Bank of Montreal 2004 Annual Report Download - page 92

BMO Financial Group Annual Report 200488
Notes to Consolidated Financial Statements
Notes
transit between us and other banks. We completed our assess-
ment of the implications of the new accounting requirements on
sources of GAAP (see Note 1) with respect to offsetting certain items
in transit in our Consolidated Balance Sheet. As a result, we
reclassified certain items to other assets, other liabilities and
deposits. The amounts reclassified were not significant.
Cash Restrictions
We have a number of banking subsidiaries whose cash is available
for use in their own business and may not be used by other related
corporations.
In addition, some of our foreign operations are required to main-
tain reserves or minimum balances with central banks in their
respective countries of operation, amounting to $494 million as at
October 31, 2004 ($377 million in 2003).
Other Changes in Accounting Policy
Other changes in accounting policy that resulted from changes by
standard setters in the current year and the two previous years are
disclosed in Notes 4, 9 and 19. New accounting policies that will
becomeeffectiveinfutureyears aredescribedinNotes3,8,15and18.
United States accounting policy changes are described in Note 27.
Use of Estimates
In preparing our consolidated financial statements we must make
estimates and assumptions, mainly concerning values, which affect
reported amounts of assets, liabilities, net income and related dis-
closures. The most significant assets and liabilities where we must
make estimates include measurement of the allowance for credit
losses, financial instruments measured at fair value, accounting
for securitization, pension and other employee future benefits, other
than temporary impairment, income taxes and goodwill. If actual
results differ from the estimates, the impact would be recorded in
future periods.
Change in Accounting Estimate
During the year ended October 31, 2004, we increased the
estimate of the liability associated with our customer loyalty
program. The change in estimate was due to rising reward
redemption rates. The impact of this change on our Consolidated
Statement of Income was a reduction in non-interest revenue –
card fees of $65 million, a decrease in income taxes of $23 million
and a decrease in net income of $42 million.
Note 2 Cash Resources
(Canadian $ in millions) 2004 2003
Cash and non-interest bearing deposits
with Bank of Canada and other banks $ 1,558 $ 1,693
Interest bearing deposits with banks 15,439 17,345
Cheques and other items in transit, net 1,048 822
Total $ 18,045 $ 19,860
Deposits with Banks
Deposits with banks are recorded at cost and include acceptances
issued by other banks which we have purchased. Interest income
earned on these deposits is recorded on an accrual basis.
Cheques and Other Items in Transit, Net
Cheques and other items in transit are recorded at cost and repre-
sent the net position of the uncleared cheques and other items in
(c) Software Development Costs
Costs of internally developed software are capitalized and amortized
over the estimated useful life of the software (up to five years).
Prior to November 1, 2003, only amounts paid to third parties
related to internally developed software were capitalized and
amortized over the estimated useful life of the software.
(d) Preferred Shares
We are no longer changing the rate at which our U.S. dollar
denominated preferred shares are translated into Canadian dollars.
Prior to November 1, 2003, we adjusted the carrying value of
these shares in shareholders’ equity to reflect changes in the
exchange rate. Due to changes in our hedging approach, there is
no longer any impact on our Consolidated Statement of Income.
The impact of these changes in accounting policy on our Consoli-
dated Statement of Income is as follows:
(Canadian $ in millions, except as noted)
For the Year Ended October 31, 2004
Increase (Decrease) to Income Before Provision for Income Taxes
Interest, Dividend and Fee Income
– Loans (a) $ 48
Non-Interest Revenue
– Trading revenues (b) (26)
Non-Interest Expense
– Employee compensation (c) 51
Non-Interest Expense
– Premises and equipment (c) (4)
Non-Interest Revenue – Foreign exchange, other than trading (d) 3
Income Before Provision for Income Taxes 72
Income taxes (25)
Net Income $ 47
Earnings Per Share (Canadian $)
Basic $ 0.09
Diluted 0.09
Note 3 Securities
Securities are divided into three types, each with a different purpose
and accounting treatment. The three types of securities we hold
are as follows:
Investment securities are comprised of equity and debt securities
that we purchase with the intention of holding until maturity or
until market conditions, such as a change in interest rates, provide
us with a better investment opportunity. Equity securities are
recorded at cost and debt securities at amortized cost, after any
write-down for impairment. Gains and losses on disposal are
calculated using the carrying amount of the securities sold.
Interest income earned, the amortization of premiums and dis-
counts on debt securities and dividends received on equity securities
are recorded in our Consolidated Statement of Income in interest,
dividend and fee income.
Our investments in equity securities where we exert significant
influence, but not control, over the issuing corporation are initially
recorded at cost. This amount is adjusted for dividends and our
propor tionate share of the corporation’s net income or loss from the
date of acquisition, and is recorded in our Consolidated Statement
of Income in interest, dividend and fee income.
Investment securities are reviewed at each quarter end to
determine whether the fair value is below carrying value.
For actively traded securities, quoted market value is considered
to be fair value. For privately issued securities and for thinly traded
securities where market quotes are not available, we use estimation
techniques to determine fair value. Estimation techniques used
include discounted cash flows, multiples of earnings or comparisons
with other securities that are substantially the same.