Bank of Montreal 2007 Annual Report Download - page 140

During the year ended October 31, 2006, under United States GAAP
we adopted new accounting guidance that provides clarification on
VIEs and their consolidation requirements. There was no material impact
on our consolidated financial statements under United States GAAP as
a result of this accounting guidance.
(b) Fair Value Option
Effective November 1, 2006, we adopted a new Canadian accounting
standard which allows us to elect to measure financial instruments
that
would not otherwise be accounted for at fair value as trading instru-
ments, with changes in fair value recorded in income provided they
meet certain criteria. Financial instruments must have been designated
on November 1, 2006, when the standard was adopted, or when new
financial instruments were acquired, and the designation is irrevocable.
The Financial Accounting Standards Board (FASB) has issued
new rules that will eliminate this difference. We expect to adopt these
new rules in fiscal 2008. Until we adopt these new rules under United
States GAAP, an adjustment is made to our Consolidated Statement
of Income to reverse the impact of the changes in fair value recorded
in income under Canadian GAAP.
(c) Pension and Other Employee Future Benefits
Effective October 31, 2007, United States GAAP requires us to recognize
the excess of the fair value of our plan assets compared to the
corresponding benefit obligation as an asset and the shortfall of
the fair value of our plan assets compared to the corresponding benefit
obligation as a liability. This is done on a plan-by-plan basis. The off-
setting adjustment is recorded in Accumulated Other Comprehensive
Income. This new guidance replaces the United States GAAP requirement
to recognize an additional minimum pension liability in cases where
the obligation, calculated without taking salary increases into account,
exceeds the fair value of plan assets at year end. There is no change
in the calculation of the pension and other employee future benefits
expense. Under Canadian GAAP, there is no similar requirement.
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 manage-
ment’s best estimate of the long-term rate of return on plan 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 amor-
tized to 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 accumulated
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.
Prior to November 1, 2006, hedging derivatives were accounted
for on an accrual basis, with gains or losses deferred and recorded
in income on the same basis as the underlying hedged item under
Canadian GAAP. Canadian GAAP changed on November 1, 2006 to
eliminate this difference.
(e) Stock-based Compensation
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.
Effective November 1, 2005, under United States GAAP, stock-based
compensation granted to employees who are eligible to retire was
expensed at the time of grant. We adopted this new standard prospec-
tively, beginning with grants issued in fiscal 2006. We retroactively
adopted new Canadian accounting guidance on stock-based compensation
during the year ended October 31, 2006, which conformed with the
United States accounting standard. Due to the differences in the methods
of adoption, there will continue to be an adjustment to our Consolidated
Statement of Income until the stock-based compensation granted
prior to November 1, 2005 has been fully amortized.
(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 eliminated 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) 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.
136 BMO Financial Group 190th Annual Report 2007
Notes to Consolidated Financial Statements
Notes