Bank of Montreal 2014 Annual Report Download - page 117

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
an impairment calculation would be performed.
Fair value less costs to sell was used to perform the impairment
test. 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 any of these
assumptions would affect the determination of fair value for each of the
CGUs 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.
Purchased Loans
Significant judgments and assumptions were made in determining the
fair value of the Marshall & Ilsley Corporation (“M&I”) loan portfolio.
Loans were identified as either purchased performing loans or
purchased credit impaired loans (“PCI loans”), both of which were
recorded at fair value at the time of acquisition. Determining the fair
value involved estimating the expected cash flows to be received and
determining the discount rate to be applied to the cash flows from the
loan portfolio. In determining the possible discount rates, we considered
various factors, including our cost to raise funds in the current market,
the risk premium associated with the loans and the cost to service the
portfolios. PCI loans are those where the timely collection of interest
and principal was no longer reasonably assured as at the date of
acquisition. Subsequent to the acquisition date, we regularly re-evaluate
what we expect to collect on PCI loans. Changes in expected cash flows
could result in the recognition of impairment or a recovery in our
provision for credit losses. Assessing the timing and amount of cash
flows requires significant management judgment regarding key
assumptions, including the probability of default, severity of loss and
timing of payment receipts, as well as the valuation of collateral. All of
these factors are inherently subjective and can result in significant
changes in cash flow estimates over the life of a loan.
Subsequent to the determination of the initial fair value, the
purchased performing loans are subject to the credit review processes
applied to loans we originate.
Additional information regarding the accounting for purchased loans
is included in Note 4.
Acquired Deposits
M&I deposit liabilities were recorded at fair value at acquisition. The
determination of fair value involved estimating the expected cash flows
to be paid and determining the discount rate applied to the cash flows.
Assessing the timing and amount of cash flows requires significant
management judgment regarding the likelihood of early redemption by
us and the timing of withdrawal by the client. Discount rates were
based on the prevailing rates we were paying on similar deposits at the
date of acquisition.
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 would result from a change in the assumption for
future investment yields.
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
associated with 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 30.
Significant Judgments Applied in Assessing Control
For most of our subsidiaries, control is determined based on holding the
majority of the voting rights. For certain investments in limited
partnerships, we exercise judgment in determining if we control an
entity. Based on an assessment of our interests and rights, we have
determined that we do not control certain entities, even though we may
have an ownership interest greater than 50%. This may be the case
when we are not the general partner in an arrangement and the general
partner’s rights most significantly affect the returns of the entity.
Additionally, we have determined that we control certain entities
despite having an ownership interest less than 50%. This may be the
case when we are the general partner in an arrangement and the
general partner’s rights most significantly affect the returns of the
entity.
We also exercise judgment in determining if we control structured
entities. Structured entities are discussed in greater detail in Note 9.
Changes In Accounting Policies
Effective November 1, 2013, we adopted the following new and
amended accounting pronouncements issued by the IASB.
Employee Benefits
On November 1, 2013, we adopted revisions to IAS 19 Employee
Benefits (“IAS 19”) that amend the measurement, presentation and
disclosure requirements for employee benefit plans. The standard has
been applied retroactively and the comparative periods in our
Consolidated Balance Sheet, Statement of Income and Statement of
Comprehensive Income have been restated. The amendments to IAS 19
require the full funded status of our pension and other employee future
benefit plans to be reflected as the net defined benefit liability or asset
in the Consolidated Balance Sheet. Actuarial gains and losses are
recognized immediately in Other Comprehensive Income (“OCI”) and are
no longer deferred and amortized into income. Past service costs
resulting from plan amendments are immediately recognized in income
when a plan is amended, without regard to vesting.
Interest costs and expected return on plan assets under the
previous version of IAS 19 have been replaced with a net interest cost or
revenue calculated by applying the discount rate to the net defined
benefit liability or asset. Further, these amendments also require
enhanced disclosures about the characteristics of those plans and the
risks to which the bank is exposed through participation in those plans.
Additional disclosures are included in Note 24 to comply with these
requirements.
Presentation of Financial Statements
Amendments to IAS 1 Presentation of Financial Statements require
items within OCI to be presented separately based on whether or not
the item will subsequently be reclassified into net income. The new
presentation was adopted on a retroactive basis together with the
amendments to IAS 19. Actuarial gains and losses that are recognized
directly in OCI under IAS 19 remain in OCI and will never be reclassified
to net income.
130 BMO Financial Group 197th Annual Report 2014