basis.
Cheques and Other Items in Transit, Net
Cheques and other items in transit are recorded at cost and represent
the net position of the uncleared cheques and other items in transit
between us and other banks.
1999 1998
Cash and non-interest bearing deposits
with Bank of Canada and other banks $ 1,261 $ 1,478
Interest bearing deposits with banks 21,617 16,768
Cheques and other items in transit, net 1,158 1,484
Total $ 24,036 $ 19,730
Securities are divided into three components, each with a different pur-
pose and accounting treatment. The three types of securities we hold
are as follows:
■
Investment securities are comprised of equity and debt securities
that we purchase with the intention of holding until maturity or until
market conditions, such as a change in interest rates, provide us with
a better investment opportunity. Equity securities are recorded at cost
and debt securities at amortized cost. When we identify a decline in
value that is other than temporary, the affected securities are written
down to their fair value. Any write-downs or gains and losses on the
disposalofourinvestmentsecuritiesarerecordedintheyeartheyoccur
and are included in our Consolidated Statement of Income as either
an increase or decrease in other income. Gains and losses on disposal
are calculated using the average cost of the securities sold. Investment
securities of designated countries are accounted for in accordance
with our accounting policy for loans which is described in note 4.
■Trading securities are securities that we purchase for resale over a
short period of time. We report these securities at their market value
and record the mark-to-market adjustments and any gains and losses
on the sale of these securities in our Consolidated Statement of
Income in other income.
■Loan substitute securities are customer financings, such as dis-
tressed preferred shares, that we structure as after-tax investments
to provide our customers with an interest rate advantage over what
would otherwise be applicable on a conventional loan. We record
these securities on the same basis as loans as described in note 4.
Wedidnotownanysecuritiesissuedbyasinglenon-government
entity where the book value, as at October 31, 1999 or October 31,
1998, was greater than 10% of our shareholders’ equity.
Cash Restrictions
We have a number of banking subsidiaries whose cash is avail-
able for use in their own business and may not be used by other
related corporations.
Some of our subsidiaries are also required to maintain re-
serves or minimum balances with central banks in their respec-
tive countries of operation. Restricted cash resources amounted
to $401 as at October 31, 1999 and $327 as at October 31, 1998.
We prepare our consolidated financial statements in accordance with
Canadian generally accepted accounting principles including the account-
ing
requirements of our regulator, the Superintendent of Financial
Institutions Canada.
In addition, our consolidated financial statements comply with the
disclosure requirements of United States generally accepted accounting
principles. The more significant differences in consolidated total assets,
total liabilities or net income arising from applying United States gener-
ally accepted accounting principles are described in note 23.
Basis of Consolidation
We conduct business through a variety of corporate structures, including
subsidiaries, joint ventures and associated corporations. Subsidiaries are
those where we exercise control through our ownership of the majority
of the voting shares.
In some instances, we exert significant influence, but not control, over
acorporation.Ourinvestmentintheseassociatedcorporationsisrecorded
as a component of securities in our Consolidated Balance Sheet. Our
proportionate share of the net income or loss is recognized in interest,
dividend and fee income in our Consolidated Statement of Income. The
amount is net of adjustments for goodwill that arose at the time we
acquired our interest in the associated corporation.
All significant intercompany transactions and balances are eliminated.
Trust assets under administration are maintained separately from our
assets and are not included in our Consolidated Balance Sheet.
Translation of Foreign Currencies
We conduct business in a variety of foreign currencies and report our
consolidated financial statements in Canadian dollars. Assets and liabili-
ties related to foreign currency transactions are translated into Canadian
dollars at the exchange rate in effect at the balance sheet date. The
income and expense amounts related to these transactions are trans-
lated using the average exchange rate for the year. The realized and
unrealized gains and losses arising from these translations are included
in other income in our Consolidated Statement of Income.
We have various investments in foreign operations which are denom-
inated in foreign currencies. Unrealized gains and losses arising from
translating investments into Canadian dollars are included in sharehold-
ers’ equity in our Consolidated Balance Sheet. All realized translation
gains and losses related to our foreign operations are recognized in
other income.
From time to time, we enter into foreign exchange hedge contracts
to reduce our exposure to changes in the value of foreign currencies.
The gain or loss on the translation of the hedge contract is offset against
the realized or unrealized gain or loss on the translation of the item
being hedged and is included in other income or retained earnings.
Use of Estimates
In preparing our consolidated financial statements we must make esti-
mates and assumptions, mainly concerning values, which affect reported
amounts of assets, liabilities, net income and related disclosures. Actual
results could differ from these estimates.
Specific Accounting Policies
To facilitate a better understanding of our consolidated financial state-
ments we have disclosed our significant accounting policies throughout
the following notes with the related financial disclosures by major caption.
Changes in Accounting Policies
New accounting policies issued by standard setters are described in notes
8, 15 and 17.