TD Bank 2007 Annual Report Download - page 77

TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Management’s Discussion and Analysis 73
TABLE 39 NON-TRADING DERIVATIVES
(millions of Canadian dollars)
Non-trading derivatives
qualifying for hedge accounting
Non-trading derivatives not
qualifying for hedge accounting
Net interest income (loss) $ (65.3)$ 56.9
Other income 2.2 9.5
ACCOUNTING FOR INCOME TAXES
Accounting for current income taxes requires the Bank to exer-
cise judgment for issues relating to certain complex transactions,
known issues under discussion with tax authorities and matters
(millions of Canadian dollars) Obligation Expense
Impact of a change of 1.0% in key assumptions
Discount rate assumption used 5.60%5.50%
Decrease in assumption $ 278 $ 45
Increase in assumption $ (220)$ (31)
Expected long-term return on assets assumption used N/A 6.75%
Decrease in assumption N/A $ 20
Increase in assumption N/A $ (20)
Rate of compensation increase assumption used 3.50%3.50%
Decrease in assumption $ (68)$ (28)
Increase in assumption $ 76 $ 19
TABLE 38 SENSITIVITY OF CHANGE IN KEY ASSUMPTIONS
require a cash flow analysis at that time. The finite life intangible
assets would be written down to net recoverable value based
on expected future cash flows. This accounting policy impacts
all of the Bank’s business segments. See Note 5 to the
Consolidated Financial Statements for additional disclosures
regarding goodwill and other intangibles.
ACCOUNTING FOR PENSIONS AND
POST-RETIREMENT BENEFITS
Pension and post-retirement benefits obligation and expense
are dependent on the assumptions used in calculating these
amounts. The actuarial assumptions are determined by manage-
ment and are reviewed annually by the Bank’s actuaries. These
assumptions include the discount rate, the rate of compensa-
tion increase, the overall health care cost trend rate and the
expected long-term rate of return on plan assets. The discount
rate used to value liabilities is based on long-term corporate AA
bond yields as at the valuation date. The other assumptions are
also long-term estimates. The expected long-term rate of return
on plan assets assumption is based on historical returns and
future expectations for returns for each asset class, as well as
the target asset allocation of the fund. As these assumptions
relate to factors that are long term in nature, they are subject
to a degree of uncertainty. Differences between actual experi-
ence and the assumptions, as well as changes in the assump-
tions resulting from changes in future expectations, result in
increases or decreases in the pension and post-retirement bene-
fits expense in future years.
The following table provides the sensitivity of the accrued
pension benefit obligation and the pension expense for the
Bank’s principal pension plan to changes in the discount rate,
expected long term return on plan assets assumption and rate
of compensation increase as at October 31, 2007. The sensitiv-
ity analysis provided in the table is hypothetical and should be
used with caution. All of the Bank’s segments are impacted by
this accounting policy. For a further discussion of the key
assumptions used in determining the Bank’s annual pension
expense and accrued benefit obligation, see Note 16 to the
Consolidated Financial Statements.
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 impacts all of the Bank’s
segments and requires judgment in the following key situations:
• Future tax assets are assessed for recoverability. The Bank
records a valuation allowance when it believes, based on all
available evidence, that it is more likely than not that all of
the future tax assets recognized will not be realized prior to
their expiration. The amount of the future income tax asset
recognized and considered realizable could, however, be
reduced if projected income is not achieved due to various
factors, such as unfavourable business conditions. If projected
income is not expected to be achieved, the Bank would record
an additional valuation allowance to reduce its future tax
assets to the amount that it believes can be realized. The
magnitude of the valuation allowance is significantly influ-
enced by the Bank’s forecast of future profit generation,
which drives the extent to which it will be able to utilize the
future tax assets.
• Future tax assets are calculated based on tax rates expected
to be in effect in the period in which they will be realized.
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 operations as it does not
plan to repatriate them. Estimated taxes payable on such
earnings in the event of repatriation would be $428 million
at October 31, 2007.
CONTINGENT LIABILITIES
The Bank and its subsidiaries are involved in various legal
actions in the ordinary course of business, many of which are
loan-related. In management’s opinion, the ultimate disposition
of these actions, individually or in the aggregate, will not have
a material adverse effect on the financial condition of the Bank.
Contingent litigation loss accruals are established when it
becomes probable that the Bank will incur an expense and the
amount can be reasonably estimated. In addition to the Bank’s
management, internal and external experts are involved in
assessing probability and in estimating any amounts involved.
Throughout the existence of a contingency, the Bank’s manage-
ment or its experts may learn of additional information that
may impact its assessments about probability or about the esti-
mates of amounts involved. Changes in these assessments may
lead to changes in recorded loss accruals. In addition, the actual
costs of resolving these claims may be substantially higher or
lower than the amounts accrued for those claims.
See Note 25 to the Bank’s Consolidated Financial Statements
for more details.
DERIVATIVES
The impact of non-trading derivatives on net interest income and
other income for the year ended October 31, 2007 is provided
in Table 39 below.