Bank of Montreal 2013 Annual Report Download - page 121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes
For held-to-maturity, available-for-sale 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 from the security and the impact can be reliably estimated.
Objective evidence of impairment includes default or delinquency
by a debtor, restructuring of an amount due to us on terms that we
would not consider otherwise, indications that a debtor or issuer will
enter bankruptcy, or the disappearance of an active market for a
security. In addition, for equity securities, a significant or prolonged
decline in the fair value of a security below its cost is objective evidence
of impairment.
The decision to record a write-down, the amount and the period in
which it is recorded could change if management’s assessment of the
factors change. We do not record impairment write-downs on debt
securities when impairment is due to changes in market interest rates, if
future contractual cash flows associated with the debt security are still
expected to be recovered.
Additional information regarding our accounting for held-to-
maturity securities, available-for-sale securities and other securities and
the determination of fair value is included in Note 3.
Income taxes
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 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.
Additional information regarding our accounting for income taxes is
included in Note 24.
Goodwill
For the purpose of impairment testing, goodwill is allocated to our cash
generating units (“CGUs”), which represent the lowest level within the
bank at which goodwill is monitored for internal management purposes.
Impairment testing is performed at least annually, and whenever there
is an indication that a CGU may be impaired, by comparing the carrying
value and the recoverable amount of the CGU to which goodwill has
been allocated to determine whether 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, we would recognize an
impairment loss.
Fair value less costs to sell was used to perform the impairment
test in 2013 and 2012. In determining fair value less costs to sell, we
employ a discounted cash flow model consistent with those used when
we acquire businesses. This model is dependent on assumptions 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
its judgment and make assumptions in determining fair value less costs
to sell, and differences in judgments and assumptions could affect the
determination of fair value and any resulting impairment write-down.
Additional information regarding goodwill is included in Note 13.
Insurance-related liabilities
Insurance claims and policy benefit liabilities represent current claims
and estimates of 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
variations in reinvestment interest rates, which may affect the valuation
of policy benefit liabilities.
Additional information regarding insurance-related liabilities is
included in Note 16.
Provisions
The bank and its subsidiaries are involved in various legal actions in the
ordinary course of business.
Provisions are recorded at the best estimate of the amounts
required to settle any obligations 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 provisions. The actual costs of
resolving these claims may be substantially higher or lower than the
amounts of the provisions.
Additional information regarding provisions is provided in Note 28.
Future Changes in IFRS
Employee benefits
In June 2011, the IASB issued amendments to IAS 19 Employee Benefits
(“IAS 19 revised”). The revised standard is effective for our fiscal year
beginning November 1, 2013. Under the revised standard, actuarial
gains and losses are to be recognized immediately in other
comprehensive income and may no longer be deferred and amortized.
Additionally, the expected return on plan assets will be set equal to the
discount rate used to determine the plan obligation. This will result in a
higher pension obligation and pension expense. Retroactive application
of the amendments would increase our defined benefit liability by
$538 million, reduce accumulated other comprehensive income by
$459 million and reduce retained earnings by $79 million as at
November 1, 2012.
Fair value measurement
In May 2011, the IASB issued IFRS 13 Fair Value Measurement (“IFRS
13”), which replaces the existing standard for fair value measurement.
The new standard provides a common definition of fair value and
establishes a framework for measuring fair value. The new standard also
requires additional disclosures about fair value measurements. IFRS 13 is
effective for our fiscal year beginning November 1, 2013. The adoption
of the new standard will result in additional disclosures. We do not
expect this new standard to have a significant impact on how we
determine fair value.
Impairment of assets
In May 2013, the IASB issued narrow-scope amendments to IAS 36
Impairment of Assets. These amendments address the disclosure of
information about the recoverable amount of impaired assets if that
amount is based on fair value less costs of disposal. The amendments
are effective for our fiscal year beginning November 1, 2014. We do not
expect the amendments to have a significant impact on our
consolidated financial statements.
Consolidated financial statements
In May 2011, the IASB issued IFRS 10 Consolidated Financial Statements
(“IFRS 10”), which provides a single consolidation model that defines
control and establishes control as the basis for consolidation for all types
of interests. Under IFRS 10, we would control an entity when we have
power over the entity, exposure or rights to variable returns from our
involvement, and the ability to exercise power to affect the amount of
our returns. IFRS 10 is effective for our fiscal year beginning
November 1, 2013. The adoption of IFRS 10 is expected to result in the
deconsolidation of two of our funding vehicles and Canadian
securitization vehicles. This will result in $802 million of subordinated
132 BMO Financial Group 196th Annual Report 2013