Bank of Montreal 2007 Annual Report Download - page 67

MD&A
BMO Financial Group 190th Annual Report 2007 63
Goodwill and Intangible Assets
Goodwill is assessed for impairment at least annually. This assessment
includes a comparison of the carrying value and the fair value of each
group of businesses to ensure that the fair value of the group is greater
than its carrying value. If the carrying value exceeds the fair value
of the group, a more detailed goodwill impairment assessment would
have to be undertaken. In determining fair value, we use valuation
models that use analysis of discounted cash flows, price-to-earnings
ratios and other multiples. Management must exercise judgment and
make assumptions in determining fair value, and different judgments
and assumptions could affect the determination of fair value and
any resulting impairment write-down. At October 31, 2007, the estimated
fair value of each of our groups of businesses was significantly greater
than its carrying value. In fact, the estimated fair value of any of our
groups of businesses would have to decline by more than 30% before
a detailed impairment assessment would be triggered.
Intangible assets are amortized to income on either a straight-line
or an accelerated basis over a period not exceeding 15 years, depending
upon the nature of the asset. There are no intangible assets with
indefinite lives. We test intangible assets for impairment when circum-
stances indicate the carrying value may not be recoverable. No such
impairment has been identified for the years ended October 31, 2007,
2006 and 2005.
Additional information regarding the composition of goodwill
and intangible assets is included in Note 13 on page 115 of the financial
statements.
Contingent Liabilities
BMO and its subsidiaries are involved in various legal actions in the
ordinary course of business.
Contingent litigation loss provisions are recorded when it becomes
likely that BMO will incur a loss and the amount can be reasonably
estimated. BMO’s management and internal and external experts are
involved in assessing any likelihood and in estimating any amounts
involved. The actual costs of resolving these claims may be substantially
higher or lower than the amounts provided. Additional information
regarding contingent liabilities is included in Note 28 on page 132 of
the financial statements.
Changes in Accounting Policies in 2007
Financial Instruments, Hedges and Comprehensive Income
On November 1, 2006, we adopted the CICA’s new accounting require-
ments for securities, hedging derivatives and certain other financial
instruments. Under these new rules, we are required to measure certain
securities and hedging derivatives at fair value and include a new
section in Shareholders’ Equity, called Accumulated Other Comprehen-
sive Income (Loss), to report unrealized gains or losses related to
certain available-for-sale securities and cash flow hedges and foreign
exchange gains or losses on our net investment in foreign operations.
Certain of our available-for-sale securities (previously referred to
as investment securities) are recorded at fair value under the new rules.
Unrealized gains or losses are deferred in Accumulated Other Compre-
hensive Income (Loss) until the securities are sold or there is impairment
that is to be considered other than temporary. It is only at that time
that any gain or loss is recorded in net income. Securities whose sale is
restricted, or that are not traded in an active market, are also included
in available-for-sale securities, but continue to be recorded at cost.
The new rules do not affect accounting for our merchant banking
investments or investments in corporate equity where we exercise
significant influence, but not control.
All of our hedging derivatives are recorded at fair value under
the new rules, but changes in fair value only impact net income
to the extent that they do not perfectly offset changes in the fair value
of the item that we are hedging (hedge ineffectiveness). Any hedge
ineffectiveness is recorded in net income. Our hedging programs are
such that hedging derivatives should very closely match the items that
they hedge and, as a result, we do not expect a significant amount
of hedge ineffectiveness to arise.
Unrealized gains and losses on equity securities included in
Accumulated Other Comprehensive Income (Loss) are now included
in our Tier 1 and Total Capital Ratios. The impact was insignificant
at October 31, 2007. Foreign exchange gains or losses related to the
translation of our net investment in foreign operations, which were
also reported in Shareholders’ Equity in prior periods, continue to be
included in the determination of our capital ratios.
Total Accumulated Other Comprehensive Income (Loss) is included
in Shareholders’ Equity for purposes of calculating return on equity,
which resulted in an insignificant increase in the return for 2007.
For details of the specific accounting changes and related impacts,
refer to Notes 1, 3, 4, 9 and 15 to the financial statements.
Future Changes in Accounting Policies
Financial Instruments – Disclosure and Presentation
Effective for the fiscal year ending October 31, 2008, BMO will adopt
the CICA’s new handbook requirements regarding the disclosure and
presentation of financial instruments. The new requirements are
intended to enhance financial statement users’ ability to evaluate the
significance of financial instruments to an enterprise and the exposures
inherent within these instruments, and to understand the entity’s
ongoing management of such exposures.
Capital Disclosures
Consistent with enhancing disclosures on risk and management
of risk, BMO will adopt the CICA’s new handbook section establishing
requirements to disclose both qualitative and quantitative information
on capital management. This disclosure requirement is intended
to enhance a reader’s evaluation of an entity’s objectives, policies
and procedures related to ongoing capital management.