Bank of Montreal 2010 Annual Report Download - page 143

Notes
BMO Financial Group 193rd Annual Report 2010 141
A portion of our structured note liabilities are designated as trading
under the fair value option and are accounted for at fair value, which
better aligns the accounting result with the way the portfolio is
managed. The change in fair value of these structured notes was a
decrease in non-interest revenue, trading revenues of $110 million
for the year ended October 31, 2010 (increase of $53 million in 2009),
including an increase of $13 million attributable to changes in our
credit spread (charge of $158 million in 2009). We recognized offsetting
amounts on derivatives and other financial instrument contracts that
are held to hedge changes in the fair value of these structured notes.
Note 16: Other Liabilities
(Canadian $ in millions) 2010 2009
Acceptances 7,001 7,640
Securities sold but not yet purchased 16,438 12,064
Securities lent or sold under repurchase
agreements 47,110 46,312
70,549 66,016
Acceptances
Acceptances represent a form of negotiable short-term debt that is
issued by our customers and which we guarantee for a fee. We have
an offsetting claim, equal to the amount of the acceptances, against
our customers. The amount due under acceptances is recorded as
a liability and our corresponding claim is recorded as a loan in our
Consolidated Balance Sheet.
Securities Sold but not yet Purchased
Securities sold but not yet purchased represent our obligation to deliver
securities that we did not own at the time of sale. These obligations are
recorded at their market value. Adjustments to the market value as at
the balance sheet date and gains and losses on the settlement of these
obligations are recorded in trading revenues (losses) in our Consolidated
Statement of Income.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements represent short-term
funding transactions in which we sell securities that we own and
simultaneously commit to repurchase the same securities at a specified
price on a specified date in the future. The obligation to repurchase
these securities is recorded at the amount owing. The interest expense
related to these liabilities is recorded on an accrual basis.
(Canadian $ in millions) 2010 2009
Other
Accounts payable, accrued expenses
and other items 6,741 5,791
Accrued interest payable 1,024 1,152
Non-controlling interest in subsidiaries 1,338 1,355
Liabilities of subsidiaries, other than deposits 2,430 2,588
Insurance-related liabilities 4,185 3,545
Pension liability (Note 23) 23 36
Tax payable 902 736
Other employee future benefits
liability
(Note 23) 771 735
Total 17,414 15,938
Included in non-controlling interest in subsidiaries as at October 31,
2010 were capital trust securities including accrued interest totalling
$1,060 million ($1,060 million in 2009) (see Note 18) and 7.375%
preferred shares of US$250 million (US$250 million in 2009) issued by
Harris Preferred Capital Corporation, a U.S. subsidiary, that forms part
of our Tier 1 regulatory capital.
Insurance-Related Liabilities
We are engaged in insurance businesses related to life and health
insurance, annuities products and reinsurance.
Insurance claims and policy benefit liabilities represent current
claims and estimates for future insurance policy benefits. Liabilities for
life insurance contracts are determined using the Canadian Asset Liability
Method, which incorporates best-estimate assumptions for mortality,
morbidity, policy lapses, surrenders, investment yields, policy dividends,
administration costs and margins for adverse deviation. These assump-
tions are reviewed at least annually and updated to reflect actual
experience and market conditions. Insurance claims and policy benefit
liabilities are included in Other liabilities – Insurance-related liabilities.
The effect of changes in actuarial assumptions on policy benefit liabilities
was not material during either 2009 or 2010.
Reinsurance
In the ordinary course of business, our insurance subsidiaries reinsure
risks to other insurance and reinsurance companies in order to provide
greater diversification, limit loss exposure to large risks and provide
additional capacity for future growth. These ceding reinsurance
arrangements do not relieve our insurance subsidiaries from their direct
obligation to the insureds. We evaluate the financial condition of the
reinsurers and monitor their credit ratings to minimize our exposure
to losses from reinsurer insolvency.
Reinsurance recoverables related to our life insurance business
are included in Other liabilities – Insurance-related liabilities to offset
the related liabilities. Insurance-related liabilities are net of ceded
reinsurance of $872 million in 2010 ($758 million in 2009).
Reinsurance amounts included in non-interest revenue, insurance
income in our Consolidated Statement of Income for the years ended
October 31 are shown in the table below.
(Canadian $ in millions) 2010 2009 (1) 2008
Direct premium income 1,256 983 492
Ceded premiums from reinsurance (462) (408) (211)
794 575 281
(1) Includes the financial results of the BMO Life Assurance acquisition on April 1, 2009.
The change in fair value related to changes in our credit
spread that has been recognized since these notes were designated
as held for trading to October 31, 2010 was an unrealized loss of
$29 million. Starting in 2009, we hedged the exposure to changes
in our credit spread.
The fair value and amount due at contractual maturity
of these notes as at October 31, 2010 were $3,976 million and
$4,084 million, respectively ($3,073 million and $3,377 million,
respectively, in 2009).