Bank of Montreal 2003 Annual Report Download - page 48

BMO Financial Group 186th Annual Report 200344
Pensions and Other Future Employee Benefits
Our pensions and other future employee benefits expense is
calculated by our actuaries based on assumptions determined by
management. If actual experience differs from the assumptions
made by management, our pension and other future employee
benefits expense could increase or decrease in future years as
a result. Additional information regarding our accounting for
pensions and other future employee benefits, including sensi-
tivity analysis for key assumptions, is included in Note 18 on
page 91 of the financial statements.
Other Than Temporary Impairment
Investment securities that are carried at cost or amortized cost
or accounted for using the equity method are reviewed at each
quarter-end reporting period to determine whether the fair value
is below the current recorded value. When the fair value of any
of our investment securities has declined below its recorded
value, management is required to assess whether the decline is
other than temporary. In making this assessment, we consider
such factors as the type of investment, the length of time and
extent to which the fair value has been less than the recorded
value, the financial condition and near-term prospects of the
issuer, and our intent and ability to hold the investment long
enough to allow for any anticipated recovery. The decision to
record a write-down, its amount and the period in which it is
recorded could change if management’s assessment of the above
factors were different. Additional information regarding our
accounting for investment securities is included in Note 3 on
page 75 of the financial statements.
Income Taxes
The provision for income taxes is calculated based on the
expected tax treatment of transactions recorded in our Consol-
idated Statements of Income or Changes in Shareholders’ Equity.
In determining our provision for income taxes, we interpret
tax legislation in a variety of jurisdictions as well as make
assumptions about the expected timing of the reversal of future
tax assets and liabilities. If our interpretations differ from those
of tax authorities or if the timing of reversals is not as anticipated,
our provision for income taxes could increase or decrease in
future periods. Additional information regarding our account-
ing for income taxes is included in Note 20 on page 95 of the
financial statements.
Goodwill
Goodwill is assessed for impairment at least annually to ensure
that the fair value of the business associated with the goodwill
is greater than or equal to its carrying value. In determining
fair value, we use valuation models that consider such factors
as projected earnings, price/earnings multiples and discount
rates. Management must apply judgment in the selection of the
approach to determining fair value and any necessary assump-
tions. These judgments may affectthefair value and any resulting
impairment write-down. Additional information regarding the
composition of our goodwill is included in Note 12 on page 87 of
the financial statements.
The Notes to Bank of Montreal’s October 31, 2003 consolidated
financial statements outline BMO’s significant accounting poli-
cies. The policies discussed below are considered particularly
important, as they require significant judgments by management.
BMO has established detailed policies and control procedures
that are intended to ensure these judgments are well controlled,
independently reviewed and consistently applied from period to
period. In addition, the policies and procedures are intended to
ensure that the process for changing methodologies proceeds in
an appropriate manner. We believe that our estimates for deter-
mining the valuation of our assets and liabilities are appropriate.
Allowance for Credit Losses
The allowance for credit losses adjusts the value of credit assets
to reflect their estimated realizable value. In assessing their esti
-
mated realizable value, we must rely on estimates and exercise
judgment regarding matters for which the ultimate outcome
is unknown. These include economic factors, developments
affecting companies in particular industries and specific issues
with respect to single borrowers. Changes in circumstances may
cause future assessments of credit risk to be materially different
from current assessments, which could require an increase or
decrease in the allowance for credit losses. Additional infor-
mation on the process and methodology for determining the
allowance for credit losses can be found in the discussion of
credit risk on page 47 as well as in Note 4 on page 76 of the
financial statements.
Financial Instruments Measured at Fair Value
BMO records trading securities and trading derivatives at fair
value. We adjust the carrying value of investment securities to
fair value when we identify a decline in value that is other than
temporary. Fair value represents our estimate of the proceeds we
would receive in a current transaction between willing parties.
The fair value of most financial instruments is determined using
quoted market prices. In situations where listed prices or quotes
are not available, management must estimate fair value using
discounted cash flows or option pricing models. Management’s
estimates may affect the fair value and resulting gain or loss
reported. Additional information about BMO’s method of deter-
mining fair value is included in Note 3 on page 75 and Note 26
on page 97 of the financial statements.
Accounting for Securitizations
When loans are securitized, we record a gain (loss) on sale. In
determining the gain (loss), management must estimate future
cash flows by relying on estimates of the amount of interest and
fees that will be collected on the securitized assets, the yield to be
paid to investors, the portion of the securitized assets that will be
repaid before their scheduled maturity, expected credit losses,
the fair value cost of servicing, and the rate at which to discount
these expected future cash flows. Actual cash flows may differ
significantly from those estimated by management. If manage-
ment’s estimate of future cash flows had been different, our gains
on securitization recognized in income would also have been
different. Additional information about accounting for securi-
tizations, including sensitivity analysis for key assumptions, is
included in Note 7 on page 79 of the financial statements.
Critical Accounting Policies