TD Bank 2002 Annual Report Download - page 14

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HOW WE PERFORMED IN 2002
manner. In addition, the Bank’s critical accounting policies are
reviewed with the Audit and Risk Management Committee (now
the Audit Committee) on a periodic basis. Critical accounting
policies that require management’s judgements and estimates
include accounting for loan losses, accounting for the fair value
of financial instruments held in trading portfolios, accounting for
income taxes, the valuation of investment securities, accounting
for loan securitizations, and the valuation of goodwill and
intangible assets.
Accounting for loan losses
Accounting for loan losses is an area of importance given the
significant size of the Bank’s loan portfolio. The Bank has three
types of allowances against loan losses – specific, sectoral and
general. Loan impairment is recognized when the timely
collection of all contractually due interest and principal payments
is no longer assured. Significant judgement is required as to the
timing of designating a loan as impaired and the amount of the
required specific allowance. Reviews by regulators in Canada and
the U.S. bring a measure of uniformity to specific allowances
recorded by banks. Sectoral allowances require ongoing
judgement as to drawdowns from sectorals to specific loss and
the amount of periodic sectoral allowances required. General
allowances also require judgement given that the level of general
allowances depends upon an assessment of business and
economic conditions, historical and expected loss experience,
loan portfolio composition and other relevant indicators. Note
1(h) of the Bank’s consolidated financial statements provides
more details.
Accounting for the fair value of financial instruments
held in trading portfolios
The Bank’s trading securities and trading derivatives are carried
at fair value on the consolidated balance sheet with the resulting
realized and unrealized gains or losses recognized immediately in
other income. The fair value of exchange traded financial
instruments is based on quoted market rates plus or minus daily
margin settlements. If listed prices or quotes are not available,
then the Bank’s management applies judgement in the
determination of the fair values by using valuation models that
incorporate prevailing market rates and prices on underlying
instruments with similar maturities and characteristics, and takes
into account factors such as counterparty credit quality, liquidity
and concentration concerns. Imprecision in estimating these
factors can impact the amount of revenue or loss recorded for a
particular position. Notwithstanding the judgement required in
fair valuing the Bank’s financial instruments, the Bank believes
its estimates of fair value are reasonable given the Bank’s process
for obtaining external market prices, internal model review,
consistent application of approach from period to period and the
validation of estimates through the actual settlement of contracts.
Accounting for income taxes
Accounting for current income taxes requires the Bank to
exercise judgement for issues relating to certain complex
transactions, known issues under discussion with tax authorities
or transactions yet to be settled in court. As a result, the Bank
maintains a tax provision for contingencies and regularly
assesses the adequacy of this tax provision.
Future income taxes are recorded to account for the effects of
future taxes on transactions occurring in the current period. The
accounting for future income taxes also requires judgement in the
following key situations:
•Future tax assets must be assessed for recoverability. The
Bank believes based on all available evidence, that it is more
likely than not that all of the future tax assets recognized will
be realized prior to their expiration. The amount of the future
income tax asset recognized and considered realizable could,
however, be reduced in the near term if projected income is
not achieved due to various factors such as unfavourable
business conditions.
•Future tax assets are calculated based on tax rates to be
applied in future periods. Previously recorded tax assets and
liabilities need to be adjusted when the expected date of the
future event is revised based on current information.
•The Bank has not recognized a future income tax liability for
undistributed earnings of certain international operations as it
does not plan to repatriate them. Estimated taxes payable on
such earnings in the event of repatriation would be $235 mil-
lion at October 31, 2002.
Valuation of investment securities
Under Canadian generally accepted accounting principles
(GAAP), investment securities are carried at cost or amortized
cost and are adjusted to net realizable value to recognize other
than temporary impairment. The determination of whether or not
other than temporary impairment exists is a matter of judgement.
The Bank’s management reviews these investment securities
regularly for possible other than temporary impairment and this
review typically includes an analysis of the facts and circum-
stances of each investment and the expectations for that
investment’s performance. Specifically, impairment of the value
of an investment may be indicated by conditions such as a
prolonged period during which the quoted market value of the
investment is less than its carrying value, severe losses by the
investee in the current year or current and prior years, continued
losses by the investee for a period of years, suspension of trading
in the securities, liquidity or going concern problems of the
investee or the current fair value of the investment is less than its
carrying value. However, when a condition indicating an impair-
ment in value for an investment has persisted for a period of
three to four years, there is a general presumption that there has
been a loss that is other than temporary in nature. This presump-
tion can only be rebutted by persuasive evidence to the contrary.
Accounting for loan securitizations
There are two key determinations that must be made relating to
the accounting for loan securitizations. For Bank-originated
securitized assets, a decision must be made as to whether the
loan securitization should be considered a sale under Canadian
GAAP. Canadian GAAP requires that specific criteria be met for
the Bank to have surrendered control of the assets and thus
recognize a gain on sale. For instance, the securitized assets
must be isolated from the Bank and put presumptively beyond
the reach of the Bank and its creditors, even in bankruptcy or
other receivership. The second key determination to be made is
whether the SPE should be consolidated into the Bank’s financial
statements. Current Canadian GAAP requires consolidation of
Management’s Discussion and Analysis of Operating Performance