Bank of Montreal 2012 Annual Report Download - page 131

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We designate certain securities held by our insurance subsidiaries
that support our insurance liabilities at fair value through profit or loss
since the actuarial calculation of insurance liabilities is based on the fair
value of the investments supporting them. This designation aligns the
accounting result with the way the portfolio is managed on a fair value
basis. The fair value of these investments as at October 31, 2012 of
$5,561 million ($4,965 million in 2011) is recorded in securities, trading
in our Consolidated Balance Sheet. The impact of recording these
investments at fair value through profit or loss was an increase of
$286 million in non-interest revenue, insurance income, for the year
ended October 31, 2012 (increase of $65 million in 2011). Changes in
the insurance liability balances are also recorded in non-interest
revenue, insurance income.
We designate investments held by our credit protection vehicle and
our structured investment vehicle (our “structured credit vehicles”) at
fair value through profit or loss, which aligns the accounting result with
the way the portfolio is managed on a fair value basis. The fair value of
these investments as at October 31, 2012 of $1,849 million ($3,317
million in 2011) is recorded in securities, trading in our Consolidated
Balance Sheet. The impact of recording these investments at fair value
through profit or loss was an increase in non-interest revenue, trading
revenues of $183 million for the year ended October 31, 2012 (decrease
of $125 million in 2011). We recognized offsetting amounts for
derivative contracts that are held to hedge changes in the fair value of
these investments.
We designate certain investments held in our merchant banking
business at fair value through profit or loss, which aligns the accounting
result with the way the portfolio is managed. The fair value of these
investments as at October 31, 2012 of $654 million ($577 million in
2011) is recorded in securities, other in our Consolidated Balance Sheet.
The impact of recording these investments at fair value through profit or
loss was a decrease in non-interest revenue, securities gains, other than
trading in our Consolidated Statement of Income of $41 million for the
year ended October 31, 2012 (decrease of $29 million in 2011).
Available-for-sale securities consist of debt and equity securities that
may be sold in response to or in anticipation of changes in interest rates
and resulting prepayment risk, changes in foreign currency risk, changes
in funding sources or terms, or to meet liquidity needs.
Available-for-sale securities are initially recorded at fair value plus
transaction costs. They are subsequently re-measured at fair value with
unrealized gains and losses recorded in unrealized gains (losses) on
available-for-sale securities in our Consolidated Statement of
Comprehensive Income until the security is sold. Gains and losses on
disposal and impairment losses are recorded in our Consolidated
Statement of Income in securities gains (losses), other than trading.
Interest income earned and dividends received on available-for-sale
securities are recorded in our Consolidated Statement of Income in
interest, dividend and fee income, securities.
Investments made by our insurance operations are classified as
available-for-sale or other securities, except for investments that
support the policy benefit liabilities on our insurance contracts, which
are designated at fair value through profit or loss as discussed above.
Interest and other fee income on available-for-sale securities is
recognized when earned in our Consolidated Statement of Income in
non-interest revenue, insurance income.
Held-to-maturity securities are debt securities that we have the
intention and ability to hold to maturity. These securities are initially
recorded at fair value plus transaction costs and subsequently
re-measured at amortized cost using the effective interest method.
Gains and losses on disposal and impairment losses are recorded in our
Consolidated Statement of Income in securities gains (losses), other
than trading. Interest income earned and amortization of premiums or
discounts on the debt securities are recorded in our Consolidated
Statement of Income in interest, dividend and fee income, securities.
Other securities are investments in companies where we exert
significant influence over operating, investing and financing decisions
(companies in which we own between 20% and 50% of the voting
share) and certain securities held by our merchant banking business.
We account for all of our securities transactions using settlement date
accounting in our Consolidated Balance Sheet. Changes in fair value
between the trade date and settlement date are recorded in net
income. For available-for-sale securities, changes in fair value between
the trade date and settlement date are recorded in other
comprehensive income.
Impairment Review
For available-for-sale, held-to-maturity and other securities, impairment
losses are recognized if there is objective evidence of impairment as a
result of an event that reduces the estimated future cash flows of the
security and the impact can be reliably estimated.
For equity securities, a significant or prolonged decline in its fair
value below its cost is objective evidence of impairment.
The impairment loss on available-for-sale securities is the
difference between the acquisition cost and current fair value, less any
previously recognized impairment losses. The impairment loss on held-
to-maturity securities is measured as the difference between the
security’s carrying amount and the present value of estimated future
cash flows discounted at the asset’s original effective interest rate.
If there is objective evidence of impairment, a write-down is
recorded in our Consolidated Statement of Income in securities gains
(losses), other than trading.
For debt securities, a previous impairment loss is reversed through
net income if an event occurs after the impairment was recognized that
can be objectively attributed to an increase in fair value, to a maximum
of the original impairment charge. Reversals of impairment losses on
held-to-maturity securities are recorded to a maximum of the amortized
cost of the investment before the original impairment charge. For equity
securities, previous impairment losses are not reversed through net
income and any subsequent increases in fair value are recorded in other
comprehensive income.
As at October 31, 2012, we had 248 available-for-sale securities
(295 in 2011) with unrealized losses totalling $86 million (unrealized
losses of $154 million in 2011). Of these available-for-sale securities,
28 have been in an unrealized loss position continuously for more than
one year (20 in 2011), amounting to an unrealized loss position of
$5 million (unrealized loss position of $8 million in 2011). Unrealized
losses on these instruments, excluding corporate equities, resulted from
changes in interest rates and not from deterioration in the
creditworthiness of the issuers. We expect full recovery of principal and
interest payments from certain debt securities due to governmental
support and/or overcollateralization provided. The share prices and
valuations of many equity securities that we hold have also appreciated
from earlier levels. Based on these factors, we have determined that
there is no significant impairment.
We did not own any securities issued by a single non-government entity
where the book value, as at October 31, 2012 or 2011, was greater than
10% of our shareholders’ equity.
Fair Value Measurement
For traded securities, quoted market value is considered to be fair value.
Quoted market value is based on bid prices. For securities where market
quotes are not available, we use estimation techniques to determine
fair value. Discussion of fair value measurement is included in Note 29.
128 BMO Financial Group 195th Annual Report 2012