Bank of Montreal 2008 Annual Report Download - page 112

Notes
108 | BMO Financial Group 191st Annual Report 2008
Notes to Consolidated Financial Statements
Note 1: Basis of Presentation
We prepare our consolidated financial statements in accordance with
Canadian generally accepted accounting principles (“GAAP”), including
interpretations of GAAP by our regulator, the Superintendent of Financial
Institutions Canada (“OSFI”). We have included certain risk disclosures
on pages 73 to 80 in the Management’s Discussion and Analysis section
of this Annual Report, as is permitted under GAAP. These disclosures are
identified in a blue-tinted font (text and tables) for clear identification
and form an integral part of these consolidated financial statements.
We reconcile our Canadian GAAP results to those that would be
reported under United States GAAP. Significant differences in consolidated
total assets, total liabilities or net income arising from applying United
States GAAP are described in Note 31. In addition, our consolidated
financial statements comply with certain disclosure requirements of
United States GAAP.
Basis of Consolidation
We conduct business through a variety of corporate structures, including
subsidiaries and joint ventures. Subsidiaries are those where we
exercise control through our ownership of the majority of the voting
shares. Joint ventures are those where we exercise joint control through
an agreement with other shareholders. All of the assets, liabilities,
revenues and expenses of our subsidiaries and our proportionate share
of the assets, liabilities, revenues and expenses of our joint ventures
are included in our consolidated financial statements. All significant
inter-company transactions and balances are eliminated.
We hold investments in companies where we exert significant
influence over operating, investing and financing decisions (those
where we own between 20% and 50% of the voting shares). These
are recorded at cost and are adjusted for our proportionate share of any
net income or loss and dividends. They are recorded as other securities
in our Consolidated Balance Sheet and our proportionate share of the
net income or loss of these companies is recorded in interest, dividend
and fee income, securities, in our Consolidated Statement of Income.
We hold interests in variable interest entities, which we consolidate
where we are deemed to be the primary beneficiary. These are more
fully described in Note 9.
Translation of Foreign Currencies
We conduct business in a variety of foreign currencies and report
our consolidated financial statements in Canadian dollars. Assets
and liabilities denominated in foreign currencies are translated into
Canadian dollars at the exchange rate in effect at the balance sheet
date. Revenues and expenses denominated in foreign currencies
are translated using the average exchange rate for the year.
Unrealized gains and losses arising from translating net investments
in foreign operations into Canadian dollars, net of related hedging activ-
ities and applicable income taxes, are included in shareholders’ equity
within accumulated other comprehensive income (loss) on translation of
net
foreign operations. When we sell or liquidate an investment in a
foreign
operation, the associated translation gains and losses, previously
included
in shareholders’ equity as accumulated other comprehensive
income (loss) on translation of net foreign operations, are recorded as
part
of the gain or loss on disposition in non-interest revenue, securities
gains (losses), other than trading. All other foreign currency translation
gains and losses are included in foreign exchange, other than trading,
in our Consolidated Statement of Income as they arise.
From time to time, we enter into foreign exchange hedge contracts
to reduce our exposure to changes in the value of foreign currencies.
Realized and unrealized gains and losses on the mark-to-market of
foreign exchange hedge contracts are included in foreign exchange,
other than trading, in our Consolidated Statement of Income.
Specific Accounting Policies
To facilitate a better understanding of our consolidated financial state-
ments, we have disclosed our significant accounting policies throughout
the following notes with the related financial disclosures by major caption:
Changes in Accounting Policy
A change in accounting policy that resulted from changes by Canadian
standard setters in the current year is disclosed as follows: securities
–Note 3. New disclosures that resulted from changes by Canadian
standard setters in the current year are disclosed as follows: financial
instruments disclosures –Notes 3, 4, 15 and 29; risk management –
Note 6; and capital management –Note 22.
Changes in accounting policy that resulted from changes by
Canadian standard setters in 2007 are disclosed as follows: presentation
of a Consolidated Statement of Comprehensive Income, which is com-
prised of net income, changes in unrealized gains or losses related to
cash flow hedges and the net unrealized foreign exchange gain or loss
related to our net investment in foreign operations; securities –Note 3;
effective interest method –Note 4; hedging derivatives –Note 10; and
fair value option –Notes 3 and 15.
Future Changes in Accounting Policy
Effective November 1, 2008, we will adopt the new Canadian Institute
of Chartered Accountants (“CICA”) Handbook section 3064 “Goodwill and
Intangible Assets”. This section establishes new standards for the recog-
nition and measurement of intangible assets, but does not affect the
accounting for goodwill. The impact of implementation of this standard
will not be material to our results of operations or financial position.
Use of Estimates
In preparing our consolidated financial statements we must make
estimates and assumptions, mainly concerning fair values, which
affect reported amounts of assets, liabilities, net income and related
disclosures. The most significant assets and liabilities where we
must make estimates include: measurement of other than temporary
impairment –Note 3; valuation of securities at fair value –Note 3;
allowance for credit losses –Note 4; accounting for securitizations –
Note 8; consolidation of variable interest entities –Note 9; valuation
of derivative instruments at fair value –Note 10; goodwill –Note 13;
customer loyalty program –Note 16; pension and other employee
future benefits –Note 24; income taxes –Note 25; and contingent
liabilities –Note 29. If actual results differ from the estimates,
the impact would be recorded in future periods.
Note Topic Page
1 Basis of Presentation 108
2 Cash Resources 109
3Securities 109
4 Loans, Customers’ Liability
under Acceptances and
Allowance for Credit Losses 113
5 Other Credit Instruments 115
6 Risk Management 115
7Guarantees 118
8 Asset Securitization 118
9 Variable Interest Entities 120
10 Derivative Instruments 122
11 Premises and Equipment 127
12 Acquisitions 128
13 Goodwill and Intangible Assets 129
14 Other Assets 129
15 Deposits 130
16 Other Liabilities 131
17 Restructuring Charge 131
18 Subordinated Debt 132
Note Topic Page
19 Capital Trust Securities 133
20 Interest Rate Risk 133
21 Share Capital 135
22 Capital Management 136
23 Employee Compensation –
Stock-Based Compensation 137
24 Employee Compensation –
Pension and Other
Employee Future Benefits 139
25 Income Taxes 142
26 Earnings Per Share 143
27 Operating and Geographic
Segmentation 144
28 Related Party Transactions 146
29 Contingent Liabilities 146
30 Fair Value of
Financial Instruments 147
31 Reconciliation of Canadian
and United States
Generally Accepted
Accounting Principles 148