Bank of Montreal 2015 Annual Report Download - page 130

Notes
external experts are involved in estimating any provisions. The actual costs of resolving these claims may be substantially higher or lower than the
amounts of the provisions.
Additional information regarding provisions is provided in Note 26.
Transfer of Financial Assets and Consolidation of Structured Entities
We sell Canadian mortgage loans to third-party Canadian securitization programs, including the Canadian Mortgage Bond program, and directly to
third-party investors under the National Housing Act Mortgage-Backed Securities program. We assess whether substantially all of the risks and
rewards of the loans have been transferred to determine if they qualify for derecognition. Since we continue to be exposed to substantially all of the
repayment, interest rate and/or credit risk associated with the securitized loans, they do not qualify for derecognition. We continue to recognize the
loans and the related cash proceeds as secured financing in our Consolidated Balance Sheet. We also use securitization vehicles to securitize our
Canadian credit card loans in order to obtain alternate sources of funding. The structure of these vehicles limits the activities they can undertake and
the types of assets they can hold, and the vehicles have limited decision-making authority. The vehicles issue term asset-backed securities to fund
their activities. We control and consolidate these vehicles, as we have the key decision-making powers necessary to obtain the majority of the
benefits of their activities.
For most of our subsidiaries, control is determined based on holding the majority of the voting rights. For certain investments in limited
partnerships, we exercise judgment in determining if we control an entity. Based on an assessment of our interests and rights, we have determined
that we do not control certain entities, even though we may have an ownership interest greater than 50%. This may be the case when we are not
the general partner in an arrangement and the general partner’s rights most significantly affect the returns of the entity. Additionally, we have
determined that we control certain entities despite having an ownership interest less than 50%. This may be the case when we are the general
partner in an arrangement and the general partner’s rights most significantly affect the returns of the entity.
Structured entities are discussed in greater detail in Note 7 and transferred assets are discussed in greater detail in Note 6.
Changes in Accounting Policies
Effective November 1, 2014, we adopted the following new and amended accounting pronouncements issued by the IASB.
Own Credit
We early adopted the own credit provisions of IFRS 9 Financial Instruments. The provisions require that for financial liabilities designated at fair value
through profit or loss, such as deposits and insurance investment contracts, changes in fair value attributable to our credit risk be presented in other
comprehensive income rather than net income, unless doing so would create or enlarge an accounting mismatch in net income. Changes in fair value
not attributable to our credit risk continue to be recorded in net income. The provisions were adopted prospectively and resulted in a $120 million
gain, net of taxes, being recorded in other comprehensive income rather than net income.
Levies
We adopted the IFRS Interpretations Committee Interpretation 21 Levies (“IFRIC 21”). IFRIC 21 provides guidance on when to recognize a liability to
pay a levy imposed by a government in accordance with legislation. The adoption of IFRIC 21 did not have a significant impact on our consolidated
financial statements.
Impairment of Assets
We adopted the amendments to IAS 36 Impairment of Assets. The amendments address the disclosure of information about the recoverable amount
of impaired assets if that amount is based on fair value less cost of disposal. The adoption of the amendments did not have an impact on disclosure
in our consolidated financial statements.
Offsetting of Financial Assets and Financial Liabilities
We adopted the amendments to IAS 32 Financial Instruments: Presentation. The amendments clarify that an entity has a current legally enforceable
right of offset if that right is not contingent on a future event, and that right is enforceable both in the normal course of business and in the event of
default, insolvency or bankruptcy of the entity and all counterparties. The adoption of the amendments did not have an impact on our consolidated
financial statements.
Future Changes in IFRS
Financial Instruments
In July 2014, the IASB issued IFRS 9 Financial Instruments (“IFRS 9”), which addresses impairment, classification, measurement, and hedge accounting.
IFRS 9 introduces a new single impairment model for financial assets. The new model is based on expected credit losses and will result in credit
losses being recognized regardless of whether a loss event has occurred. The expected credit loss model will apply to most financial instruments not
measured at fair value, with the most significant impact being to loans. The expected credit loss model requires the recognition of credit losses based
on a 12-month time horizon for performing loans, and requires the recognition of lifetime expected credit losses for loans that have experienced a
significant deterioration in credit risk since inception. The expected loss calculations are required to incorporate forward looking macro-economic
information in determining the final provision.
The new standard requires that we classify assets based on our business model for managing the financial assets and the contractual cash flow
characteristics of the financial assets. Financial assets are to be measured at fair value through profit or loss unless certain conditions are met which
permit measurement at amortized cost or fair value through other comprehensive income. As noted above in Changes in Accounting Policies, we
early adopted the requirements for financial liabilities regarding own credit risk.
IFRS 9 also introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge accounting and aligns
hedge accounting more closely with risk management. The new model no longer specifies quantitative measures for effectiveness testing and does
not permit hedge de-designation.
In order to meet the requirement to adopt IFRS 9, we have established an enterprise-wide project. We are currently evaluating the impact of
adoption which is effective November 1, 2017.
Revenue
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), which replaces the existing standards for revenue
recognition. The new standard establishes a framework for the recognition and measurement of revenues generated from contracts with customers,
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