TD Bank 2010 Annual Report Download - page 77

TD BANK GROUP ANNUAL REPORT 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS 75
(millions of Canadian dollars, except as noted) Obligation Expense
Impact of a change of 1.0% in key assumptions
Discount rate assumption used 5.81% 6.90%
Decrease in assumption $ 499 $ 74
Increase in assumption (386) (57)
Expected long-term return on assets assumption used n/a 6.75%
Decrease in assumption n/a 26
Increase in assumption n/a (26)
Rate of compensation increase assumption used 3.50% 3.50%
Decrease in assumption $ (121) $ (24)
Increase in assumption 129 26
INCOME TAXES
We are subject to taxation in numerous jurisdictions. There are many
transactions and calculations for which the ultimate tax determination
is uncertain during the ordinary course of business. We maintain provi-
sions for uncertain tax positions that we believe appropriately reflect
our risk with respect to tax positions under discussion, audit, dispute,
or appeal with tax authorities, or which are otherwise considered to
involve uncertainty. These provisions are made using the best estimate
of the amount expected to be paid based on a qualitative assessment
of all relevant factors. We assess the adequacy of these provisions at
the end of each reporting period. However, it is possible that at some
future date, an additional liability could result from audits by the
relevant taxing authorities. Provisions are reversed to income in the
period in which management assesses they are no longer required
or as determined by statute.
This accounting policy impacts all of the Bank’s business segments.
See Note 9 to the 2010 Consolidated Financial Statements for additional
disclosures regarding goodwill and other intangibles.
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 of expected long-term return on plan assets,
compensation increases, health care cost trend rate and discount rate
are management’s best estimates and are reviewed annually with the
Bank’s actuaries. The Bank develops each assumption using relevant
experience in conjunction with market related data and considers if
there is any prolonged or significant impact on the assumptions. The
discount rate used to value liabilities is based on long-term corporate
AA bond yields as at the measurement date. The expected long term
return on plan assets is based on historical returns and future expec-
tations for returns for each asset class, as well as the target asset
allocation of the fund. The other assumptions are also long-term
estimates. All assumptions are subject to a degree of uncertainty.
Differences between actual experience and the assumptions, as
well as changes in the assumptions resulting from changes in future
expectations, result in increases or decreases in the pension and
post-retirement benefits obligation and expense in future years. All
of the Bank’s segments are impacted by this accounting policy.
The following table provides the sensitivity of the accrued pension
benefit obligation and the pension expense for the Bank’s principal
pension plans to changes in the discount rate and assumptions for
expected long-term return on plan assets and compensation increases.
The sensitivity analysis provided in the table is hypothetical and should be
used with caution. For a further discussion of the key assumptions used
in determining the Bank’s annual pension expense and projected benefit
obligation, see Note 24 to the 2010 Consolidated Financial Statements.
SENSITIVITY OF CHANGE IN KEY ASSUMPTIONS
TABLE 48
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 before 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
determines 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 $409 million at October 31, 2010.
CONTINGENT LIABILITIES
Contingent liabilities arise when there is some uncertainty whether,
as a result of a past event or transaction, the Bank will incur a loss in
the future. 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 loss accruals are established when it becomes likely
that the Bank will incur an expense and the amount can be reason-
ably estimated. In addition to the Bank’s management, for contin-
gent litigation loss accruals, internal and external experts are involved
in assessing the likelihood and in estimating any amounts involved.
Throughout the existence of a contingency, the Bank’s management
or its experts may learn of additional information that may impact its
assessments about probability or about the estimates 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 31 to the Bank’s Consolidated Financial Statements for
more details.