TD Bank 2002 Annual Report Download - page 80

78
FINANCIAL RESULTS
Restructuring costs
Under previous Canadian GAAP, restructuring costs incurred in
respect of an acquired company could be accrued as a liability
provided that a restructuring plan detailing all significant actions
to be taken had been approved by an appropriate level of man-
agement, and significant changes to the plan were not likely. U.S.
GAAP and current Canadian GAAP require that restructuring costs
related to an acquired company be included as a liability in the
allocation of the purchase price, thereby increasing goodwill.
U.S. GAAP also requires that all restructuring costs be incurred
within one year of a restructuring plan’s approval by management
and that all employees to be involuntarily terminated be notified
of their termination benefit arrangement. In accordance with U.S.
GAAP, restructuring costs of $101 million after-tax have been rec-
ognized during fiscal 2002 (2001 – $188 million; 2000 – $55
million). There were no restructuring costs under Canadian GAAP
for fiscal 2002 (2001 – $138 million; 2000 – $271 million).
Loan securitizations
U.S. GAAP and current Canadian GAAP require gains on loan
securitizations to be recognized in income immediately. Under
previous Canadian GAAP, gains were recognized only when
received in cash by the Bank.
During fiscal 2001, the Bank adopted the U.S. accounting
standard for transfers and servicing of financial assets and extin-
guishments of liabilities. The principal impact of this new U.S.
standard on the Bank’s financial statements is to require consoli-
dation of special purpose entities (SPEs) in circumstances where
the SPE is considered a single-seller and either its activities
are not sufficiently limited or it does not have a minimum 3%
external equity investment. Canadian GAAP requires consolidation
of such SPEs only when the Bank retains substantially all the
residual risks and rewards of the SPE.
Non-controlling interest
Under U.S. GAAP, preferred shares of the Bank’s subsidiary,
TD Mortgage Investment Corporation, are presented as a non-
controlling interest on the consolidated balance sheet, and
the net income applicable to the non-controlling interest is
presented separately on the consolidated statement of operations.
Under Canadian GAAP, these preferred shares are included
within the total preferred shares presented on the consolidated
balance sheet.
Future income taxes
Under Canadian GAAP, the effects of income tax rate reductions
are recorded when considered substantively enacted. Under U.S.
GAAP, the effects of rate changes do not impact the measurement
of tax balances until passed into law.
Investment securities
U.S. GAAP requires that investment securities be classified as
either “available for sale” or “held to maturity”, and requires
available for sale securities to be reported on the balance sheet
at their estimated fair values. Unrealized gains and losses arising
from changes in fair values of available for sale securities are
reported net of income taxes in other comprehensive income.
Other than temporary declines in fair value are recorded by trans-
ferring the unrealized loss from other comprehensive income to
the statement of income. For U.S. GAAP, the Bank accounts
for substantially all investment securities as available for sale.
Under Canadian GAAP, investment securities are carried at cost
or amortized cost, with other than temporary declines in value
recognized based upon expected net realizable values.
In addition, under U.S. GAAP certain non-cash collateral
received in securities lending transactions is recognized as an
asset and a liability is recorded for obligations to return the col-
lateral. Under Canadian GAAP, non-cash collateral received as
part of a securities lending transaction is not recognized in the
consolidated balance sheet.
Derivative instruments and hedging activities
The Bank adopted the U.S. standard relating to derivative instru-
ments 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 comprehen-
sive income in fiscal 2001. 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 operations. 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, liabili-
ties 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. For fiscal 2002, deferred net losses on
derivative instruments of $68 million (2001 – $132 million)
included in other comprehensive income 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 20 years, although a substantial majority is
under two years. The ineffective portion of hedging derivative
instruments’ changes in fair values are immediately recognized in
income. For fiscal 2002, under U.S. GAAP, the Bank recognized
pre-tax gains of $3 million (2001 – $13 million) for the ineffec-
tive 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
adjustments are presented in retained earnings.
(millions of dollars)
Prepaid pension expense $117
Intangible asset 8
Accumulated other comprehensive income before income taxes 186
Net amount recognized $ 311
U.S. GAAP also requires an additional minimum liability to be
recorded if the accumulated benefit obligation is greater than the
fair value of plan assets. Canadian GAAP has no such require-
ment. In fiscal 2002, for U.S. GAAP purposes, the Bank recog-
nized the amounts noted in the table below in the consolidated
balance sheet.