Bank of Montreal 2003 Annual Report Download - page 104

(2) The impact of applying United States GAAP to total non-interest
revenue is as follows:
(Canadian $ in millions) 2003 2002 2001
Increase (decrease)
Securitization revenues (i) $ (44) $ (40) $ (17)
Derivative accounting (ii) (3) (37) (19)
Foreign currency translation (iii) –– 81
Total $ (47) $ (77) $ 45
(i) 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 other
loans securitized were recorded over the life of the loans securitized.
Effective July 1, 2001, we adopted a new Canadian accounting stan-
dard 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.
(ii) Under United States GAAP, we adopted a new accounting
standard 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 commitment, or is recorded in other comprehensive
income until the hedged item is recorded in our Consolidated State-
ment 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 Consol-
idated Statement of Income.
When we adopted this new United States accounting standard on
November 1, 2000, it increased consolidated assets by $163 million,
increased consolidated liabilities by $149 million, increased other
comprehensive income by $13 million and increased net income
by $1 million. 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 Canadian GAAP, hedging derivatives are accounted for on
an accrual basis, with gains or losses deferred and recorded in income
on the same basis as the underlying hedged item.
(iii) During the year ended October 31, 2001, we sold our investment
in Grupo Financiero BBVA Bancomer and recognized translation
losses of $99 million in non-interest income under Canadian GAAP.
Under United States GAAP, we recognized translation losses of
$18 million, net of the $81 million previously recognized in net
income in the years ended October 31, 1999, 1998 and 1997.
(3) The impact of applying United States GAAP to total non-interest
expense is as follows:
(Canadian $ in millions) 2003 2002 2001
Increase (decrease)
Stock options (i) $ 43 $ 47 $ 40
Software development costs (ii) (39) (40) (44)
Pension and related benefits (iii) 248
Amortization of goodwill (iv) –– 62
Amortization of goodwill and other assets (v) (7) (10) (10)
Total $ (1) $ 1 $ 56
(i) Under United States GAAP, the fair value of stock options granted
is recorded as compensation expense over the period that the
options vest. Prior to November 1, 2002 (under Canadian GAAP),
we included the amount of proceeds in shareholders’ equity when
the options were exercised and did not recognize any compensation
expense. Effective November 1, 2002, we adopted a new Canadian
accounting standard on stock-based compensation that eliminated
this difference for stock options granted after November 1, 2002. As
a result, there will continue to be an adjustment to our Consolidated
Statement of Income until stock option expense has been fully
recognized for stock options granted prior to fiscal 2002 under
United States GAAP.
(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
certain external costs of internally developed software are capital-
ized 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
expense, net of tax, on a separate line in our Consolidated State-
ment of Income under Canadian GAAP. That presentation was not
permitted 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.
(4) In addition to the tax impact of differences outlined above,
under United States GAAP, tax rate changes do not impact the
measurement 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.
(5) Under United States GAAP, non-cash collateral received in
security 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 $1,220 million and $2,399 million for the years
ended October 31, 2003 and 2002, respectively.
(6) Includes cumulative adjustment to shareholders’ equity arising
from current and prior years’ GAAP differences.
Notes to Consolidated Financial Statements
BMO Financial Group 186th Annual Report 2003
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