Bank of Montreal 2004 Annual Report Download - page 61

BMO Financial Group Annual Report 2004 57
MD&A
Changes in Accounting Policies in 2005
Variable Interest Entities
We will adopt the Canadian Institute of Chartered Accountants’
(CICA) guideline on the consolidation of variable interest enti-
ties (VIEs) on November 1, 2004. VIEs include entities where
the equity invested is considered insufficient to finance the
entity’s activities. Under this new guideline, we will be required
to consolidate VIEs if the investments we hold in these entities
and/or the relationships we have with them result in us being
exposed to a majority of their expected losses, being able to
benefit from a majority of their expected residual returns, or
both, based on a calculation outlined by the standard setters.
Under the new rules, we will be required to consolidate our
customer securitization vehicles. These VIEs are set up to assist
our customers with the securitization of their assets in order to
provide them with an alternate source of funding. The impact
of consolidating these VIEs will be an increase in assets of
$20,807 million, an increase in liabilities of $20,848 million
and a decrease in opening retained earnings of $41 million.
The impact on net income in future periods is not expected
to be significant. When we adopt the new rules, we will not
restate prior period financial statements.
Our assets-to-capital multiple, a measure of capital adequacy,
will increase as a result of the consolidation of these VIEs.
Our regulator, the Office of the Superintendent of Financial
Institutions (OSFI), has provided capital relief for those assets
for the first two quarters of fiscal 2005. If capital relief is
not extended beyond the second quarter, we may restructure
these vehicles.
Liabilities and Equity
We will adopt the CICA’s new accounting requirements on the
classification of financial instruments as liabilities or equity on
November 1, 2004. The new rules require that our preferred
shares and capital trust securities that are ultimately convert-
ible into a variable number of our common shares at the
holders’ option be classified as liabilities. Under the new rules,
$1,150 million of our capital trust securities currently recorded
as non-controlling interest in subsidiaries will be classified
as debt in our Consolidated Balance Sheet. The return paid
to capital trust securities holders will be recorded as interest
expense rather than as non-controlling interest in subsidiaries
in our Consolidated Statement of Income. Under the new rules,
we will also reclassify $450 million of our Class B Preferred
shares, Series 4 and 6, as debt. As a result, dividends on these
shares will be recorded as interest expense.
The adoption of these new rules is expected to increase
interest expense by approximately $100 million, decrease
non-controlling interest in subsidiaries by approximately
$40 million and decrease income taxes by approximately
$35 million, resulting in an overall decrease in net income of
approximately $25 million for the year ended October 31, 2005.
This change will not have any impact on earnings per share
or net income available to common shareholders in future or
prior periods, since preferred share dividends are currently
deducted from net income in determining these measures.
When we adopt the new rules, we will restate our consolid-
ated financial statements to reflect the change in prior periods.
The impact of restating prior periods will be an increase in
interest expense of between $122 million and $128 million,
a decrease in non-controlling interest in subsidiaries of
$41 million, a decrease in income taxes of $37 million and a
decrease in net income of between $44 million and $50 million
in each of fiscal 2002, 2003 and 2004.
Our regulator, OSFI, will continue to consider all of
our reclassified instruments to be Tier 1 capital. Our Series D
Capital Trust Securities issued in September 2004 will continue
to be recorded as non-controlling interest in subsidiaries and
our other Class B Preferred shares, Series 5 and 10, will continue
to be classified as equity under the new rules. New capital
instruments issued in the future are expected to have terms
consistent with presentation as equity.
Investment Companies
We will adopt the CICA’s new accounting requirements for
merchant banking subsidiaries beginning on November 1, 2004.
These subsidiaries currently account for their investments at
cost. Under the new rules, these investments will be accounted
for at fair value, with the initial adjustment to fair value and
subsequent changes recorded in net income. The ultimate
impact of this change depends on future changes in fair value
and cannot be determined at this time. The carrying amount
of investments subject to this accounting change was approxi-
mately $550 million as at October 31, 2004.
Changes in Accounting Policies in 2004
At the beginning of fiscal 2004, we made changes in accounting
policy in response to new accounting standards. These changes
related to our accounting for mortgage prepayment fees,
our holdings of our own stock, software development costs and
U.S.-dollar-denominated preferred shares. In accordance with
the new standards, we did not restate prior peri od financial
statements to reflect these changes. For fiscal 2004, the total
impact of these changes was to increase net income by
$47 million and earnings per share by $0.09. For further
information, see Note 1 on page 87 of the financial statements.