Bank of Montreal 2004 Annual Report Download - page 91

BMO Financial Group Annual Report 2004 87
Notes
We prepare our consolidated financial statements in accordance
with Canadian generally accepted accounting principles (“GAAP”),
including interpretations of GAAP by our regulator, the Super-
intendent of Financial Institutions Canada.
We reconcile our Canadian GAAP results to those that would
result under United States GAAP. Significant differences in consoli-
dated total assets, total liabilities or net income arising from applying
United States GAAP are described in Note 27. In addition, our
consolidated financial statements comply with applicable dis-
closure requirements of United States GAAP, except for disclosures
related to Canadian and United States GAAP differences disclosed
in Note 27.
Basis of Consolidation
We conduct business through a variety of corporate structures,
including subsidiaries and joint ventures. Subsidiaries are those
where we exercise control through our ownership of the majority
of the voting shares. Joint ventures are those where we exercise
joint control through an agreement with other shareholders.
All of the assets, liabilities, revenues and expenses of our sub-
sidiaries and our proportionate share of the assets, liabilities,
revenues and expenses of our joint ventures are included in our
consolidated financial statements. All significant inter-company
transactions and balances are eliminated.
We hold investments in companies where we exert significant
influence over operating and financing decisions (those where we
own between 20% and 50% of the voting shares). Generally, these
are recorded at cost and are adjusted for our proportionate share
of any net income or loss and dividends. They are recorded as
investment securities in our Consolidated Balance Sheet and our
proportionate share of the net income or loss of these companies
is recorded in interest, dividend and fee income – securities, in
our Consolidated Statement of Income.
We hold interests in variable interest entities that are not included
in our consolidated financial statements; these are more fully
described in Note 8.
Translation of Foreign Currencies
We conduct business in a variety of foreign currencies and report
our consolidated financial statements in Canadian dollars. Assets
and liabilities denominated in foreign currencies are translated
into Canadian dollars at the exchange rate in effect at the balance
sheet date. Revenues and expenses denominated in foreign cur-
rencies are translated using the average exchange rate for the year.
Unrealized gains and losses arising from translating net invest-
ments in foreign operations into Canadian dollars, net of related
hedging activities and applicable income taxes, are included in
shareholders’ equity as net unrealized foreign exchange gain (loss).
When we sell or liquidate an investment in a foreign operation,
the associated translation gains and losses, previously included in
shareholders’ equity as net unrealized foreign exchange gain (loss),
are recorded in non-interest revenue as part of the gain or loss
on disposal of the investment. All other foreign currency translation
gains and losses are included in foreign exchange, other than
trading, in our Consolidated Statement of Income as they arise.
From time to time, we enter into foreign exchange hedge contracts
to reduce our exposure to changes in the value of foreign currencies.
Realized and unrealized gains and losses on the translation of
foreign exchange hedge contracts are included in foreign exchange,
other than trading, in our Consolidated Statement of Income.
Specific Accounting Policies
To facilitate a better understanding of our consolidated financial
statements, we have disclosed our significant accounting policies
throughout the following notes with the related financial dis-
closures by major caption:
Note Topic Page
2 Cash Resources 88
3 Securities 88
4 Loans, Customers’ Liability under Acceptances
and Allowance for Credit Losses 91
5 Other Credit Instruments 93
6 Guarantees 94
7 Asset Securitization 95
8 Variable Interest Entities 96
9 Derivative Financial Instruments 97
10 Premises and Equipment 102
11 Acquisitions 103
12 Goodwill and Intangible Assets 104
13 Other Assets 104
14 Deposits 105
15 Other Liabilities 105
16 Subordinated Debt 106
17 Interest Rate Risk 107
18 Share Capital 108
19 Employee Compensation –
Stock-Based Compensation 109
20 Employee Compensation –
Employee Future Benefits 111
21 Income Taxes 114
22 Earnings Per Share 115
23 Operating and Geographic Segmentation 116
24 Related Party Transactions 118
25 Contingent Liabilities 118
26 Fair Value of Financial Instruments 119
27 Reconciliation of Canadian and United States
Generally Accepted Accounting Principles 120
Changes in Accounting Policy
Sources of GAAP
Effective November 1, 2003, we adopted new accounting require-
ments of the Canadian Institute of Chartered Accountants (“CICA”)
that provide guidance on sources to consult when selecting
accounting policies on matters not covered explicitly in Canadian
accounting standards. As a result of these new requirements,
we made the following changes to our accounting policies effective
November 1, 2003:
(a) Mortgage Prepayment Fees
Mortgage prepayment fees are recognized in income when the
related mortgages are prepaid or renegotiated at market rates.
Prior to November 1, 2003, mortgage prepayment fees were deferred
and amortized to income over the average remaining term of
the related mortgages. In adopting this new policy we recorded
in income an initial adjustment related to the balance of deferred
mortgage prepayment fees as at November 1, 2003 of $42 million
before income taxes.
(b) Treasury Shares
Purchases and sales of Bank of Montreal shares by subsidiaries
are recorded in shareholders’ equity, with any gain included
in contributed surplus. Prior to November 1, 2003, these shares
were recorded as trading securities at market value, with related
dividends and realized and unrealized gains and losses included
in trading revenues.
Notes to Consolidated Financial Statements
Note 1 Basis of Presentation