Bank of Montreal 2002 Annual Report Download - page 97

BMO FINANCIAL GROUP ANNUAL REPORT 2002 93
(2) Under United States GAAP, gains on all securitized assets are
recorded at the date of the securitization. Under Canadian GAAP,
prior to July 1, 2001, gains on sales of NHA-insured mortgages were
recorded at the date of the securitization and gains on sales of loans
securitized were recorded over the life of the loans securitized.
Effective July 1, 2001, we adopted a new Canadian accounting
standard on securitizations that eliminates this difference between
Canadian and United States GAAP. There will continue to be an
adjustment to our Consolidated Statement of Income until the
gains related to loans securitized prior to July 1, 2001 have all been
recorded in income. As a result of this difference, non-interest
revenue has been decreased by $40, $17 and $19 for the years ended
October 31, 2002, 2001 and 2000, respectively.
(3) Under United States GAAP, we adopted a new accounting stan-
dard on derivatives and hedging effective November 1, 2000. Under
this new standard, all derivatives are recorded at fair value in our
Consolidated Balance Sheet. Changes in the fair value of derivatives
that are not hedges are recorded in our Consolidated Statement of
Income as they arise. If the derivative is a hedge, depending on the
nature of the hedge, a change in the fair value of the derivative is
either offset in our Consolidated Statement of Income against the
change in the fair value of the hedged asset, liability or firm commit-
ment or is recorded in other comprehensive income until the hedged
item is recorded in our Consolidated Statement of Income. If the
change in the fair value of the derivative is not completely offset by
the change in the fair value of the item it is hedging, the difference
is recorded immediately in our Consolidated Statement of Income.
When we adopted this new United States accounting standard
on November 1, 2000, it increased consolidated assets by $163,
increased consolidated liabilities by $149, increased other compre-
hensive income by $13 and increased net income by $1. Because
the transition adjustment was not material to our consolidated net
income, the adjustment to net income was included in non-interest
revenue on a before-tax basis rather than shown separately as the
cumulative effect of an accounting change.
Under current Canadian GAAP and United States GAAP prior
to November 1, 2000, hedging derivatives were accounted for on
an accrual basis, with gains or losses deferred and recorded in
income on the same basis as the underlying hedged item. As a result
of this difference, non-interest revenue has been decreased by $37
and $19 for the years ended October 31, 2002 and 2001, respectively.
(4) The impact of applying United States GAAP to total non-interest
expense before restructuring charge is as follows:
2002 2001 2000
Increase (decrease)
Stock options (i) $ 47 $ 40 $ 32
Software development costs (ii) (40) (44) (47)
Pension and related benefits (iii) 48 82
Amortization of goodwill (iv) – 62 54
Amortization of goodwill and other assets (v) (10) (10) (10)
Total $ 1 $ 56 $ 111
(i) Under United States GAAP, the fair value of stock options granted
is recorded as compensation expense over the period that the options
vest. Under Canadian GAAP, we currently include the amount of
proceeds in shareholders’ equity when the options are exercised.
(ii) Under United States GAAP, certain costs of internally developed
software are required to be capitalized and amortized over the
expected useful life of the software. Under Canadian GAAP, only cer-
tain external costs of internally developed software are capitalized
and amortized over the expected useful life of the software.
(iii) Under United States GAAP, both pension and other future
employee benefits are recorded in our Consolidated Statement of
Income in the period services are provided by our employees. The
related obligations are valued using current market rates. Under
Canadian GAAP, prior to November 1, 2000, pension benefits were
recorded in our Consolidated Statement of Income in the period
services were provided by our employees, with the corresponding
obligation valued using management’s best estimate of the long-
term rate of return on assets, while other future employee benefits
were expensed as incurred. Effective November 1, 2000, we adopted
a new Canadian accounting standard on pension and other future
employee benefits that eliminates this difference between Canadian
and United States GAAP. When we adopted this new standard, we
accounted for the change in accounting as a charge to retained
earnings. As a result, there will continue to be an adjustment to our
Consolidated Statement of Income until amounts previously deferred
under United States GAAP have been fully amortized to income.
(iv) Effective November 1, 2001, we adopted a new accounting
standard on goodwill that is identical under Canadian and United
States GAAP. Previously, we presented goodwill amortization ex-
pense net-of-tax on a separate line in our Consolidated Statement
of Income under Canadian GAAP. That presentation was not per-
mitted under United States GAAP.
(v) Under United States GAAP, our acquisition of Suburban Bank
Corp. would have been accounted for using the pooling of interests
method. Under Canadian GAAP, we accounted for this acquisition
using the purchase method which resulted in the recognition and
amortization of goodwill and other intangible assets associated with
the acquisition. Effective November 1, 2001, goodwill is no longer
amortized to income under either United States or Canadian GAAP.
(5) In addition to the tax impact of differences outlined above, under
United States GAAP, tax rate changes do not impact the measure-
ment of our future income tax balances until they are passed into
law. Under Canadian GAAP, tax rate changes are reflected in the
measurement of our future income tax balances when they are
substantively enacted.
(6) Under United States GAAP, non-cash collateral received in secu -
rity lending transactions that we are permitted by contract to sell
or repledge is recorded as an asset in our Consolidated Balance
Sheet and a corresponding liability is recorded for the obligation
to return the collateral. Under Canadian GAAP, such collateral and
the related obligation are not recorded in our Consolidated Balance
Sheet. As a result of this difference, securities and other liabilities
have been increased by $2,399 at October 31, 2002 and $740 at Octo-
ber 31, 2001.
(7) During the year ended October 31, 2001, we sold our investment
in Bancomer and recognized translation losses of $99 in non-interest
income under Canadian GAAP. Under United States GAAP, we recog-
nized translation losses of $18, net of the $81 previously recognized
in net income in the years ended October 31, 1999, 1998 and 1997. As
a result of this difference, non-interest revenue has been increased
by $81 for the year ended October 31, 2001.
(8) Includes cumulative adjustment to shareholders’ equity arising
from current and prior years’ GAAP differences.
Future Changes in United States Accounting Policies
The Financial Accounting Standards Board has issued a proposed interpretation
regarding the consolidation of special-purpose entities, which we expect will be
consistent with the draft guideline being developed by the Canadian Institute
of Chartered Accountants discussed in Note 7. As a result, we do not expect that
this will create a new difference between Canadian and United States GAAP.
The Financial Accounting Standards Board has issued a proposed interpretation
on the measurement and disclosure of guarantees. The proposed interpretation
would require companies to recognize a liability equal to the fair value of its obli-
gations under certain guarantees. Although the Canadian Institute of Chartered
Accountants has issued a draft guideline on the disclosure of guarantees, it does
not address the recognition of similar guarantees in the consolidated financial
statements. We expect that this will create a new difference between Canadian
and United States GAAP. We are currently reviewing the proposed interpretation
to determine its impact on our consolidated financial statements.