Bank of Montreal 2015 Annual Report Download - page 128

Notes
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.
Foreign currency translation gains and losses on available-for-sale debt securities that are denominated in foreign currencies are included in
foreign exchange, other than trading, in our Consolidated Statement of Income. Foreign currency translation gains and losses on available-for-sale
equity securities that are denominated in foreign currencies are included in accumulated other comprehensive income on available-for-sale securities
in our Consolidated Statement of Changes in Equity.
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 that arise on the mark-to-market of foreign exchange contracts related to economic hedges are included in
non-interest revenue in our Consolidated Statement of Income. Changes in the fair value of forward contracts that qualify as accounting hedges are
recorded in our Consolidated Statement of Comprehensive Income within net change in unrealized gains (losses) on cash flow hedges, with the spot/
forward differential (the difference between the foreign currency exchange rate at the inception of the contract and the rate at the end of the
contract) recorded in interest income (expense) over the term of the hedge.
Dividend and Fee Income
Dividend Income
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity securities.
Fee Income
Fee income (including commissions) is recognized based on the services or products for which the fee is paid. See Note 4 for the accounting
treatment for lending fees.
Investment management and custodial fees are based primarily on the balance of assets under management and assets under administration as
at the period end, respectively, for services provided.
Securities commissions and fees and underwriting and advisory fees are recorded as revenue when the related services are completed. Deposit
and payment service charges and insurance fees are recognized over the period in which the related services are provided. Card fees primarily include
interchange income, late fees, cash advance fees and annual fees. Card fees are recorded as billed, except for annual fees, which are recorded evenly
throughout the year.
Use of Estimates and Judgments
The preparation of the consolidated financial statements requires management to use estimates and assumptions that affect the carrying amounts of
certain assets and liabilities, certain amounts reported in net income and other related disclosures.
The most significant assets and liabilities for which we must make estimates include allowance for credit losses; financial instruments measured
at fair value; pension and other employee future benefits; impairment of securities; income taxes and deferred taxes, purchased loans; goodwill;
insurance-related liabilities; provisions and transfers of financial assets and consolidation of structured entities. We make judgments in assessing
whether substantially all risks and rewards have been transferred in respect of transfers of financial assets and whether we control SEs. These
judgments are discussed in Notes 6 and 7, respectively. If actual results were to differ from the estimates, the impact would be recorded in future
periods.
We have established detailed policies and control procedures that are intended to ensure these judgments are well controlled, independently
reviewed and consistently applied from period to period. We believe that our estimates of the value of our assets and liabilities are appropriate.
Allowance for Credit Losses
The allowance for credit losses adjusts the value of loans to reflect their estimated realizable value. In assessing their estimated realizable value, we
must rely on estimates and exercise judgment regarding matters for which the ultimate outcome is unknown. These include economic factors,
developments affecting companies in particular industries, and specific issues with respect to single borrowers. Changes in circumstances may cause
future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for
credit losses.
Additional information regarding the allowance for credit losses is included in Note 4.
Financial Instruments Measured at Fair Value
Fair value measurement techniques are used to value various financial assets and financial liabilities and are used in performing impairment testing
on certain non-financial assets. A detailed discussion of our fair value measurement techniques is included in Note 3 and Note 18.
Pension and Other Employee Future Benefits
Our pension and other employee future benefits expense is calculated by our independent actuaries using assumptions determined by management.
If actual experience were to differ from the assumptions used, we would recognize this difference in other comprehensive income.
Pension and other employee future benefits expense, plan assets and defined benefit obligations are also sensitive to changes in discount rates.
We determine discount rates at each year end for all of our plans using high-quality Aa rated corporate bonds with terms matching the plans’ specific
cash flows.
Additional information regarding our accounting for pension and other employee future benefits is included in Note 23.
Impairment of Securities
We have investments in securities issued or guaranteed by Canadian, U.S. and other governments, corporate debt and equity securities, mortgage-
backed securities and collateralized obligations, which are classified as either available-for-sale securities, held-to-maturity securities or other
securities. We review held-to-maturity, available-for-sale and other securities at each quarter-end reporting period to identify and evaluate
investments that show indications of possible impairment.
For held-to-maturity, available-for-sale and other securities, impairment losses are recognized if there is objective evidence of impairment as a
result of an event that reduces the estimated future cash flows from the security and the impact can be reliably estimated. Objective evidence of
impairment includes default or delinquency by a debtor, restructuring of an amount due to us on terms that we would not otherwise consider,
indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for equity securities,a
significant or prolonged decline in the fair value of a security below its cost is objective evidence of impairment.
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