Bank of Montreal 2014 Annual Report Download - page 62

MD&A
assumptions, including the probability of default, severity of loss, timing
of payment receipts and valuation of collateral. All of these factors are
inherently subjective and can result in significant changes in cash flow
estimates over the term of a loan.
The purchased performing loans are subject to the credit review
processes applied to loans we originate.
Acquired Deposits
M&I deposit liabilities were recorded at fair value at the date of acquis-
ition. The determination of fair value involved estimating the expected
cash flows to be paid and determining the discount rate to be applied to
the cash flows. Estimating 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 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. If the assumed yield were to increase by one
percentage point, net income would increase by approximately
$71 million. A reduction of one percentage point would lower net
income by approximately $63 million. See the Insurance Risk section on
page 102 for further discussion of the impact of changing rates on
insurance earnings.
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 required. 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 30
on page 178 of the financial statements.
Caution
This Critical Accounting Estimates section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
Changes in Accounting Policies in 2014
BMO adopted the following new or amended standards in 2014: IAS 19
Employee Benefits; IAS 1 Presentation of Financial Statements; IFRS 10
Consolidated Financial Statements; IFRS 11 Joint Arrangements; IFRS 12
Disclosure of Interests in Other Entities; IFRS 13 Fair Value Measurement;
and the offsetting provisions of IFRS 7 Financial Instruments: Disclosures.
The impact of adoption is discussed in Note 1 on page 128 of the finan-
cial statements.
Future Changes in Accounting Policies
BMO monitors the potential changes to IFRS proposed by the Interna-
tional Accounting Standards Board (IASB) and analyzes the effect that
any such changes to the standards may have on BMO’s financial
reporting and accounting policies. New standards and amendments to
existing standards that will be effective for BMO in the future are
described in Note 1 on page 128 of the financial statements.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our
key management personnel and their affiliated entities, joint ventures
and equity-accounted investees on the same terms that we offer to our
customers for those services. Key management personnel are defined as
those persons having authority and responsibility for planning, directing
and/or controlling the activities of an entity, being the directors and
most senior executives of the bank.
Details of our investments in joint arrangements and associates and
the compensation of key management personnel are disclosed in Note
29 on page 177 of the financial statements. A select suite of customer
loan and mortgage products is offered to our employees at rates nor-
mally made available to our preferred customers. We also offer
employees a subsidy on annual credit card fees.
Management’s Annual Report on Disclosure Controls and Procedures and
Internal Control over Financial Reporting
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to
senior management, including the Chief Executive Officer (CEO) and the
Chief Financial Officer (CFO), on a timely basis so that appropriate deci-
sions can be made regarding public disclosure.
An evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures was conducted as at
October 31, 2014, by Bank of Montreal’s management under the super-
vision of the CEO and the CFO. Based on this evaluation, the CEO and the
CFO have concluded that, as of October 31, 2014, our disclosure controls
and procedures, as defined in Canada by National Instrument 52-109,
Certification of Disclosure in Issuers’ Annual and Interim Filings, and in
the United States by Rule 13a-15(e) under the Securities Exchange Act of
1934 (the Exchange Act), are effective.
Internal Control over Financial Reporting
Internal control over financial reporting is designed to provide reason-
able assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with IFRS and the
BMO Financial Group 197th Annual Report 2014 73