TD Bank 2001 Annual Report Download - page 76

74
FINANCIAL RESULTS
The effective dates noted below are the dates on which
new accounting standards must be implemented. Earlier imple-
mentation is permitted and the Bank will assess each standard
separately to determine the year of adoption.
Business combinations
Two new related accounting standards on business combinations
and goodwill and other intangible assets, have been issued.
The new standard on business combinations eliminates the
pooling-of-interests accounting method and is applicable to all
acquisitions initiated on or after July 1, 2001.
The new standard on goodwill and other intangible assets is
effective for fiscal 2003, although earlier adoption effective fiscal
2002 is permitted. The Bank intends to implement the new
standard in fiscal 2002. This new standard discontinues the
amortization of goodwill and intangible assets with indefinite
useful lives. The new standard introduces an annual assessment
and recognition of goodwill and indefinite life intangible asset
impairment. The Bank is currently reviewing the new accounting
standard and its related guidance to determine whether any
intangible assets are considered to have indefinite useful lives.
Earnings per share
A new accounting standard on earnings per share has been
issued and is effective for fiscal 2002. The new standard
harmonizes Canadian GAAP with both U.S. and international
accounting standards. The new standard requires the use of the
treasury stock method, whereby the proceeds received from the
exercise of stock options are assumed to be used to repurchase
shares. Under the current imputed earnings approach, the Bank
assumes the proceeds are invested to earn a return. The new
standard is not expected to have a material impact on reported
earnings per share.
Stock-based compensation
A new accounting standard on stock-based compensation has
recently been approved by the Accounting Standards Board,
which will harmonize Canadian GAAP with U.S. GAAP and is
effective for fiscal 2003. The new standard requires that stock
appreciation rights be measured at fair value at each reporting
date, with the change in fair value reported in the statement of
income. The standard encourages but does not require the use
of the fair value method for all other stock-based compensation
plans. The standard is to be implemented retroactively without
restatement at the time of adoption. The Bank is currently
reviewing its stock option plan design in the context of the new
standard and may modify its stock option plan as a result of
this review. Accordingly, the impact of this new standard on the
Bank’s results cannot be determined at this time.
Derivative instruments and hedging activities
The Bank adopted the new U.S. standard relating to derivative
instruments and hedging activities on November 1, 2000 and
recorded a cumulative transition adjustment recognizing after-tax
gains of $10 million in net income and $20 million in other com-
prehensive income. U.S. GAAP requires all derivative instruments
be reported on the consolidated balance sheet at their fair values,
with changes in the fair value for derivatives that are not hedges
reported through the consolidated statement of income. U.S.
GAAP provides specific guidance on hedge accounting including
the measurement of hedge ineffectiveness, limitations on hedging
strategies and hedging with intercompany derivatives. For fair
value hedges, the Bank is hedging changes in the fair value of
assets, liabilities or firm commitments and changes in the fair
values of the derivative instruments are recorded in income. For
cash flow hedges, the Bank is hedging the variability in cash
flows related to variable rate assets, liabilities or forecasted
transactions and the effective portion of the changes in the fair
values of the derivative instruments are recorded in other
comprehensive income until the hedged items are recognized
in income. Deferred net losses on derivative instruments of
$132 million included in other comprehensive income at
October 31, 2001 are expected to be reclassified to earnings
during the next twelve months. Cash flow hedges also include
hedges of certain forecasted transactions up to a maximum of
10 years, although a substantial majority is under 2 years. The
ineffective portion of hedging derivative instruments’ changes
in fair values are immediately recognized in income. For fiscal
2001, under U.S. GAAP, the Bank recognized gains of $13 mil-
lion for the ineffective portion of cash flow hedges.
Under Canadian GAAP, the Bank recognizes only derivatives
used in trading activities at fair value on the consolidated balance
sheet, with changes in fair value included in income.
Foreign currency translation adjustments
U.S. GAAP requires foreign currency translation adjustments
arising from subsidiaries where the functional currency is other
than the Canadian dollar to be presented net of taxes in other
comprehensive income, a separate component of shareholders’
equity. Under Canadian GAAP, foreign currency translation adjust-
ments are presented in retained earnings.
NOTE 21 Future accounting changes