TD Bank 2002 Annual Report Download - page 81

79
FINANCIAL RESULTS
Hedging relationships
During the year, the Canadian Institute of Chartered Accountants
(CICA) issued an accounting guideline on hedging relationships.
The guideline is effective for the Bank beginning November 1,
2003. The guideline sets out the criteria that must be met in
order to apply hedge accounting for derivatives and is based on
many of the principles outlined in the U.S. standard relating to
derivative instruments and hedging activities. Specifically, the
guideline provides detailed guidance on (a) the identification,
designation, documentation and effectiveness of hedging relation-
ships, for purposes of applying hedge accounting; and (b) the dis-
continuance of hedge accounting. The Bank intends to implement
the guideline in November 2003 and the impact on future results
will depend on the Bank’s hedging strategies and market volatility.
Stock-based compensation
A new accounting standard on stock-based compensation has
been issued which substantially harmonizes Canadian GAAP with
U.S. GAAP and is effective for fiscal 2003. The new standard
requires the use of the fair value method of accounting for
awards that are direct awards of stock, or call for settlement in
cash or other assets. For all other stock-based compensation
awards the standard encourages but does not require the use of
the fair value method of accounting. For fiscal 2003, the Bank
has elected to apply the fair value method of accounting for stock
options; therefore, the Bank will recognize compensation expense
for stock option awards granted after November 1, 2002. The
impact of adopting this new accounting policy will be to increase
the Bank’s compensation expense and to reduce reported earn-
ings per share. The amount of the additional compensation
expense depends on the number of options granted and their fair
value at the time of grant. Had the Bank adopted the new
accounting standard on November 1, 2001, the impact would
have been to reduce reported basic and diluted earnings per
share by approximately two cents per share for the year ended
October 31, 2002. The fair value of options granted during the
year was estimated at the date of grant using the Black-Scholes
valuation model with the following assumptions: (i) risk-free
interest rate of 4.91%; (ii) expected option life of 5.5 years;
(iii) expected volatility of 25% and (iv) expected dividends of
2.90%. The weighted-average fair value of each option granted
was $9.48.
Consolidation of special purpose entities
The Canadian Accounting Standards Board (AcSB) and the U.S.
Financial Accounting Standards Board (FASB) issued similar
exposure drafts relating to the consolidation of special purpose
entities (SPEs), that provide more detailed guidance on when
the Bank should consolidate a SPE. In Canada, the AcSB has yet
to determine the effective date of these new consolidation
requirements. For U.S. GAAP purposes, these new consolidation
requirements are applicable to all SPEs created after the date the
proposed guidance is issued and for SPEs created before that
date, the guidance is expected to be applicable to those SPEs
still existing as of the beginning of the Bank’s fourth quarter of
fiscal 2003. The Bank is currently evaluating the impact of the
new guidance and as a result the impact is not yet quantifiable.
Accounting for costs associated with exit
or disposal activities
During the year, the U.S. FASB issued a new accounting stan-
dard, relating to accounting for costs associated with exit or
disposal activities. The standard requires the recognition of costs
associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal
plan. The Bank is required to apply the standard for U.S. GAAP
purposes prospectively to exit or disposal activities initiated after
December 31, 2002.
NOTE 23 Future accounting changes