Bank of Montreal 2010 Annual Report Download - page 116

Notes
114 BMO Financial Group 193rd Annual Report 2010
Note 1: Basis of Presentation
Realized and unrealized gains and losses on the mark-to-market of
foreign exchange contracts related to economic hedges are included
in foreign exchange, other than trading, in our Consolidated Statement
of Income. Changes in fair value on forward contracts that qualify as
accounting hedges are recorded in other comprehensive income, with
the spot/forward differential (the difference between the foreign
currency rate at inception of the contract and the rate at the end of the
contract) being recorded in interest expense over the term of the hedge.
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:
Note Topic Page
1 Basis of Presentation 114
2 Cash Resources and
Interest Bearing
Deposits with Banks 116
3 Securities 116
4 Loans, Customers’ Liability
under Acceptances and
Allowance for Credit Losses 120
5 Other Credit Instruments 122
6 Risk Management 122
7 Guarantees 125
8 Asset Securitization 126
9 Variable Interest Entities 128
10 Derivative Instruments 130
11 Premises and Equipment 137
12 Acquisitions 137
13 Goodwill and Intangible Assets 138
14 Other Assets 139
15 Deposits 140
16 Other Liabilities 141
17 Subordinated Debt 142
Note Topic Page
18 Capital Trust Securities 142
19 Interest Rate Risk 143
20 Share Capital 145
21 Capital Management 147
22 Employee Compensation –
Stock-Based Compensation 147
23 Employee Compensation –
Pension and Other
Employee Future Benefits 149
24 Income Taxes 155
25 Earnings Per Share 156
26 Operating and Geographic
Segmentation 157
27 Related Party Transactions 159
28 Contingent Liabilities 159
29 Fair Value of
Financial Instruments 160
30 Reconciliation of Canadian
and United States
Generally Accepted
Accounting Principles 165
Changes in Accounting Policy
During the 2010 fiscal year, there were no changes in Canadian GAAP
accounting policies or disclosure requirements. Changes in accounting
policies that resulted from changes by Canadian standard setters in
2009 are disclosed as follows: financial instruments – Notes 3 and 4;
and goodwill and intangible assets – Note 13. New disclosures that
resulted from changes by Canadian standard setters in 2009 are presented
as follows: risk management – Note 6; and financial instruments
disclosures – Note 29.
Future Changes in Accounting Policy
Transition to International Financial Reporting Standards
Canadian public companies will be required to prepare their financial
statements in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International Accounting Standards
Board (“IASB”), for fiscal years beginning on or after January 1, 2011.
Effective November 1, 2011, we will adopt IFRS as the basis for preparing
our consolidated financial statements. We will report our financial results
for the quarter ended January 31, 2012 prepared on an IFRS basis.
We will also provide comparative data on an IFRS basis, including
an opening balance sheet as at November 1, 2010 (“transition date”).
Prior to our transition date, we will begin to address IFRS disclosure
requirements, where appropriate. We have enhanced our disclosure
in Note 12 – Acquisitions; Note 22 – Employee Compensation –
Stock-Based Compensation; and Note 23 – Employee Compensation
– Pension and Other Employee Future Benefits to include certain
IFRS disclosure requirements.
Notes to Consolidated Financial Statements
We prepare our consolidated financial statements in accordance
with Canadian generally accepted accounting principles (“GAAP”),
including interpretations of GAAP by our regulator, the Office of the
Superintendent of Financial Institutions Canada (“OSFI”). We have
included certain risk disclosures on pages 80 to 87 in the 2010 Manage-
ment’s Discussion and Analysis. To clearly identify these disclosures,
which form an integral part of these consolidated financial statements,
they are presented in a blue-tinted font (text and tables).
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 30. In addition, our consolidated financial
statements comply with certain disclosure requirements of United States
GAAP and the United States Securities and Exchange Commission (“SEC”)
that are applicable to us.
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 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
activities and applicable income taxes, are included in shareholders’
equity within accumulated other comprehensive 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
loss on translation of net foreign operations, are recorded as part of the
gain or loss on disposition. 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.