Bank of Montreal 2008 Annual Report Download - page 113

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Notes
BMO Financial Group 191st Annual Report 2008 | 109
Note 2: Cash Resources
(Canadian $ in millions) 2008 2007
Cash and non-interest bearing deposits
with Bank of Canada and other banks $ 6,936 $ 2,264
Cheques and other items in transit, net 2,198 1,386
Total cash and cash equivalents 9,134 3,650
Interest bearing deposits with banks 11,971 19,240
Total $ 21,105 $ 22,890
Cash and Cash Equivalents
Cash and cash equivalents comprise balances, including cash and
non-interest bearing deposits with Bank of Canada and other banks
and cheques and other items in transit.
Deposits with Banks
Deposits with banks are recorded at amortized cost and include accept-
ances we have purchased that were issued by other banks. Interest
income earned on these deposits is recorded on an accrual basis.
Cheques and Other Items in Transit, Net
Cheques and other items in transit are recorded at cost and represent
the net position of the uncleared cheques and other items in transit
between us and other banks.
Cash Restrictions
Some of our foreign operations are required to maintain reserves
or minimum balances with central banks in their respective countries
of operation, amounting to $480 million as at October 31, 2008
($457 million in 2007).
Note 3: Securities
Changes in Accounting Policy
During October 2008, the CICA issued amendments to Handbook
section 3855 “Financial Instruments –Recognition and Measurement”,
section 3861 “Financial Instruments –Disclosure and Presentation”
and section 3862 “Financial Instruments –Disclosure”. The amendments
permit, in rare circumstances, certain reclassifications of non-derivative
financial assets from
the trading category to either the available-for-
sale or held-to-maturity categories. It also permits the reclassification
of certain
available-for-sale loans to loans and receivables.
We elected to transfer securities from trading to available-for-sale
for which we had a change in intent caused by current market
circumstances to hold the securities for the foreseeable future rather
than to exit or trade them in the short term. In accordance with the
amendments, we elected to recognize the transfers at the fair value
of the securities on August 1, 2008. A continuity of the transferred
securities is as follows:
(Canadian $ in millions)
FairvalueofsecuritiesasatAugust1,2008 $ 2,078
Net (sales) purchases (52)
Fair value change recorded in Other Comprehensive Income (183)
Other than temporary impairment recorded in income (29)
Impact of foreign exchange 141
Fair value of securities as at October 31, 2008 $ 1,955
As of the reclassification date, effective interest rates on reclassified
trading assets ranged from 2% to 17%, with expected recoverable cash
flows of $2.2 billion. Ranges of effective interest rates were determined
based on weighted-average rates of the portfolios transferred.
On November 1, 2006, we adopted the CICA’s new accounting re-
quirements for securities. The new rules required us to classify securities,
other than trading securities, as held-to-maturity or available-for-sale.
(a) Available-for-Sale Securities
Available-for-sale securities are measured at fair value with unrealized
gains and losses recorded in accumulated other comprehensive income
(loss) on available-for-sale securities in our Consolidated Statement
of Changes in Shareholders’ Equity until the security is sold, or if an
unrealized loss is considered other than temporary, the unrealized
loss is recorded in income. Gains and losses on disposal are recorded
in our Consolidated Statement of Income in securities gains (losses),
other than trading. Interest income earned and dividends received
on available-for-sale securities are recorded in our Consolidated State-
ment of Income in interest, dividend and fee income, securities.
We have not classified any of our securities as held-to-maturity.
Available-for-sale securities whose sale is restricted are recorded
at amortized 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. These are recorded as other
securities in our Consolidated Balance Sheet.
On November 1, 2006, we remeasured our available-for-sale
securities at fair value, as appropriate. A net unrealized gain of $3 million
was recorded in opening accumulated other comprehensive income
on available-for-sale securities.
(b) Fair Value Option
The new rules allow management to elect to measure financial
instruments that would not otherwise be accounted for at fair value
as trading instruments, 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 new standard was
adopted, or when new financial instruments were acquired, and the
designation is irrevocable.
During the year ended October 31, 2008, we designated bonds
purchased to support our Municipal Tender Option Bond Program
as trading securities under the fair value option. These bonds would
otherwise be accounted for as available-for-sale securities with
unrealized gains and losses recorded in Other Comprehensive Income.
In managing this program, we enter into derivatives to hedge against
changes in the fair value of those bonds that arise due to changes
in interest rates. Electing the fair value option for the bonds better
aligns the accounting result with the way the program is managed.
The impact of recording the bonds as trading securities was a decrease
in
non-interest revenue, trading revenues of less than $1 million for the
year ended October 31, 2008. The bonds were sold in September 2008.
Securities in our insurance subsidiaries that support our insurance
liabilities were designated as trading securities under the fair value
option on adoption of the standard on November 1, 2006. Since the
actuarial calculation of insurance liabilities is based on the investments
supporting them, electing the fair value option for these investments
better aligns the accounting result with the way the portfolio is
managed. On November 1, 2006, we remeasured these securities
and the net unrealized loss of less than $1 million was recorded
in opening retained earnings. The fair value of these securities
as at October 31, 2008 was $28 million ($30 million in 2007). The impact
of recording these as trading securities was an increase in non-interest
revenue, insurance income of less than $1 million for the year ended
October 31, 2008 (decrease of $1 million in 2007).