Bank of Montreal 2012 Annual Report Download - page 75

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Additional information regarding our accounting for available-
for-sale securities and other securities and the determination of fair
value is included in Note 3 on page 127 of the financial statements.
Income Tax-Related
The provision for income taxes is calculated based on the expected tax
treatment of transactions recorded in our Consolidated Statements of
Income or Changes in Shareholders’ Equity. In determining the provision
for income taxes, we interpret tax legislation in a variety of jurisdictions
and make assumptions about the expected timing of the reversal of
deferred tax assets and liabilities. If our interpretations differ from those
of tax authorities or if the timing of reversals is not as expected, our
provision for income taxes could increase or decrease in future periods.
The amount of any such increase or decrease cannot be
reasonably estimated.
Public discussions regarding the U.S. fiscal situation suggest it is
possible that corporate income tax rates may be reduced during BMO’s
fiscal year ending October 31, 2013. If corporate tax rates were to be
reduced, this would result in a reduction of the deferred tax asset and a
charge to the provision for income taxes. A 1% reduction in the U.S.
federal corporate tax rate would result in a decrease in our deferred tax
asset of approximately $60 million and a corresponding reduction in net
income. Any reduction in the U.S. federal tax rate would be expected to
increase net income from our U.S. operations in future periods.
Additional information regarding our accounting for income taxes is
included in Note 24 on page 164 of the financial statements.
Goodwill and Intangible Assets
Goodwill is assessed for impairment at least annually. This assessment
includes a comparison of the carrying value and the recoverable amount
of each group of businesses to verify that the recoverable amount of the
group is greater than its carrying value. If the carrying value were to
exceed the recoverable amount of the group, a more detailed goodwill
impairment assessment would have to be undertaken. The recoverable
amount of an asset is the higher of its fair value less costs to sell, and
its value in use. Fair value less costs to sell was used to perform the
impairment test in 2012 and 2011. In determining fair value less costs
to sell, we employ a discounted cash flow model, consistent with that
used when we acquire businesses. This model is dependent on assump-
tions related to revenue growth, discount rates, synergies achieved on
acquisition and the availability of comparable acquisition data. Changes
in each of these assumptions would affect the determination of fair
value for each of the business units in a different manner. Management
must exercise judgment and make assumptions in determining fair
value, and differences in judgments and assumptions could affect the
determination of fair value and any resulting impairment write-down. At
October 31, 2012, the estimated fair value of each of our groups of
businesses was greater than its carrying value.
Intangible assets are amortized to income on either a straight-line
or an accelerated basis over a period not exceeding 15 years, depending
on the nature of the asset. There are no intangible assets with indefinite
lives. We test intangible assets for impairment when circumstances
indicate the carrying value may not be recoverable. No such impairment
was identified for the years ended October 31, 2012, 2011 and 2010.
Additional information regarding the composition of goodwill and
intangible assets is included in Note 13 on page 149 of the financial
statements.
Insurance-Related Liabilities
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, future investment yields, policy
dividends, administration costs and margins for adverse deviation. These
assumptions are reviewed at least annually and updated to reflect actual
experience and market conditions. The most significant impact on the
valuation of a liability results from a change in the assumption for future
investment yields. Future investment yields may be sensitive to varia-
tions in reinvestment interest rates and accordingly may affect the
valuation of policy benefit liabilities. If the assumed yield were to
increase by one percentage point, net income would increase by
approximately $94 million. A reduction of one percentage point would
lower net income by approximately $74 million.
Contingent Liabilities
BMO and its subsidiaries are involved in various legal actions in the
ordinary course of business.
Provisions are recorded at the best estimate of the amount required
to settle the obligation related to these legal actions as at the balance
sheet date, taking into account the risks and uncertainties surrounding
the obligation. Management and internal and external experts are
involved in estimating any amounts involved. The actual costs of
resolving these claims may be substantially higher or lower than the
amount of the provisions.
Additional information regarding provisions is provided in Note 28
on page 169 of the financial statements.
Caution
This Critical Accounting Estimates section contains forward-looking statements. Please see the
Caution Regarding Forward-Looking Statements.
72 BMO Financial Group 195th Annual Report 2012