Bank of Montreal 2010 Annual Report Download - page 117

Notes
BMO Financial Group 193rd Annual Report 2010 115
The differences between the bank’s accounting policies and IFRS
requirements, combined with our decisions on the optional IFRS 1
exemptions from retroactive application of IFRS, will result in measure-
ment and recognition differences when we transition to IFRS. The net
impact of these differences will be recorded in opening retained earnings,
affecting shareholders’ equity. Precisely quantifying all of the impacts
that will result from adopting IFRS will be subject to the completion of
all our project work streams, finalization of all decisions where choices
of accounting policies are available, including optional exemptions from
retroactive restatement available under IFRS 1, and the prevailing market
conditions and economic circumstances at the time of transition.
Based on our analysis to date, certain of the more significant
changes that will result from the adoption of IFRS are expected
to be in the areas of pension and other employee future benefits, asset
securitization, consolidation and accumulated other comprehensive
loss on translation of foreign operations.
The differences described in the sections that follow are based on
Canadian GAAP and IFRS that are in effect as of this date. This should not
be considered a comprehensive list of the main accounting changes
when we adopt IFRS.
Pension and Other Employee Future Benefi ts
Under the IFRS employee benefits standard (IAS 19), we will continue to
record pension and other employee future benefits expense as cost of
benefits earned in the year plus the interest cost on the obligation, net
of the expected return on assets. IFRS provides two alternatives for how
to account for the unrealized market-related gains or losses on pension
fund assets and the impact of changes in discount rates on pension
obligations (“market-related amounts”). We can either record these
market-related amounts directly in equity or defer them on our balance
sheet and amortize amounts in excess of 10% of our plan assets or
benefit liability balances to pension expense over a period of approxi-
mately 12 years. We currently follow the second alternative. We have not
yet finalized our decision on which alternative to elect for the accounting
of market-related amounts. Additional information on our pension and
other employee future benefits is included in Note 23.
On transition to IFRS, we can either recalculate pension expense
back to inception of the plans as though we had always applied the
IFRS pension requirements or, alternatively, record market-related
amounts that exist on November 1, 2010 directly in retained earnings
(“fresh start method”).
Should the bank elect the fresh start method, the impact
on the bank’s balance sheet would be a reduction in opening retained
earnings of approximately $1,200 million, a decrease in other assets
of approximately $1,600 million and a decrease in other liabilities of
approximately $400 million on November 1, 2010, the beginning of our
comparative year. Adopting this alternative would also result in reduced
pension expense in future years since any deferred losses that exist
on October 31, 2010 would not be amortized to pension expense.
We have not yet finalized our decision on whether to elect the
fresh start method as permitted under IFRS.
Asset Securitization
We have substantially completed our assessment of certain of our
significant asset securitization programs and whether the loans and
mortgages sold through these programs qualify for off-balance sheet
treatment under IFRS. The assessment included our Canadian credit
card loans and Canadian mortgage loans sold to the bank’s securitization
vehicles and to the Canada Mortgage Bond program, a third-party
securitization program. We assessed whether the loans and mortgages
qualify for off-balance sheet treatment based on the transfer of
the risks and rewards, as determined under the derecognition criteria
contained in the IFRS financial instruments standard (IAS 39). Based
on the analysis completed to date, our preliminary conclusion is
that the loans or mortgages sold under these securitization programs
will not qualify for off-balance sheet recognition under IFRS. Under
Canadian GAAP, the mortgages and loans sold through these programs
are removed from our balance sheet. Additional information on our asset
securitization vehicles is included in Note 8.
If the securitized assets sold to the securitization vehicles
noted in the preceding paragraph were to be recognized on the bank’s
balance sheet, assets and liabilities would increase by approximately
$18 billion and opening retained earnings would be reduced by less than
$100 million on November 1, 2010, the beginning of our comparative
year. The reduction in retained earnings primarily represents the reversal
of the gain on sale previously recognized in earnings. In addition, the
interest and fees collected from customers, net of the yield paid to
investors in the securitization vehicle, would be recorded in net interest
income using the effective interest rate method over the term of the
securitization and credit losses associated with loans and mortgages would
be recorded in the provision for credit losses.
We have not completed our assessment of the asset securitization
activity associated with selling the bank’s Canadian mortgage loans
to certain other third-party asset securitization programs.
Consolidation
We have substantially completed our assessment of whether we are
required to consolidate our credit protection vehicle and our structured
investment vehicles when we transition to IFRS. We assessed the
consolidation requirement based on whether the bank would in substance
control the vehicles, as determined under the criteria contained in
the IFRS consolidated and separate financial statements standard (IAS 27)
and, where appropriate, SIC-12 (an interpretation of IAS 27). Our analysis
considered whether the activities of the vehicles are conducted
on behalf of the bank, the bank’s exposure to the risks and benefits,
its decision-making powers over the vehicles, and whether these
considerations demonstrate that the bank in substance controls the
vehicles and therefore must consolidate them.
Information on these vehicles, including total assets, our
exposure to loss and our assessment of the consolidation requirement
under Canadian GAAP, is included in Note 9.
Credit Protection Vehicle
Based on the analysis completed to date, our preliminary conclusion
is that the bank would be required to consolidate this vehicle,
as our
analysis indicates that the bank in substance controls this vehicle
based on the definition of control under IFRS. Under Canadian GAAP,
we are not required to consolidate this vehicle.
Consolidation of this vehicle would impact the bank’s balance
sheet, increasing assets and liabilities by approximately $500 million on
November 1, 2010, the beginning of our comparative year. Our estimate
incorporates the elections permitted under IFRS to fair value certain
assets and liabilities of the credit protection vehicle, with changes in the
fair value recorded in income as they occur.
Structured Investment Vehicles (“SIVs”)
Based on the analysis completed to date, our preliminary conclusion
is that the bank would be required to consolidate the SIVs, as our
analysis indicates that the bank in substance controls the SIVs based on
the definition of control under IFRS. Under Canadian GAAP, we are not
required to consolidate the SIVs.
Consolidation of the SIVs would impact the bank’s balance
sheet, increasing assets and liabilities on the bank’s balance sheet by
approximately $200 million on November 1, 2010, the beginning of
our comparative year. This represents the amount by which the assets
of the SIVs exceed the amount drawn on the loan facility the bank
has made available to the SIVs as of November 1, 2010. Our estimate
incorporates the election permitted under IFRS to fair value the assets
and liabilities of the SIVs, with changes in the fair value recorded in
income as they occur.