Bank of Montreal 2004 Annual Report Download - page 126

BMO Financial Group Annual Report 2004122
Notes to Consolidated Financial Statements
Notes
difference and resulted in recording in income for Canadian GAAP
purposes, the balance of deferred mortgage prepayment fees as at
November 1, 2003 of $42 million before income taxes. This amount
was already recognized in net income under United States GAAP.
(c) Securitizations
Under United States GAAP, gains on all of our securitizations are
recorded at the date of the securitization. Under Canadian GAAP,
prior to July 1, 2001, gains on sales of NHA-insured mortgages were
recorded at the date of the securitization and gains on sales of other
loans securitized were deferred and recorded over the life of the
loans securitized. Effective July 1, 2001, we adopted a new Canadian
accounting standard on securitizations that eliminated this differ-
ence for securitizations that took place after July 1, 2001. There will
continue to be an adjustment to our Consolidated Statement of
Income until the deferred gains related to loans securitized prior
to July 1, 2001 have all been recorded in income.
(d) Derivatives
Under United States GAAP, hedging derivatives are recorded at
fair value in our Consolidated Balance Sheet. Changes in the fair
value of hedging derivatives are either offset in our Consolidated
Statement of Income against the change in the fair value of the
hedged asset, liability or firm commitment, or are recorded in other
comprehensive income until the hedged item is recorded in our
Consolidated Statement of Income. If the change in the fair value
of the derivative is not completely offset by the change in the
fair value of the item it is hedging, the difference is recorded
immediately in our Consolidated Statement of Income.
Under Canadian GAAP, hedging derivatives are accounted for
on an accrual basis, with gains or losses deferred and recorded in
income on the same basis as the underlying hedged item.
(e) Stock Options
Under United States GAAP, the fair value of stock options on their
grant date is recorded as compensation expense over the period that
the options vest. Under Canadian GAAP, prior to November 1, 2002,
we included the amount of proceeds in shareholders’ equity
when the options were exercised and did not recognize any
compensation expense. Effective November 1, 2002, we adopted a
new Canadian accounting standard on stock-based compensation
that eliminated this difference for stock options granted on
or after November 1, 2002. As a result, there will continue to be
an adjustment to our Consolidated Statement of Income until
stock option expense has been fully recognized for stock options
granted prior to November 1, 2002 under United States GAAP.
(f) Software Development Costs
Under United States GAAP, costs of internally developed software are
required to be capitalized and amortized over the expected useful life
of the software. Under Canadian GAAP, prior to November 1, 2003,
only costs paid to third parties related to internally developed
software were capitalized and amortized over the expected useful
life of the software. Effective November 1, 2003, we adopted a
new Canadian accounting standard on sources of GAAP that elim-
inated this difference for software development costs incurred
after October 31, 2003. There will continue to be an adjustment to
our Consolidated Statement of Income until software development
costs capitalized prior to fiscal 2004 are fully amortized.
(g) Pension and Related Benefits
Under United States GAAP, both pension and other employee future
benefits are recorded in our Consolidated Statement of Income in
the period services are provided by our employees. The related
obligations are valued using current market rates. Under Canadian
GAAP, prior to November 1, 2000, pension benefits were recorded
in our Consolidated Statement of Income in the period services
were provided by our employees, with the corresponding obligation
valued using management’s best estimate of the long-term rate of
return on assets, while other employee future benefits were expensed
as incurred. Effective November 1, 2000, we adopted a new Canadian
accounting standard on pension and other employee future benefits
that eliminated the difference between Canadian and United States
GAAP. When we adopted this new standard, we accounted for the
change in accounting as a charge to retained earnings. As a result,
there will continue to be an adjustment to our Consolidated
Statement of Income until amounts previously deferred under
United States GAAP have been fully amortized to income.
(h) Goodwill and Other Assets
Under United States GAAP, our acquisition of Suburban Bancorp, Inc.
in 1994 would have been accounted for using the pooling of interests
method. Under Canadian GAAP, we accounted for this acquisition
using the purchase method, which resulted in the recognition and
amortization of goodwill and other intangible assets associated with
the acquisition. Effective November 1, 2001, goodwill is no longer
amortized to income under either United States or Canadian GAAP.
The remaining difference relates to the amortization of intangible
assets under Canadian GAAP.
(i) Income Taxes
In addition to the tax impact of differences outlined above, under
United States GAAP, tax rate changes do not impact the measure-
ment of our future income tax balances until they are passed
into law. Under Canadian GAAP, tax rate changes are recorded
in income in the period of change.
(j) Non-Cash Collateral
Under United States GAAP, non-cash collateral received in security
lending transactions that we are permitted by contract to sell or
repledge is recorded as an asset in our Consolidated Balance Sheet
and a corresponding liability is recorded for the obligation to return
the collateral. Under Canadian GAAP, such collateral and the related
obligation are not recorded in our Consolidated Balance Sheet.
As a result of this difference, available for sale securities and other
liabilities have been increased by $1,289 million and $1,220 million
for the years ended October 31, 2004 and 2003, respectively.
(k) Shareholders’ Equity
Accumulated other comprehensive income is recorded as a
separate component of shareholders’ equity under United States
GAAP. Canadian GAAP does not permit presentation of other
comprehensive income.
The accumulated balances related to each component of other
comprehensive income, net of income taxes, are as follows:
(Canadian $ in millions) 2004 2003
Unrealized loss on translation of net investments
in foreign operations, net of hedging activities $ (471) $ (176)
Net unrealized gains on available for sale securities (l) 11 129
Unrealized gains on derivatives designated
as cash flow hedges (d) 274 226
Minimum pension liability (m) (50) (45)
Total Accumulated Other Comprehensive Income (Loss) $ (236) $ 134
(l) Available for Sale Securities
Under United States GAAP, we have designated as available for sale
all of our investment securities and loan substitute securities, other
than investments in corporate equity where we exert significant
influence but not control. Available for sale securities are carried
at fair value, with any unrealized gains or losses recorded in other
comprehensive income. Under Canadian GAAP, investment securities
are carried at cost, amortized or adjusted cost. Investments in
corporate equity where we exert significant influence but not
control are classified in other assets under United States GAAP.
(m) Minimum Pension Liability
Under United States GAAP, we must recognize an additional pension
liability equal to the excess of the pension obligation, calculated
without taking salary increases into account, over the unrecognized
cost of plan amendments. This excess is recognized as a reduction
in other comprehensive income. The pension obligation, calculated
without taking salary increases into account, was $3,087 million
and $2,889 million as at October 31, 2004 and 2003, respectively.
Under Canadian GAAP, there is no similar requirement.