Bank of Montreal 2010 Annual Report Download - page 118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes
116 BMO Financial Group 193rd Annual Report 2010
We do not expect consolidation of these vehicles would result
in any significant adjustment to opening retained earnings.
We have not completed our assessment of our U.S. customer
securitization vehicle and our Canadian customer securitization vehicles
and other less significant VIEs.
Accumulated Other Comprehensive Loss on
Translation of Foreign Operations
On transition to IFRS, we can either recalculate translation differences
on an IFRS basis as though we had always applied the IFRS requirements,
or reset the accumulated other comprehensive loss on translation of net
foreign operations to zero. We expect to elect to reset our accumulated
other comprehensive loss on translation of net foreign operations to zero.
The impact on the bank’s balance sheet will be an increase of $1,100 mil-
lion in accumulated other compre hensive income and a
corresponding
reduction in retained earnings of approximately $1,100 million
on
November 1, 2010, the beginning of our comparative year.
Note 2: Cash Resources and Interest Bearing Deposits with Banks
(Canadian $ in millions) 2010 2009
Cash and deposits with Bank of Canada
and other banks 16,693 8,656
Cheques and other items in transit, net 675 1,299
Total cash and cash equivalents 17,368 9,955
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.
Note 3: Securities
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 for which 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 and intangible
assets – Note 13;
insurance-related liabilities – Note 16; pension and
other employee future
benefits – Note 23; income taxes – Note 24;
contingent liabilities – Note 28; and fair value of financial instruments
– Note 29. If actual results differ from the estimates, the impact
would be recorded in future periods.
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 $461 million as at October 31, 2010
($326 million as at October 31, 2009).
Interest Bearing Deposits with Banks
Deposits with banks are recorded at amortized cost and include accep -
tances we have purchased that were issued by other banks. Interest
income earned on these deposits is recorded on an accrual basis.
Changes in Accounting Policy
On August 20, 2009, the Canadian Institute of Chartered Accountants
(“CICA”) released new accounting requirements relating to the
classification and measurement of financial assets. The new standard
redefined loans and receivables to include all non-derivative financial
assets with fixed or determinable repayment terms which are not
quoted in an active market. The standard also permits reclassification
of available-for-sale securities to loans when there is no active market.
Impairment on the reclassified debt securities will be calculated in a
manner consistent with our loan portfolio, based on our assessment of
the recoverability of principal and interest.
This change in accounting policy does not have any impact on our
results of operations or financial position since we were not required
to and did not elect to transfer any available-for-sale securities to loans.
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 from trading to available-for-sale those
securities for which we had a change in intent to hold the securities
for the foreseeable future rather than to exit or trade them in the short
term due to market circumstances at that time. In accordance with
the amendments, we recognized the transfers at the fair value of the
securities on August 1, 2008.
A continuity of the transferred securities is as follows:
For the year ended October 31 (Canadian $ in millions) 2010 2009
Fair value of securities at beginning of year 1,378 1,955
Net (sales) purchases (928) (613)
Change in fair value recorded in
other comprehensive income 55 232
Other than temporary impairment
recorded in income (17) (99)
Impact of foreign exchange (53) (97)
Fair value of securities at end of year 435 1,378
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.
Fair value changes recorded in other comprehensive income
would have resulted in a gain of $55 million being recorded in income
for the year ended October 31, 2010 (gain of $232 million in 2009) if
the securities had not been transferred from trading to available-for-sale.
Interest and dividend income of $26 million related to the transferred
securities was recorded in interest, dividend and fee income,
securities in our Consolidated Statement of Income for the year
ended October 31, 2010 ($57 million in 2009).