TD Bank 2007 Annual Report Download - page 74

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis70
including designating a business-level committee to review rep-
utational risk issues and to identify issues to be escalated to the
enterprise-wide Reputational Risk Committee. In our wholesale
business, we also have defined and documented a process to
approve structured transactions. The process involves commit-
tees with representation from the businesses and control func-
tions, and includes consideration of all aspects of a new
structured product, including reputational risk.
WHO MANAGES REPUTATIONAL RISK
Ultimate responsibility for the Bank’s reputation lies with the
Senior Executive Team and the executive committees that exam-
ine reputational risk as part of their ongoing mandate. The
Reputational Risk Committee is the executive committee with
the enterprise-wide responsibility for making decisions on repu-
tational risks. The purpose of the Committee is to ensure that
new and existing business activities, transactions, products or
sales practices that are referred to it are subject to a sufficiently
broad and senior review to fully consider the associated reputa-
tional risk issues. However, every employee and representative
of our organization has a responsibility to contribute in a posi-
tive way to our reputation. This means ensuring that ethical
practices are followed at all times, that interactions with our
stakeholders are positive, and that we comply with applicable
policies, legislation and regulations. Reputational risk is most
effectively managed when every individual works continuously
to protect and enhance our reputation.
Environmental Risk
Environmental risk is the possibility of loss to our financial,
operational or reputational value resulting from the impact
of environmental issues or concerns.
Protecting and preserving the environment is very important
to our business and operations, both within Canada and inter-
nationally. We are sensitive to our environmental footprint, and
carefully manage environmental risks that may affect our finan-
cial, operational or reputational value. Important environmental
issues and concerns include habitat degradation, forestry biodi-
versity, climate change and the impact on indigenous peoples.
WHO MANAGES ENVIRONMENTAL RISK
The Corporate Environmental Affairs group, in partnership with
Corporate Operations, is responsible for the design and imple-
mentation of our Environmental Management System (EMS),
which sets out the policy, processes and procedures for system-
atically identifying environmental risk issues and impacts on our
business, as well as setting goals for compliance, performance
and continuous improvement. Responsibility for management
of environmental risk is distributed throughout the organiza-
tion, and also is integrated within the management of other
risks such as credit, operational and reputational risk.
HOW WE MANAGE ENVIRONMENTAL RISK
There are two principal sources of environmental risk to our
business: ownership or operation of physical premises and,
second, the actions of our borrowers. These sources of risk are
actively managed through our EMS and credit risk management
processes. Credit risk management involves establishing credit
policy and monitoring the credit assessment process, as well as
obtaining environmental assessments where necessary. In 2007,
our credit granting practices in the area of project finance were
further enhanced with the adoption of the internationally-rec-
ognized Equator Principles for determining, assessing and man-
aging social and environmental risk.
A key component of the EMS is our Environmental Policy,
approved by the Risk Committee of the Board, and our comple-
mentary Environmental Management Framework. Together, the
Policy and Framework guide how we will manage and minimize
the potential impact of environmental risks and issues arising
from our business and operations. We also monitor policy and
legislative developments, and continue to have an ongoing dia-
logue with environmental organizations, industry associations
and socially responsible investment organizations. These discus-
sions focus on the role that banks could or should take on cer-
tain environmental issues that we believe are important to our
customers and the communities in which we operate.
For more information on our Environmental Policy and
Environmental Management Framework and related activities,
please refer to our Corporate Responsibility Report, which is
available at our website www.td.com.
The Bank’s accounting policies are essential to understanding its
results of operations and financial condition. A summary of the
Bank’s significant accounting policies is presented in the Notes
to the Consolidated Financial Statements. Some of the Bank’s
policies require subjective, complex judgments and estimates as
they relate to matters that are inherently uncertain. Changes in
these judgments or estimates could have a significant impact on
the Bank’s Consolidated Financial Statements. The Bank has
established procedures to ensure that accounting policies are
applied consistently and that the processes for changing meth-
odologies are well controlled and occur in an appropriate and
systematic manner. In addition, the Bank’s critical accounting
policies are reviewed with the Audit Committee on a periodic
basis. Critical accounting policies that require management’s
judgment and estimates include accounting for loan losses,
accounting for the fair value of financial instruments, account-
ing for income taxes, accounting for securitizations and variable
interest entities, the valuation of goodwill and other intangibles,
accounting for pensions and post-retirement benefits, and
contingent liabilities.
ACCOUNTING STANDARDS AND POLICIES
Critical Accounting Estimates
ACCOUNTING FOR LOAN LOSSES
Accounting for loan losses is an area of importance given the
size of the Bank’s loan portfolio. The Bank has two types of
allowances against loan losses – specific and general. Loan
impairment is recognized when the Bank determines, based on
its identification and evaluation of problem loans and accounts,
that the timely collection of all contractually due interest and
principal payments is no longer assured. Judgment is required
as to the timing of designating a loan as impaired and the
amount of the required specific allowance. Management’s
judgment is based on its assessment of probability of default,
loss given default and exposure at default. Changes in these
estimates, due to a number of circumstances, can have a direct
impact on the provision for loan losses and may result in a
change in the allowance. Changes in the allowance, if any,
would primarily impact the Canadian Personal and Commercial
Banking, the U.S. Personal and Commercial Banking and the
Wholesale Banking segments. Reviews by regulators in Canada
and the U.S. bring a measure of uniformity to specific allowances
recorded by banks.